This article was contributed by Kenina Court, our favourite accountant and tax advisor. Kenina talks about co-investing in buy and hold properties. Short term joint ventures are a bit different and we have a separate article about what you should consider here.
With the currently high loan to value ratio (LVR) requirements for investment property, it is more likely than ever that people will want to get together with others to buy their investment property together. If you go down this track, what are some of the things you should consider?
There are two broad issues for you to consider:
How should you own your property investments? What should you think about from a tax point of view? You have some of options to consider:
This part is the part that is often completely missed, simply because most people don’t think about it – what happens when things go wrong? And things will go wrong, because that’s life. Being in business with partners is very much like marriage – it’s easy to jump into bed together, but hard to separate. The old adage of plan for the worst and expect the best, is very much true in business. Sometimes, it may not even be that the business had something go wrong in it. It could be that one of the partners has had something change in their personal life that now impacts the lives of everyone around them, including their business partners.
My experience is that the hardest times are when people have done no planning for when things go wrong. Something happens and all of a sudden, everyone is trying to work out what to do. When someone's back is up against a wall it’s not the best or easiest time to try and work out what is in the best interests of everyone, particularly when it might be your back that is up against the wall.
The best way to plan is to do the thinking about what could go wrong, when you first start out together in a venture (ideally before you even start!). That is when there is nothing at risk because nothing has yet happened. Think of all the things that could go wrong or change and discuss how you would like to see them solved. It can be tough, but you get everything out on the table and you see everyone’s expectations and values. You can then see if those mesh with your own, and if they don’t, then that’s a great place to start talking.
All of this should then culminate in some sort of agreement that gets drawn up and each person signs to show that they will agree to abide by it. This agreement could be the partnership agreement or a shareholders’ agreement. There’s no rule that says it has to be drawn up by a lawyer, but you are likely to get a much better result if you do use a lawyer with experience in this area as they will make sure you have covered all the bases.
And last but not least, there is no ‘one size fits all’ for structures and agreements. People are individuals and as such, their structures and agreements should be tailored to their specific requirements. Be sure to talk with someone with expertise in this area to ensure you put in place what’s right for you.
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