Making a trust and buying property with 2-3 others

Nothing really new as a concept - you are forming an unlisted property trust.

Out of curiosity, how will you (for your friends sake) outperform say BrickX (or Centuria or Charter Hall for that matter)?


The Y-man

 

Before you start - you need to think about how you will end.

What is the exit plan?

What if someone needs their money urgently?

What if someone loses their job and cannot afford to pay the loans?

At what point do you sell the property? What if selling causes tax problems for one of the friends?

What if one of your friends becomes bankrupt?

What if someone gets married and then divorced and their share is part of the settlement and so one of the parties is no longer a "friend", but someone hostile?

What if someone dies?

Who is going to administer the trust? Who is going to make the decisions? What if you can't agree on important decisions?

Why would you use equity in your house and then have equal ownership? It's your equity - surely you get a greater percentage of the ownership?

Don't do it. It sounds great in theory - but the practical realities and difficulties can be really difficult to overcome.

It can be done - and I've heard of people making this type of thing work - but you are also introducing a million new variables for things to get really really complicated because **** happens.

If you are going to do it - you would probably want to use a unit trust so you each have exactly the same rights based on the units you hold. A company loses CGT discounts, so might not be the best choice.

Be aware the financing can be a little more tricky because of the structure - and you need to be careful because a lender may require all of you to be jointly and severally liable for the debt - which means that if one of your friends stops making payments, the bank will make it your problem.

 

Not always the case.

Remember large trusts have:

• access to cheaper and bigger finance
• capability/expertise to doing (really) big deals
• more liquidity (for unit holders to sell down or exit)
• larger portfolios to even out vacancies
• Ability to land bank - buy huge tracts of land, hold, and then do subdivisions, land sales and H&L when the market is right.

amongst other things....

Other questions that come to mind:
- How will the 2 tradie partners be paid? In shares?


In terms of performance examples, let's take Charter Hall DOF as an example...

I bought in at 72 cents per unit in 2014
They are currently worth $1.57
They have paid me consistently around 7% pa in rental return (net of all costs) throughout.

There have been bigger performers, but they are a bit harder to find these days.

The Y-man

 

Is that mostly from a financing perspective?

Ignoring the finance aspect, I would have thought that a unit trust makes the most sense when it gives everyone clearly defined specific rights basd on their unitholding? Unlike a discretionary trust where by-definition there is flexibility and thus is subject to the discretion (whim?) of the individuals involved, which could lead to unfair outcomes?

Speaking entirely theoretically of course - none of these may be the best choice for their specific circumstances - while also recognising that we can't actually ignore the finance aspect unless they happen to be buying with cash only!