Impact of joint venture on finance application

Hi Folks,

Considering going in 50% on a development site purchase coming up this weekend.

For simplicities sake, let's say the property is worth 1 million and purchase a 50% stake along with a partner that has the remaining 50%. And assume the rental income from the property is $500 per week.

I understand that the bank will hold each stakeholder accountable for the full purchase amount - but my question is around borrowing capacity/serviceability.

Will the bank do it's calculations based on a loan of 500k with a rental income of $250 per week for each owner?

Looking to purchase the property with a company with two equal shareholders or a tenants in common agreement.

Just want to make sure that I don't screw up my future serviceability by having a 500k stake in a deal that gets counted as one million.

Thoughts?

 

If you are mortgaging the property - i.e. using it as security then you will be going on a joint loan with your friend as such you will be liable for the full amount borrowed (each of you). If the total borrowings is $1mil you will be assessed on future borrowings as having borrowed $1mil for this.

However if you borrow based on other property, and your mate does too, then future serviceability will be based on $500,000 as that is all you have borrowed.

 

For the deal in progress, the banks will simply put both of your incomes, assets and liabilities into their calculators. The same process as applies to a couple buying a property.

For future applications without the JV partner, most lenders will add 100% of the debt into their calculator but only 50% of the rent from that property. So as far as most lenders are concerned, you've got the full $1M debt, but only $250 / week income.

There are a few lenders who will assume that you've got 100% of the debt and you receive 100% of the income. At the end of the day, the mortgage documents you sign state that you'll be paying off 100% of the loan, not half.

As a result, a JV now might be devastating for future investing.

 

Thanks for the feedback guys.
That's kind of what I suspected/feared.

Having said all that - is there a better way to get into a JV deal without the screwing up your future borrowing capacity?

 

Have an exit strategy from the JV. I wouldn't recommend a JV for a long term buy and hold property. Those that work well is where people get in, get it done and get out.

 

Good point.

I was thinking another option would be to buy and subdivide immediately and sell off one title.

Obviously there are some stamp duty and CGT implications... But it might be the lesser of two evils.

 

The problem with selling off one title is that you still own the remaining property with the JV partner, unless one of you buys the other out with the sale proceeds.

 

Or unless you partition the title. Legal Tip 77: Joint Purchasers of Land and deeds of partition

 

I was thinking of putting through the sale with one person (considering you're on the hook for it all anyway) and then completing the sale post settlement.

 

Very interesting. That's the great thing about this forum.... you learn something new everyday