What to look for in a Joint Venture

Hi,

My friend and I want to go into a JV together to obtain a house with a large amount of land (650sqm).
We want to hold it for 10 years, but along the way we want to submit a subdivision application and build 2 townhouses, then split our ways.

My question is that what should we be aware of in terms of financial structure.

One note is that I already have 4 properties under my name, and some accountants advised me to create a trust for my next purchase.

All is under the assumption that both of us can take out the mortgage to afford the property (50% each).

Thank you.
Tom

 

I was looking to a JV with a few people to try and diversify like you mentioned, and I was recommended to look at the new Bricklet platform.. have you heard of it?

 

I just had a look. Seems to be a bit similar to BrickX. I'll need to read the PDS to know more. However we're interested in a private deal instead of taking it to platforms, since the mentioned property will go on auction.

 

I'd treat all my investments as businesses; consult professionals who have answers to your questions or even ask questions you don't even know you should ask yet - get second opinions. Accountants are a good start to put together a structure together to protect you and minimise your exposure and liability, you'll need a strong lawyer to put an agreement together along with an exit strategy that's agreeable for all parties, and lastly, a solid finance broker to put together a suitable loan structure from the get go seeing that your investment will evolve over the years (it helps if the broker is an investor him/herself).

 

That's kinda like saying a good dentist is the one who's had the most holes in their teeth...
The broker doesn't need to be an investor they just need to know what they're doing, one of the best brokers in the business doesn't invest in property but has built many successful portfolios for his investor clients.

 

What about the legal advice?

If you plan to go your separate ways you will need 2 entities to own the property. This could be the trustees of 2 trusts or 2 people or 2 companies or a combination of these.

Using a trust will not be a good idea, unless perhaps it is 2 trusts. But then you have to consider the land tax and other legal issues.

When you do go your separate ways you will need to consider the stamp duty and CGT implications of changing ownership too - as well as GST.

Death, divorce, bankruptcy and incapacity need to be considered too.

And the finance aspects.

Best to seek legal advice for structuring - it is more than tax.

 

Speak to a good Lawyer to draw up the agreement between yourself and friend.
Finance should be fairly straight forward as there's only two of you involved (assuming you can both afford to borrow), you will each be individually liable for the total loan portion should one default

 

I guess the question is Tom,with 4 ips already and the back-up you would have in the investment's why take on a 50/50 split in ten years time ?..
In the beginning ,when i knew close to nothing and still do,the big mistakes i have seen people i know who are lot smarter then me make is what you are about too do,as it's non-measurable uncertainly ..
But if you intend to go down this road start at the end in ten years time ,and have a EXIT Clause and who ever you wake up too each morning understand's 1000 percent..good luck..

 

Hi David,

I have 2 questions.
- Is it going to be a single bank loan for both parties, or will there be multiple loans, each covers 1/2 of the property.
- Which type of lawyer handles property transactions, as in my mind, all lawyers are pretty much doing the same thing Will need you guys to open my eyes here.

Regards,
Tom

 

Yes I think I'll need a legal advice before I get my next one.
I'm in Melbourne VIC. It would be great if you can refer someone over here.

Thank you.

Regards,
Tom

 

I talked to multiple mortgage brokers, and apparently they don't lend based on equity anymore, but on the serviceability.
I'm stuck with a 45% LVR (after I pull the money out for this venture), but cannot borrow further until my income improves.

Imagine the surprising face of mine when I know about this. Since all youtube videos, all seminars, etc., always assume that we can borrow up to 80% of the property value.

Regards,
Tom

 

It will be a single bank loan which you will be jointly liable for

 

As a broker I've never known a lender to lend based on equity only (unless talking about private lending) Maybe there was a time when banks did this, but it would be before my time.
You must be able to show capacity to repay the debt and then some (due to repayment buffers, min living expenses etc that are applied to serviceability calculators)
Most property investment youtube videos, seminars etc mainly talk about structure and they likely have disclaimers stating "subject to your borrowing capacity/serviceability" etc etc

 

More than 10 years ago there were No Doc loans - if you had equity and a pulse you could get a loan. These disappeared in 2009 with the introductions of the NCCP Act.

But there are still no doc for commerical type loans, in some situations as the NCCP Act doesn't apply.

 

Thing is seems a big risk to assume both of you have the same 10 year view of the property, possibly build, and with no changes in the meantime?

 

Yes that's one of my concern as well.
Life situations are normally unexpected. I think the only way is to put what we can come up with regarding life situations in the agreement, with solutions.

Regards,
Tom

 

If you had 2 companies owning as tenants in common, for example, if one wanted out the other could buy the shares of the company of the other. Duty could be nil in some states. Same with unit trusts - which might be better.

If you decided to stay you could divide the land into 2 titles and one company own each, also without duty or CGT if set up right.

Once titles are separated loans redone, cross colleralisation of securties removed and each entity has separate loan to the other with each individual guaranteeing only their entity's loan.

- as an example. I am not suggesting you do this

 

Changes to companies and unit trusts may still trigger CGT of course. CGT applies to an "interest" as much as it does to legal title. This could in its worst cases trigger double taxation.

All reasons to seek personal legal / tax advice.