Hey guys.
My sister-in-law from South Africa wants to invest in Australian property. She’ll provide the cash but the not cashflow. My wife and I have very little spare cash of our own, but just enough cashflow to gear her deposit up to about 85% LVR, but are dying to buy another IP because we can tell the market’s ripe.
I heard that with the complications of foreign law, we could be looking at $10-15k in legal fees to set up a proper International Joint Venture. It’s probably going to be hard enough just getting the money out of South Africa. So we’re looking at ways to make it simpler, and this looks simplest:
We agree on a % to split the profits. At the end of the day we both get back the money we put in, plus our % of the profits (equity growth + rent). Sis puts her money in our account, we borrow & invest completely in our name, then when she wants her money back we harvest her equity from our bank, and pay her back the cash. (We intend to hold it forever.) If we want to harvest equity for our next IP, we probably have to ask her first, to check that she doesn’t want her share any time soon, as it’s likely that the bank wont let us harvest equity too often.
What problems do you see? Of course we’ll need to get it watertight legally, but Rob Balanda says it’s best to get all the possibilities nailed down before you see a lawyer.
Will we be stuck having to harvest equity together and invest in every subsequent property under the same arrangement? If all goes swimmingly that would be fine but it’s worth having a viable get-out plan. What if she moves to Australia once she’s a millionaire and we have to move her share into her name? Aside from giving her the cash from our equity, I cant see any other option to avoid CGT.
We’ve read the recent API mag articles on JVs, and bought the Rob Balanda CD, but we’re having a hard time finding anyone who’s actually done a JV like ours before.
Sounds good in theory, but what if values go down? I have a client who did this. A friend put money in the deal and he constructed 2 houses and they were going to split the profits etc. Now values have falled and they are in negative territory. luckily there was plenty of equity at the start so they can sell and have some left over, but the investor has caveats on both houses and he won't remove them on the one sold unless he gets $x. So this could make the sale fall over while they argue etc. Investor is also refusing to chip in more money for the big shortfall each month.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Ouch. So there’s the cashflow risk of rental rates declining and interest going up. Everything eventually rises though, so if I intend to hold forever it will come right eventually. But it might be worth adding provision to obtain cashflow assistance from my sister-in-law if things get tight.
What kind of legal structure(s) do we need?
Not everything rises – look at Japan, things have been going down in value since 1990. They have deflation problems!
So you should factor in what to do if values have dropped and one of you wants out.
You probably need some sort of joint venture agreement. I think there is an agreement on lawcentral.com.au called a joint property purchase agreement or something similar. That may help, or give you some ideas anyway. You can register for free and then go through the process of building the agreement without being charged until the end.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
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