The six keys to successful joint venturing of property ownership: Chan & Naylor

Property investors’ awareness of creating wealth via add value strategies like renovation, granny flat additions and  “knock down and build two”  strategies have been fuelled by the plethora of reno shows on TV and the media  focus on creation of wealth via property in a relatively flat market.

There seems to be a sense of urgency to “get in and get started” particularly among younger investors who are finding it hard to enter the property market for the first time and even harder to  get in if the plan is to renovate or do a small development on the site. For those investors who want to get into the property market sooner rather than later and do not have sufficient savings for a deposit or are short on servicing capacity,  joint venturing a deal is coming up more often as an alternative solution.

“Joint venturing” tends to refer to shorter-term arrangements, while “co-ownership” refers to the longer-term holding of property by two or more individuals or entities, be they a couple, friends, family members or trusts.

Three clients of ours successfully recently completed a 14-month investment project and walked away with $43,600 each (pretax!). John, Helen and Marie were each unable to purchase an investment property in their own right, and all wanted to gain firsthand experience doing a small development.  They decided to join forces and do a small development that they could on sell quickly. Together they purchased an old weatherboard Queenslander on an 1,100-square-metre residential corner block 12 kilometres from Brisbane CBD.   The existing dwelling was at the front of the block and the back of the block had easy street access and room to construct a second dwelling on it.  They erected a neat two-storey, four-bedroom dwelling on the back of the block, subdivided it onto two titles, renovated the original Queenslander and landscaped the property with established trees and plantings.

The maths on this is as follows:  Purchase: $465,000, council and DA costs: $40,000, build costs: $260,000, renovation costs: $85,000, subdivision costs: $20,000, agent’s fees: $37,000.  The renovated Queenslander sold for $570,000 and the new dwelling sold for $610,000.  The profit on the venture was $281,000, which they divided between them. After netting out their original $50,000 contributions they had $43,600 each.  Each of them will have different capital gains tax liabilities as this depends on their individual financial situations, and so they are off to their Chan & Naylor accountant to clarify this.  They are also looking for their next project.

Benefits of joint venturing

• Savings are pooled towards the deposit, allowing you to buy into a property sooner.
• Combined savings can also go towards renovation expenses or deposits on construction loans if an add-value strategy is being pursued.
• Borrowing power for the loan is also combined across owners, often resulting in being able to buy a better-quality property than you could have afforded on your own.
• Running expenses of the property are shared, affording you a little left over in the budget for the occasional treat.
• The expertise, workload and responsibility for planning developments and renovations are also shared.

Risks of joint venturing

• All parties are jointly and severally liable for the entire debt, not just for their individual shares, so if anything happens to one of the partners the others are held responsible for the debt in its entirety.
• When calculating serviceability for additional loans to individuals, lenders will take the 100% of the debt of any joint venture into account, not just your individual share.

For example, if John, Helen or Marie, during the course of their joint venture project, had wanted to refinance a loan against a property he or she held only in his or her name, the  lender would have counted 100% of the JV loans as their total responsibility.  The message here is to plan ahead for such individual needs when joint venturing.

Conflict may arise during the course of a joint venture project as individual circumstances and needs change.  Plan how you will mediate through differences of opinion before you enter a JV arrangement and put these agreements in writing.

The keys to successful joint venturing:

1. Do investigate joint venturing options, as they can be both profitable and fun.  Be careful to not go into an arrangement and investment without extensive research and planning.
2. Invest extra time in planning the structures you will use. By using the right legal structure you can come up with the most tax-efficient and safe outcomes for the project that you are planning.
3. Do your due diligence on any purchase regardless of whether you are joint venturing or not.  The old saying of “you make your money at the time of purchase” has strong backing from experienced investors, so heed it.  Check in with town planners and councils that what you plan to do is allowable in their area.
4. Number crunch your renovation and construction projects thoroughly and repeatedly. It’s easy to blow the budget and your well earned profit margin with it.
5. Draw up a joint venture agreement to cover changes in circumstances and seek professional advice to ensure you are each adequately inured and protected. A legal document designed to set out the rights and responsibilities of each owner, whilst an added expense is essential to avoid issues in the future if circumstances change.
6. Get a good financial or investment strategist to run their eye over your proposed JV and point out its strengths and weaknesses.  They are not emotionally involved in the project and will give you an unbiased opinion on what you are planning.

Jenna Ford is a finance strategist and partner at Chan & Naylor Finance