Hi all,
I have recently decided to venture into the property market along with 4 other friends. We have limited experience and we’re looking for any advice/help we can get. In short, this is our situation:
– we want to start an investment business and run it as a unit trust
– start it between 4 people with a $25,000 buy in for 25% share
– buy $500,000 worth of property initially under the business
– invest $96,000 p.a (plus rent contribution) thereafter
– we then run a portfolio of properties and/or businesses (cafe, restaurant, pub, etc) for 6 years if all goes to plan
We want the flexibility of being able to buy out each others shares or allowing others to buy into the business as it grows.
Do we get the same tax benefits under a business as we would get if we bought an investment property on our own? maybe different business structure?
How will we be taxed on the capital gains we make?
Considering our large deposit and regular contributions, should we be considering positive geared properties as well as negative?
Finally… if you had all this money and 6 years how would you make $4 million net profit (or $400k recurring income, not just assets)?I know this is a lot to digest but I appreciate all comments/criticisms offered.
MSN
Hi MSN,
Sounds like you have a plan.
I'm a little confused about how much each person is investing to reach your target of 4 mil net profit after 6 years.
Is it 25k each initially and 96 k each PA?
So total amount invested by all 4 partners would be around 2.4 mil (not all in the first year though) ,if not continuing in the 7 year?Is that what you're saying?
Hi, a bit puzzling. 100K startup to buy 500K worth of property. Means loan of 420K. Yield = 20K @4% [if you're lucky] interest on loan = $29400 [7%]
To invest 96K p.a. each partner has to inject $2000 a month.
Is that what you're saying?
KY
A unit trust is a good way to proceed. You may be able to transfer the units without stamp duty (in NSW) as of next year.
But some things to consider. Who will be the trustee? A company is ideal – but then who will be the directors? Ideally one person only should be director to limit the risk.
Banks will generally want personal guarantees from all unit holders. Each guarantor will be responsible for the whole debt. So if three do not pay the 4th must. If things go bad the bank can sue one or all of you separately. If it is two couples involved, maybe you could just have one person from each couple to hold the units. This will reduce the risk.
You can also have a discretionary trust own the units so each person has their own trust owning their 25%. From there it can be distributed amongst further beneficiariies saving each family unit more tax.
What happens if one of the group goes bankrupt? Creditors could get their hands on their units. Using a discretionary trust to hold the units will reduce this risk.
What happens if one person gets a divorce? Family law court could make an order that the units go to their spouse. She/he could then be involved.
Many things to consider.
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
Hi all,
I'm one of those 4 other friends. I thought i'd join up to add some more clarity to the sitaution.
Esentially we are an investment group – with a primary focus on property.
Basic Set-Up.
1. 4-6 members
2. $25k buy in.
3. $400 contribution each per week / $1600 per month (some can put more than others, but this figure is within all our capabilities after paying cost of living expenses – including insurances, going out every other week and contingency).
4. Unit trust seems the way to go under a PTY LTD which we will also set up. (I like the sound of a discretionary unit trust – we'll look into it)
5. It looks like start up costs will be around $20k (inc. registering, website, business cards, logo, contracts, accountant, lawyer etc.) – u can always go all out and pay $35k for just a business name let alone other expenses but we went for good value for money – a large portion of the start up fee is for the accountant.Business.
1. Running our numbers (after interest rates, council, water, insurances, contingency for repairs etc. and allowing for time wtihout rent), we would save approx 96k a year.
2. At the end of 2011, combined we would personally have saved approx $200k and 100k every year after (without investing).
3. We first thought of buying strong capital growth properties in Sydney but quickly came to the realisation equity doesn't help much. The only thing we were growing by buying more and more negative geared properties was debt.
4. Focusing on value adding to properties we found we could get a lot further (roughly estimating about $3.5M in 10 years, still far from our $4M goal in 6 years).
5. Due to our lifestyles we travel a lot for work and have been able to cover a fairly large area. We found a way we can increase our profits through slightly more sauvy property investing.Progress.
