Expert Advice: by Ian Hosking Richards

Joint venture partnerships are becoming increasingly popular as a way for two or more individuals to jointly qualify for a loan who individually would not be ready to invest. 

Lenders are looking for ability to service the loan, and also for evidence of genuine savings as a deposit. The joint venture partners may be two individuals who have some savings and moderate incomes, or it may be one individual with plenty of cash and savings but little verifiable income, and another with really good income but no savings.  Neither would qualify individually, but together they do qualify. It seems that there are indeed many potential investors out there who find themselves in this predicament. The readers that have contacted me personally are intrigued by the possibility of employing this strategy, but are asking for more detail.  What would be the best legal structure for the purchase?  What kind of agreement would need to be in place?  How would disputes be handled? Etc etc...

Whilst I am not authorised to give this kind of advice, I have come across many such joint venture partnerships in the course of my real estate career, and am happy to share with you what I have learned over the years.

Legal Structure

From what I can gather, one of the best structures for this type of joint venture is a hybrid unit trust.  The main advantages of this particular structure are two-fold. Firstly, because each joint venture partner owns units in the trust, rather than holding a direct interest in real property, it does not impact on the ability of the investor to claim any FHOG benefits, should they purchase their own home at a later date.  The other big advantage is that they also do not lose their negative gearing benefits, as one would under a normal discretionary trust structure.

The Agreement

Prospective co-ownership participants will require a specific and suitably drafted:

  1. Hybrid Investment Unit Trust
  2. Unit Holders’ Agreement; and
  3. Appropriate Minutes.

Alternatively, if the participants are not interested in maintaining the FHOG, they are free to purchase and borrow in their own names, in which case they will need a suitably drafted Co-Ownership Agreement.  These documents clearly deal with entry of each of the parties, exit events, defaults of the participants, dispute resolution, valuation of each of the participants’ interests and how the profits are distributed on sale.  They also allow for negative gearing and suitable borrowing strategies. Approximate costs for the structures, documents, professional services etc are $2,500-$5,000 depending on the approach and the circumstances of the deal.  There will be very particular borrowing requirements based on the set up of the deal.  So you need to make sure that you use a broker who is familiar with setting up these types of deals.

Summary

Although it appears that at first sight there are a lot of things to consider and potentially a lot of things to go wrong, joint venture projects need not necessarily be a ‘mine field’ as long as they are  well thought out.  I firmly believe that it is better to own 50% of a property than no property at all, and with the formidable barriers to entering the market that new investors now face it is an option that more and more investors are having to consider. Careful planning and expert advice, along with realistic expectations and a good understanding of the nature of the partnership should result in both parties being in a position to start their own portfolios further down the track, which is the aim of the game.

For those investors who would like to pursue this option further I have put together a ‘Joint Venture Pack’ which I am happy to send out to anyone who requests it.  This pack contains additional detail that I do not have the space to go in to here, such as how to find a suitable joint venture partner. It also  includes contact details for brokers and solicitors who would be able to help with the setting up of a suitable joint venture structure.  So if you are one of the many who have been waiting to get started in property investing but just couldn’t get past the lenders, take heart, the wait may be over!

Ian Hosking Richards is a successful property investor with a portfolio of over 30 properties. He is the CEO and founder of Rocket Property Group, a leading independent real estate agency that helps hundreds of people each year enter the property market or grow their existing portfolios. 

For further information or assistance, please visit www.rocketpropertygroup.com.au or call 1300 850 038.

To read more articles by Ian Hosking Richards, click here