co-investing with family and friends

Hi, I want to get some views about co-investing with friends and family.
what are the pitfalls, what kind of structure to protect yourself and what are the things to watch out?

 

That's a very short question which ONLY has very long answers.

If you search on joint ventures and partnerships on the forum you will find a lot of information that may answer some of these questions.

 

There is also one very short answer of "don't do it".

It is a massive can of worms in regards to
- finance
- legal
- changing strategies and circumstances of all parties
- different personality types
- different risk appetites

I have just finished a successful joint venture partnership and we are now winding up the legal side and closing it down as it's finished. Even though it was successful I would advise a lot of caution.

 

so I am reading that buy and hold will not work with co- investing, can you highlight why?

 

What happens if in 10 years' time one party prefers to sell after all, to take some profits.

I debate with myself all the time, whether to do that - I shudder to think what it would be like if there was another actual person on the other side of the debate!

 

Because nobody know their future self and requirements. Joint Ventures tend to work best with finite timelines where everybody is on board for a set number of years and buy and holds tend to be longer.

Imagine Friend Y and Friend X buy a keeper in 2020 and want to hold it for 10yrs then imagine
- Friend Y loses his job in 2021 and can't pay his share of the mortgage
- Friend Y and Friend X go to a party in 2021, get drunk and sleep together and are mortified the next day then decide to see where things lead to but break up acrimoniously 6mths later
- Friend X meets someone and they want to buy a PPOR together but due to Friend X being on the loan and 100% accountable with only 50% ownership for the other property they no longer service to buy themselves a PPOR
- Friend X falls pregnant and goes on maternity leave
- Friend X and new partner get married and then divorce. Her husband wants a share of the JV house

Soooo many issues.

 

This is the best structure.


When you buy and borrow, you simply keep everything with your name & or your spouses, and you make sure you only use your money and or your spouses.

If you want to know more on why I use that structure, well, you can lay in bed for a few nights and think of how many ways you could be involved in a car crash on our roads or highways, you may come up with a few ways to come unstuck, and you may also have the attitude that it wont likely happen too you.

 

Agreed.

People usually do this when they are either scared of going it alone, or lack the financial capability to do so - in either case, you're probably not ready to invest. The list of potential issues are long and numerous and I would personally avoid it at all costs. Not to mention the tax and record keeping complications and any exit plans can cost money and often the relationship itself, plus gains are reduced by appropriate proportions.

One common mistake is thinking you can just buy out your partner without paying stamp duty. It is essentially a sale so if you buy a home for $500,000 on a 50/50 share and in a few years it's worth $800,000 and you want to buy out your partner, you have to pay stamp duty on the $400,000 (half) of the transfer which can be prohibitive for a lot of people. Best to take that gain yourself and handle the cash flow burden yourself in the meantime.

- Andrew

 

Make sure you have a decision making process in place, like paper scissors rock.

 

If you buy assets jointly (actually go into debt jointly), understand that you'll be financially joined at the hip until that debt no longer exists.

What affect one person financially affects the other and this means everything. Job loss, financial stress, future purchases, even getting married or divorced.

The only person I'd jointly go into debt with is my spouse.

 

We have been involved with a number of Property Development Joint Ventures with family members as well as a number with non-family. All ventures have gone well!

We suggest your aim should always be to settle properties out of joint ownership at some point.

Issues can arise in time when peoples goals change so you "get into bed" with people who seem "on the same page" for mutual benefit but time may alter this.

We have a number of strategies that ensure re-naming can take place without costly implications. For us the project is not complete until ownership has settled.

 

just wondering if joint venture under the form of company (Pty. Ltd.) would work, since then everything is company's assets. If a party were to sell his/her shares, then that would be a different issue.

 

similar but different issues would arise

 

Unit trust
Shareholder agreement
Trust agreement
Minority control
Drag along tag along
Arbitration clauses