1. We have been meeting investors, lawyers, and accountants to organise contracts and formalise the process.
2. We found a good (very good) accountant can cover the general legal aspects and will save money on hiring a lawyer (will still need one for other contract work). We don't want to be tight here as a good accountant will essentially be another member of yoru team.
3. There is no need to cough up the cash immediately, other than set up costs as we can each put $1 to allocate our equal share holding in the business until we want to buy.
4. Our biggest concern was funding, amusingly it seems to come by easier than we thought.
5. In saying this, we have learnt to distinguish between realistic investors (passive) and those who want to double or triple their money (get rich quick at 0 risk). There seems to be a lot of them out there.
6. We have gotten to the point of turning people down who want in as they have no skills to offer other than money.
7. What we are lacking is diversity, we are all in our early 20’s and have the same work background, we have been looking for accountants or experienced business owners to join us (we may have found some but it’s not confirmed).
8. As mentioned by Terryw, we are still finalising the ‘WHAT IF’s and Exit Strategies at 1 year, 3 – 6 etc. which is important and seems as hard to put together as coming up with the business name (haha). Also it doesn’t have to be so drastic as what if someone dies, someone could simply want to leave.
9. It is better to keep your money as insurance and invest other money as it creates more leverage.
10. We found getting out of your comfort zone and networking will help you exponentially as opportunities keep coming.Future
1. We will be finalising our contracts within the next 4-6 weeks. Purchasing our first property hopefully by the beginning of next year.
2. Finding business partners (other investment groups) we eventually want to team up on bigger projects. (we have found some but we aren't ready to team up as yet).
3. To reach our goal we realise we need to invest in other companies as well and build up a relationship of investing in each other. (which is why we are an investment group and not just a property group).We aren't rushing it (although it's only been 6 weeks since we started) but we have set milestones in order to see progress.
I guess our biggest concern is structure and tax issues, any thougths/comments/questions?NHG
I think you have considered most things, but perhaps the most important is how to structure the group so that you do not waste all your borrowing capacity. Imagine if the bank requires personal guarantees from all members – each person will be responsible for the whole loan. So applying for future loans will mean that the whole debt of the first loan will be taken as being borrowed by that person, yet possibly only one quarter of the income will be allowed. This can greatly decrease borrowing capacity.
You may also not know what other debts etc the other members have. One person may drag the group down because of higher debts compared with their income.
On the other hand you may need all 4 people's incomes to service. And a lender may not allow someone's guarantee unless that person is part of the group.
So you need to be careful in structuring. Some banks will want guarantees from all directors. Others will want guarantees from all units holders or all named beneficiaries – you may not want this.
Giving guarantees also creates considerable risk. Its best not to give a guarantee unless you must. If one project goes bad you don't want to ruin the whole group. All will have their credit files damaged and personal assets at risk.
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
Just saw an article in current API, might be useful
http://www.apimagazine.com.au/api-online/web-specials/2010/diy-syndicates
thanks for the link hschmid, it really did provide some insight.
its actually intersting that a lot of conclusions we came up with through discussion we are finding others have done as well.
it seems there is no such thing as a new idea!when attempting to find the right % for buy ins and outs lastmonth, eg. if a member died or wanted to leave, the figures i came up with that would cover costs happened to be the same as shown in 'THE MONEY GROUP' i finished reading today.
Assuming an evaluation is done every three months, im thinking:
100% minus expenses upon death (well they couldnt really help it could they)
95% minus expenses if they simply want to leave/get married/divorced
85% minus expenses minus money owing if they weren't up to date on their contributionsI guess when we get the paperwork sorted we could post it here to show our set-up.
does anybody have any experience with property investment groups btw?
i mean the smaller scale groups not the 100 person 'clubs'.
i guess i should add, we are taking a hands on aggresive approach, not a passive approach.
Also consider what happens if one goes bankrupt. Or worse, divorce. What is a spouse puts a caveat on the property and you are unable to sell – and he/she subpoenas all records related to the property etc.
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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