Hi All,
Need some help here.
I am looking to buy a property for the purpose of investment, where we split everything 50/50.
The purpose of the investment is a buy, renovate and rent out.
My investment strategy is to be able to recycle the equity (when appropriate) for further property investments and to provide an income from renting the property out (after time of course).
My position is:
– Employed full time
– Have a property (in my name) with substantial equity purchased with FHOG
– I live in my current property as well as obtaining rent for a spare room.My mates position is:
– Employed full time
– Is cashed up and will be living at home with minimal expensesMy question is of the legal/accounting nature.
– How do I structure the investment with my mate, do I set up a trust and put the capital into the property as a line of credit against my current property. or separate loan entirely?
– If it's in a structure, I will not be able to use the negative gearing from the property against my income from my understanding, so it is harder to push the ROI for the property?
– How do I setup an agreement for buyouts if a partner needs out, etc.
– Is there anything from experience I should be aware of?
Really appreciate the help on this.
Cheers,
MiikeI have done this myself and seen many others do it – none have lasted beyond a few years. So from the begininning plan it assuming one of you will want out in a few years.
There are a heap of issues to consider such as asset protection – what if the other guy goes bankrupt or a family law type claim and his/her partner slaps a caveat on the property (- this can happen even if a company or trust).
You will need a written agreement regarding the:
– expenses
– stamp duty on one exiting (does the remaining person pay?)
– CGT (if u use a trust and one wants out ownership may not change so the remaining person may be lumped with it)
– equity – how do you use it and when?
– time – one may resent the other as he/she won't put in the same time, but expect the same split
– changing loan if one wants out -can the other service?
– what if there is a loss when pulling out?
– initial contribution – who and how?
– negative gearing – if one has a higher income he may get more tax benefits back – is this fair?Have a think about structure. Using a company as trustee may allow one person to back out without having to change the title. So much easier, but then you may have more land tax to pay and then the losses cannot be used to offset your personal income.
If you use a discretionary trust then the trustee can distribute to the lowest taxable beneficiary – should this be done, or split equally?Loans – who guarantees the loan? 1 or both? using 1 may assist serviceability later, but does the person guaranteeing get compensated for their risk? If both guarantee and one leaves will he want to remove his guarantee?
Many things…
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
Excellent response Terry,
If I can put a practical application on your suggestions:
– I would utilise a unit trust structure
– I would set up a company to be trustee of the unit trust with both yourself and your mate as the directors and shareholders
– Miike to drawdown on your equity as a separate loan and use the funds to purchase units in the unit trust ($1 per unit)
– Your mate to purchase the equivalent amount of units using his cash
– The combined capital introduced used as the deposit for the target property
– Additional units can be purchased by both parties in the future to provide an additional cash injection to fund renovations and expenses (you can stagger this and have an agreement that you can each contribute an even amount to keep it 50/50)
– The trustee of the unit trust will borrow in its own right to fund the rest of the purchase (i.e. borrow up to 80% even if you don't need to and keep the excess cash to fund renovations / loan repayments etc)
– Miike will get negative gearing benefits as the interest on the separate loan to purchase the units will be deductibleAs per Terry, you will need a unit-holders agreement. It will cost you money in legal fees, but it will me money well spent. The general processes and decisions can be worked out before hand between you and your mate, and then you can visit a lawyer to formalise it.
The above structure is not perfect – you will still run into problems if one of you wants to exit the arrangement and the units themselves as an asset could potentially be at risk if one of you either has a family law issue or faces personal bankruptcy.
You mention that in the future when appropriate you would want to utilise any built up equity to fund other projects (i.e. re-borrow and use $ for deposits). With this structure it may be a good idea to keep a reserve of equity available to cover 50% to 60% of the net equity (property value less loan secured against the property) – this will enable the unit trust to be re-financed in the future to pay out either part if one decides to dispose of their interest.
A key issue I see is if one of you guys can't match 50/50 with the required cash – i.e. if any renovations run over budget and one of you has to put more cash into the venture than the other – I have seen this happen and it can rip friendships apart.
At the end of the day it will be easier to transfer any units than a portion of a property title – especially if you have a corporate trustee as both Terry and myself have suggested.
Although probably not relevant to you guys (based on age) I have seen in practice two unrelated parties invest into a unit trust with 50/50 interests utilising their superannuation via a SMSF to fund the purchase of the units and provide the seed capital for a similar venture and the unit trust borrowing.
This can work as the super laws state it is allowable provided each party doesn't have more than 50% of the income and capital entitlements – exactly 50% each is OK. A private ruling from the ATO and extensive professional advice obviously highly recommended though!
I hope the above information provides some direction – if you have further questions please ask.
I would also like to see other forum members contribute their expertise as 2 brains are always better than 1 …..
Grow SMSF | Grow SMSF
https://growsmsf.com.au
Email Me | Phone MeSelf-Managed Super Fund (SMSF) Specialist Accountants
Thanks for the responses.
That was extremely useful and will help with our thought process on looking into making this happen.
Really Appreciate the effort in both posts.
Cheers,
MiikeHey Miike,
My mates and I have been/are looking at doing something similar,
Check out the thread we started with some good contributions from Terry – not sure how helpful it will be.
https://www.propertyinvesting.com/forums/property-investing/help-needed/4332942?highlight=sydney%2CaccountantsWe are leaning towards starting seperately as some of us are more cashed up or just keener to start. Please let me know what you find, especially in regards to unit trusts, it has been a struggle to find the right accountant (will start a thread on this now).
Keep us posted.
Regards
NHG
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