Should I buy property with someone else?
Whilst most people start their investment journey via direct residential property investment, for many investors there comes a point in their journey when they will look to diversify or advance their property portfolio through alternative wealth creation strategies. This decision can be driven by a range of factors, such as an investor’s changing financial needs, their need to balance their portfolio with different types of assets, or a desire to gain exposure to more aggressive or income-focussed wealth creation tactics.
Two strategies in particular investors might consider at some point in their property journey are property development and commercial investment. However, whilst both can be valuable additions to an investor’s portfolio in different ways, these investments also share one problem in common – they are both highly capital intensive, especially when it comes to high-quality assets.
One option that a growing number of investors are considering to access these larger-scale assets is joint investment. This essentially involves pooling funds together with other buyers for the purpose of purchasing a property or site, with the benefit being that there’s a lower capital outlay involved for each party. Depending on the structure in which you carry out the investment, there can be a number of different benefits and risks involved.
Joint venture arrangement
A joint venture arrangement is when investors pool money together with other buyers from their own network to purchase a property or development site as a grouped investment. Together, the investors own the property directly and control all decisions relating to its purchase, ongoing management and eventual sale. The investors split the costs of the property, as well as any profit (or equally any losses) made upon the asset’s eventual sale.
High level of control – Joint ventures may be a suitable option for investors who want to enter a joint arrangement whilst at the same time maintaining high levels of control over the associated asset(s). As opposed to professionally managed property syndicates, whereby an experienced asset and property management team will oversee the assets and strategy on investors’ behalf, the parties involved in a joint partnership will share responsibility for all decisions relating to the asset.
No asset management fees – If you’re choosing to oversee the property yourself in a joint venture, you won’t need to pay fees to an asset manager. However, this will generally require investors to have a greater level of market knowledge and expertise to manage the project effectively and mitigate market risks.
Joint liability – In order to finance joint venture purchases, investors will generally take out a joint loan with the other parties involved in the arrangement. As part of this, the bank will usually require investment partners to sign guarantees for the whole amount of the loan (not just their own percentage), which can be an added risk factor for those involved. This not only means investors would be liable to cover the costs should another investor default on their repayment – it could also be factored into the investors’ future loan applications, and may limit their borrowing capacity as a result.
Limited by own knowledge – Having greater control of the assets in a joint investment may seem like a compelling concept, but the downside of this is that investors are limited by their own knowledge, time and experience. When you’re dealing with complex assets such as commercial properties and large-scale developments, the demands on investors can be a lot higher, both in terms of the knowledge and time investment required. For investors such as busy professionals, farmers and business owners who don’t have a lot of time on their hands, this approach can be a lot more stressful and risky than having a professional manager act on your behalf.
A property syndicate or trust is a form of joint investment whereby investors purchase a share of an asset, site or group of assets which are held in a professionally managed unit trust. As opposed to joint ventures, each individual commits the funds they wish to invest (without the need to recruit other interested parties) and a specialist team acquires and manages the asset(s) on investors’ behalf. Depending on the type of syndicate, investors will generally receive either regular income distributions from the investment (usually the case with commercial property trusts) and/or a share of the capital growth or loss achieved at the end of the syndicate.
Professional management: The main benefit of this approach is that the assets involved in the syndicate are acquired and managed by a professional team who (when chosen correctly) will generally have extensive experience in their respective industries. This negates the need for the same level of specialist market knowledge and research on the part of investors, and can be important for risk mitigation when it comes to navigating the complexities of larger-scale projects and unfamiliar markets.
Access to more market opportunities: As industry professionals, established syndicators will often have access to a broader range of resources and investment opportunities. This can include dedicated research teams, industry contacts and off-market deals, which may not be available to other investors.
Non-recourse loan: If the syndicate is structured as a unit trust, any borrowings for property syndicates or trusts will be entered into by the entity itself, not by individual investors. This means that investors won’t be subject to personal guarantees in the same way as they would with joint ventures, which can significantly reduce the risk to individual investors in the event of a default on the loan.
Access to larger developments/assets: Syndicates can offer an attractive alternative for time-poor investors who want to enjoy exposure to larger scale assets or developments, but without the hands-on approach involved with acquiring and managing the project directly.
Less control: Given the passive nature of syndicates, they are generally less suited to investors who want full control over decisions relating to the management of their investment.
Illiquid investment: It’s important to note that managed syndicates and unlisted property trusts are for the most part illiquid investments. Most commercial property trusts will have a fixed-term (generally around five years), during which it can be difficult, and usually not recommended, to exit the investment. Similarly, whilst property development syndicates will often have a projected completion date, this can also change subject to factors such as market conditions and project delays. As such, these investments may not be suited to those who require greater flexibility when it comes to exiting the investment or investors who require funds to be returned within a specific time frame.
Management fees: Investors who partake in syndicates will generally be required to pay asset management fees to cover the costs of acquiring, negotiating and managing the assets involved. Whilst this expense would not be incurred if investors were managing the investment directly, many would argue the benefits of the professional guidance of managed syndicates far outweigh the potential risks that come with limited market experience.
Whilst they can hold a number of benefits for investors when chosen and managed well, like any investment, joint ventures and property syndicates carry their own risks, and it’s crucial that you take the time to understand these before committing to any project or investment with others.
If you would like to learn more about property syndicates and the latest development opportunities with Momentum Wealth, visit the following link for our recent and upcoming residential development syndicates. Alternatively, request the commercial property trust guidebook from our sister company, Mair Property Funds, to learn more about syndicated investments through unlisted property trusts.