Hi, i'm looking to buy an IP with a friend. Hold for about 5 years to let the underlying value increase and the area gentrify more and then develop and sell. I'm a town planning consultant so site selection is sorted. Interested to know your thoughts on both that basic strategy and using a tenants in common setup. BTW I've been reading avidly for a while and love your work!
tenants in common would be preferred (or joint tenancy) because each party can deal with their share of the property in their will, but many general issues with joint ownership of property. You should have a written agreement that covers things such as - who does what - what pays for what - what if one wants out - what if one dies - what if one wants to sell but the other doesn't - what if one wants to buy but the other doesn't Consider also Stamp duty on any buy outs Effects of family law - spouse of the other owner slaps a caveat - can't contract out of that one. impact on serviceabilty
If you buy with a friend you should view it as a business venture. You need to plan for bad outcomes and unforseen events. The plan should have forecast profits and expectations of how you act when key milestones happen. You would normally buy as tenants in common and rarely buy as joint tenants with a third party. I am sure there is a situation when you would buy as joint tenants - but I cannot think of any at this stage.
I would say you'd either want to purchase as TIC or possibly using a trust (although this will require additional cost and research). With TIC you will also be able to allocate percentages of ownership if one of you didn't necessarily want or have the capacity to buy 50%. One thing to consider with these sorts of joint purchases is the effect on your own personal borrowing capacity. Lenders can and indeed do, treat each party as though they have undertaken the entire debt as in the event one person defaults, passes away, etc., the other party will still be liable for the full amount. This can impact borrowing capacity outside of the partnership so make sure you speak to a good mortgage broker and an accountant regarding the impact of your proposed arrangement on any other personal purchasing goals you may have.
A discretionary trust should be avoided, but a unit trust may be a good way to go as if one of you decided to sell his 'share' to the other this could be done without change of title and without stamp duty in some states - such as NSW.
Yes, definitely. Sorry, I should have specified. A discretionary trust is also known as a family trust for anyone reading who has heard both terms.
Thanks Terry, I sat down with my accountant today and he confirmed this. I found podproperty online who do agreements.
Thanks Andrew, looks like a Trust will work and each of our Trusts owns a share in a Company..... if I followed my accountant closely enough....
Hi Andrew, appreciate the advice about trigger points for decision making. Hadn't discussed that with my mate yet, so will next time.
Are you saying a company owns the property with each of you using a discretionary trust to own the shares in that company?
You'll want your relationship to be worth more than the transaction you enter into. If things go pear shaped you could lose a lot of money, if the relationship is important you'll want to be able to move past that to keep it intact. $$$ < relationship
Just be careful of purchasing property in a company i.e. the company owning the property and not the trust. There are big disadvantages from a lending and tax perspective in my opinion and is really only suitable in certain circumstances, namely if the company is already a functioning entity, not created specifically for the purposes of purchasing property. As always, follow the guidance of your accountant and mortgage broker for your specific situation.
Mmmm, I agree Tom. Will be slowing down to make sure that we are not committing beyond our mutual means if there is a downturn. And yes Andrew, I need to nail the structure down. My accountant has experience so I'll rely on his knowledge.
In some states and some instances a unit trust ownership strategy may be a little more flexible. Legal advice would be sensible
A company can work out well in many cases. E.g in NSW a company could save $8k or so in land tax compared to a trust each year. A company can also retain income and distribute it in different tax years too
