JV - tenants in common- need help!

[Khooj123]

Hi, I am newbie to this forum. Learnt lots of fascinating insights from the experts active members around here.

Here is my situation:

1) thinking to set up JV with friend to invest property in NSW
Budget circa $800k
2) each will pool in capital$85k for deposit+ expenses.
3) strategy is to buy and hold for min 7-8 years, maximise negative gearing.
4) I am single live in Melbourne and he is married with kids, live in NSW
5) both of us work as profession with no side business.

Given the above context, would JV tenants in common be appropriate?
Considering the risk and priority of following :

1) asset protection: low to medium. He might divorce, wife file caveat against selling the property.
2) estate planning : low priority
3) borrowing capacity: high priority, I am at acquisition stage.
4) ability to transfer to SMSF: low priority.
5) JV partner bankrupt default: low. Even if so, I am prepared to buy off the other
6) minimise tax( land tax, stamp duty & CGT).

I know it may seem a lot start of; but would like to get understanding of the risks involved, things to look out; so that I am prepared. Any helps will be appreciated.

 

[Terry_w]

You might want to consider a unit trust as easy and cheaper to buy each others units if one wants out.

Either way this will hurt borrowing capacity. First thing to do would be to talk to a broker about borrowing capacity and see what you can get now, and then how this could possibly affect you in the future with you both buying again jointly and each buying something separately.

 

[Aaron_C]

Yes you need to sit down with a broker to work out the borrowing power. However, more important, you need to work out the EXIT strategy. Having complications arise from either of your personal situations will completely compromise the other person so make sure you have a plan to get the property either sold ASAP at the end of the development, or have provisions to allow each other to buy the other out (and work out if you can do so or not).

 

[Brady]

Hi, I am newbie to this forum. Learnt lots of fascinating insights from the experts active members around here.

Here is my situation:

1) thinking to set up JV with friend to invest property in NSW
Budget circa $800k
2) each will pool in capital$85k for deposit+ expenses.
3) strategy is to buy and hold for min 7-8 years, maximise negative gearing.
4) I am single live in Melbourne and he is married with kids, live in NSW
5) both of us work as profession with no side business.

Given the above context, would JV tenants in common be appropriate?
Considering the risk and priority of following :

1) asset protection: low to medium. He might divorce, wife file caveat against selling the property.
2) estate planning : low priority
3) borrowing capacity: high priority, I am at acquisition stage.
4) ability to transfer to SMSF: low priority.
5) JV partner bankrupt default: low. Even if so, I am prepared to buy off the other
6) minimise tax( land tax, stamp duty & CGT).

I know it may seem a lot start of; but would like to get understanding of the risks involved, things to look out; so that I am prepared. Any helps will be appreciated.

Personally I would never look to do a JV with anyone for a buy+hold especially over a min 7-8years.

I see the negatives outweighing the benefits.

I don't mind JV for short period, mainly just in use for a development as maximum capital required. But the development also assist with the exit strategy.

 

[Khooj123]

You might want to consider a unit trust as easy and cheaper to buy each others units if one wants out.

Either way this will hurt borrowing capacity. First thing to do would be to talk to a broker about borrowing capacity and see what you can get now, and then how this could possibly affect you in the future with you both buying again jointly and each buying something separately.

Thanks terry. I might be confused here. With unit trust I thought you are only liable for your portion of contribution hence borrowing capacity will not be affected by other beneficiaries; just like shareholder case. Or is my assumption incorrect ?

 

[Khooj123]

Personally I would never look to do a JV with anyone for a buy+hold especially over a min 7-8years.

I see the negatives outweighing the benefits.

I don't mind JV for short period, mainly just in use for a development as maximum capital required. But the development also assist with the exit strategy.

Any specific reason why this strategy not suitable for long term buy and hold? Is it because the longer period increase the uncertainty subsequently the risk associated? Am still learning ...

 

[Terry_w]

Thanks terry. I might be confused here. With unit trust I thought you are only liable for your portion of contribution hence borrowing capacity will not be affected by other beneficiaries; just like shareholder case. Or is my assumption incorrect ?

The unit holders would generally be required to guarantee the loan of the trust jointly and severally.

 

[Khooj123]

Thanks guys for all your advice!

 

[Paul@PFI]

The issue of who borrows isnt that simple. Whenever possible I prefer unitholders individually finance their own units and the trustee NOT borrow. Sure this doesnt work for all situations. An asset poor unitholder for example might need to use the trust property as loan security.

If a loan is taken by the trustee be careful and dont try to issue units in some way so that the unit trust replicates a hyybrid trust concern...ie Think of two people as Trustee Directors. Trustee Co borrows and yet units are issued 30% / 70% to those people..And it just so happens the 30% owner has a lower taxable income.. Part IVA and the ATO may deny interest deductions arguing "benefits others".

For unitholders that borrow their individual loans are deductible personally as they are buying units that are intended to earn fixed trust income...
No loss quarantining....Losses get trapped in trust.
SMSF maybe involved if its an ungeared UT...Maybe it funds 30%+
Availability to refinance later and switch non-deductible debt to deductible.

Get guidance before acting.

The unit holders would generally be required to guarantee the loan of the trust jointly and severally.

 

[spludgey]

I don't like negative gearing and I don't like joint ventures, especially not if the other person has declared bankruptcy before.
If I was in your shoes, I'd buy three IPs:

• $200k-$250k range
• Big blocks
• Rental yield 7%+

This will mean that your portfolio will pretty much be neutrally geared, you don't have to rely on a second person and your borrowing capacity hasn't decreased as much as your cashflow is higher than it would have been with your suggestion.
Not only that, but you'll be holding over $600k in property as opposed to $400k, so it's likely that you'll have better capital gains.