Setting up a property syndicate can be a daunting prospect because of the amount of knowledge you need about finance, the law and the tax system. So where is the best place to start?
Step 1: Find your partners
This is probably the most important step to navigate. Money is a very emotive and personal thing for many people and so investing with others is not going to be for everyone. You have to be prepared to be a little bit flexible and recognise that you are not going to be in control of every decision. You also need to make sure that the people in your property collective have a similar relationship with money and are open and genuine people that you can trust.
For that reason it helps if the members of your property collective are friends and/or family members. All but one of the property collectives I have been involved with have been between friends. The ones that have worked best have been those that have been those formed between groups of friends and family members. I think this is purely because friends and family members trust each other more than they do acquaintances or strangers and are more in tuned to the way each other operates and communicates. This reduces the chances of misunderstandings developing.
Because starting a property collective is typically a long term venture, the dynamics of the group need to suit having a long term relationship. Typically most people in a property collective look at committing to a 5 to 10 year horizon. So it does take a particular type of person to make a venture like this work.
Typically people who suit a property collective:
- Are a little bit entrepreneurial
- Have good communication skills
- Want to build a residential property portfolio
- Believe that residential property is a good long term investment
- Have some regular disposable income that they would like to devote to building a property portfolio
- Have a group of friends and/or family members who they can trust to commit to keeping their promises to each other
- Have a “can do” attitude
Step 2: Agree on your objectives
The goals of your collective might be to buy, renovate and hold one, two, three, five or more properties, over a period of 3, 5, 10 or more years. It might be to build a 5 townhouse development or or it might be simply to purchase a holiday house for you to all enjoy.
There are plenty of property strategies out there. Investing in apartments vs houses, positive cash flow vs capital growth, new vs established etc. The objectives of your property collective are limited only by your group’s timeframes, property strategy and the level of commitment you are all comfortable with.
Typically the main thing to agree on at this early stage is the broad strategy. It is only once you have completed the next two steps that you will refine your strategy and start to really understand your specific objectives.
Step 3: Work out your finance strategy
After finding the right partners, this is probably the most important part of the process. This is because property investors are not actually in the business of property, they are really in the business of finance.
What do I mean by this? Well while property selection is obviously very important, if you think about it, ultimately it is the ability of a property investor to use finance and leverage to acquire a property (and/or properties) and hold it (or them) over the long term that makes that investor their money.
So you have to be extremely careful when it comes to incorporating the finance strategy into the design of your property collective. Your guiding principle in designing your strategy and the structure of your syndicate should be that the finance or money strategy comes first.
Particularly if the structure you are looking at involves a group finance solution where parties become jointly and severally liable for the full amount of the mortgage. This may allow you to purchase a more expensive property, but it may also restrict your ability for your collective to achieve its ultimate objectives.
The structure of the syndicate should ideally be flexible enough for all members of the collective to achieve their shared goals for the syndicate, but also allow members the freedom to achieve their personal goals outside of the syndicate.
This is because forming a property syndicate is normally a long term venture. And while you can do a lot of work to manage your risk, no one can really know what is going to happen in the future. Things change. So you want to build flexibility into the design of the structure.
Finding a mortgage broker with a lot of experience with financing property investments is a good place to start. These professionals are in the best position to provide you with practical and unbiased advice on your finance options based on your current situation and what you want to achieve.
Step 4: Determine the investment structure you are going to use
In reality step 4 is done in conjunction with step 3. Your finance strategy and your investment structure are intimately connected. The two can’t really be separated.
There are many types of structure you can use. Co-ownership of property can be done as joint tenants, tenants in common, a partnership, a private company, a unit trust, or discretionary trust. It can be also done as a mix of these options.
Each of these structures has their specific pros and cons. At this point it is extremely important to do your due diligence. The structure you choose will ultimately affect your ability to leverage into more properties and the amount of tax benefits you will receive personally via your syndicate.
So it will help to get your accountant talking to your mortgage broker at this stage. Between them and yourself you should be able to arrive at the most appropriate structure for what you want to achieve.
Step 5: Agree on your property strategy
It is only once you have finalised your individual and group finance strategy and know the vehicle you are going to invest through that you can narrow down and finally agree on your specific property strategy.
This is because your finance strategy will determine how much equity will be required to achieve your objectives and how much money you will each need over what period of time to maintain your property purchases.
So it is only at this point that you can:
- Finalise and agree on the specific property selection criteria ie. Price, location, type, etc.
- Understand exactly what you can achieve ie. Number of properties over what time period, how much you spend on renovations etc.
It’s important that at this stage everyone clearly understands and agrees on the specifics of your property strategy. It’s also critical to really focus and be clear on what your entry and exit strategy will be.
Step 6: Put a legal agreement in place
This step is your social and business risk management strategy in one.
It’s very important at this stage to consider every aspect of the venture you are starting, to think about every situation that might unfold, no matter how crazy or unlikely it seems and talk about it openly and honestly with your group. The more brainstorming and scenario planning you do the better you will be at managing your risk and the minimising the chance of unforeseen circumstances arising.
Once you have arrived at answers that you are all comfortable with, then you can get your lawyer to document what as a group you have all agreed and committed to do.
Some of the main things you should consider are:
- What happens if someone can’t or doesn’t want to honour their financial commitments?
- What are the roles and responsibilities of the different parties?
- What type of decisions can be made by whom?
- Can new participants be admitted?
- What if one of the parties wants to retire before the agreed termination of the collective?
- How will you resolve any disputes between the parties?
- How will you agree on the appointment of third parties?
- Execute your strategy
This is an extract from my article “Your Step by Step Guide to Forming a Property Syndicate”. If you are interested in reading the rest of this article click here
Tim Riley is the principal of Property Collectives. Property Collectives helps groups of friends and family invest in & develop property together by sharing their money, time, skills and knowledge. To find out more visit www.propertycollectives.com.au