Hi all,
I found a property, with everything required to split it one block into two.
I got the money to buy the block, however if I buy the property, I won’t have any money left to subdivide and build on.
Therefore, I am talking to friends and relatives to buy it for me while I do the subdivision and build two houses, on what would you call a passive investor.Question I am being asked, What’s fair in terms of percentage at the end on how profits should be split?
House $450 + Stamp duty
Subdivision $80 (cash)
new House $450 (cash)
Selling price on new house $650 each
Selling cost $40
Total profit $280KI'd say 50/50 if the others are taking out the loan (+ interest).
Is it approved? If I was your friend I would want to have that in writing before I committed.
Profit $280 minus holding costs $30, stamp duty $10 landscaping etc $10 = $230 – CGT = real profit divided between partners.
Earl,
Initially i though about 50/50, but then, I am committing $80 + building cost in cash for what I could be making some interest.
Secondly, I am the one with the knowledge on how to make this deal work. Found the deal, know how to subdivide and know who to hire to do the building. They in the other hand, are committing at most 20% of $450 + stamp duty and interest.I think a 60/40 should be reasonable as cash is king if not more like a 70/30?
Open to comments.
I'd agree with Catalyst that it should be a 50/50 split particularly if you want to possibly do the same thing again with these same friends and family.
I would get agreement on what each party is responsible for, cover all the possible what ifs that both parties can think of even if unlikely eg what happens if one party dies or divorces, what happens if the property can't be rented or sold, what time frame is all this to happen in and then take it to a solicitor and get the agreement done legally.
What names are you putting it in and will there be a loan involved?
You putting in a large amount in cash is certainly worth more, plus you are doing the hard work.
Make sure you get the legal work done and try to think of everything bad that could happen. eg. death or sudden lack of capacity.
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
Fair enough points but they are cont committing just 20% (well in cash yes) but they are committing to a loan of more than that. Plus stamp duty. Risk is worth something. They are taking all the risk until the properties are built. If you don't carry through or if the land cannot be subdivided they are the ones that are committed to a large loan.
Good points Terry. You really need to get that right. Might be an issue getting the loan in one name and title together. Not impossible I don't think but needs to be considered.
I am not sure i am fully understanding your numbers and individual cash imputs.
From first look it appears that you would be able to gear a fair amount of the deal so not exactly sure why you need family or friends.
Course there could be serviceability issues but if this is the case i am not convinced you are opening up a finance can of worms involving other members. They will need to be on Title as well as on the loan and this may not be suitable for such a project.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Gio,
Firstly, the numbers look a bit iffy.
I would be concerned about spending $450,000 building on a $250,000 parcel of land.
As for an equitable structure, you could consider 50/50 in/out, whereby you share costs and profits equally.
Or, buy the land in partnership and agree to buy the subdivided land from the partnership for say cost + 30%.Good luck with the initiative.
I am involved in a JV at the moment. How it is done:
new company was registered and company owns a land and has a loan. All JV partners are directors, however, different JV partners own different proportion of shares (based on percantage of $$$ contributed ). All cash contributied went into company's bank account. When project is completed, profit is distributed per share. That way all involved people are in control and it is simple for a lender. Aside we also have a detalied JV Agreement, prepared by solicitor.
Hope this helps-at least as an idea.
You may not need to build at all to do this deal. There is often no greater profit in building the extra house than there is in subdividing and selling the land. Even if there is a greater profit, if you could do the deal on your own without building, the profit margin you retain is likely to be higher than splitting the profits with someone else.
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