[CodyB]

I'm considering purchasing a property with a friend of mine probably 6-8 months down the track and I am just wondering whether or not anyone else has done something similar?

We're both Male, 25-30, Living alone, Existing property owners and spend > 40% of the year outside of Australia. He isn't from this website nor does he outwardly express any RP beliefs but he very much lives that lifestyle. Single and doesn't appear to want to change that.

We've agreed on the following;
2-3 Bedroom Unit in an area with existing strong rental income and growth potential
Renting out either room or whole apartment on AirBnb or something similar, especially when overseas to screened tenants
Keeping the apartment minimalist
Should any conflict arise having a 12 month mediation period followed by sale unless sale is agreed by both parties beforehand
No live in Girlfriends
No Animals
Setting up a home conducive to our work lives

Positives:
The guy I'm investing with is smart and not passive aggressive nor is he a homebody
We have fail safes in places to allow us to resolve any conflict with an agreed period of mediation unless we both agree to sell
Because so much time is spend overseas at key times of the year, it's going to be possible to rent out the flat on Airbnb for about 20% above market rent. That will cover mortgage + incidentals.
We both love pussy - we will never be at each others throats about bringing girls back and we will be able too run pretty tight party / host game as well as this place should have a good view, in a good spot with a very well endowed liquor cabinet (Mine keeps growing because I rarely drink)

Negatives:
If I want to purchase another property (definitely on the cards as I've been trying to sell my current house for a very tidy return) the whole value of the loan will be counted when assessing my ability service the loan
He might be a cunt
Despite everything we agree to, and going against my judgement he ends up with a live in girlfriend - SHE will likely be a cunt and it might be hard to write relationship criteria into a contract
He goes bankrupt or I go bankrupt (neither unlikely, but in both of our industries one 2008esque year can burn you to the ground pretty quick)

What excites me is I'm going into a business partnership (kind of) with a like minded individual. Both of our longterm plans are to go overseas permanently so it will eventually become a fairly lucrative investment property as well.

Any thoughts or similar experiences?

[Windom Earle]

Pretty sound plan.

To protect against implications of potential bankruptcy, have you thought about setting up a discretionary trust? Any assets of a discretionary trust are protected from creditors.

[The Black Knight]

I think this is a very bad idea in general.

Why would you do co-ownership over a small time property with this many potential X factors that could go sideways at any time? Rental property ownership is a long game. You need to be thinking in terms of 10, 20, and 30 years out and what could go wrong. A lot of X factors plus a long time period is a recipe for disaster.

Also, not having full control over an asset with this much money involved can lead to all kinds of hell that usually involves expensive lawyers and wasted time in court. A difficult tenant in a tenant friendly country is enough of a hassle (I'm assuming Australia is tenant friendly given the politics there; most libtard places are). A potential difficult co-owner is a whole another ball of shit I would never want to deal with.

You get co-owners (and minority control co-owners at that) when you are doing big deals that require large capital that you can't borrow on your own. This project you should be able to do by yourself without a friend. You might have to spend/borrow a bit more upfront and do a bit more work but the returns in the long-run will be far better and you will have WAY less potential bullshit to deal with; bullshit that could cost you a lot of time and money.

Ultimately, if you can't afford to do 2/3 bedroom place on your own as a rental or partial rental property, you have no business doing this with a partner. For me, this particular arrangement sounds like high risk and low reward. Why would you do that?

[Suits]

I'd suggest that you swing for getting a property by yourself. Ultimately, while it may be a bigger investment for you initially, you stand to gain 100% of the profits.

[CodyB]

(03-12-2016 03:48 AM)The Black Knight Wrote:  

I think this is a very bad idea in general.

Why would you do co-ownership over a small time property with this many potential X factors that could go sideways at any time? Rental property ownership is a long game. You need to be thinking in terms of 10, 20, and 30 years out and what could go wrong. A lot of X factors plus a long time period is a recipe for disaster.

Also, not having full control over an asset with this much money involved can lead to all kinds of hell that usually involves expensive lawyers and wasted time in court. A difficult tenant in a tenant friendly country is enough of a hassle (I'm assuming Australia is tenant friendly given the politics there; most libtard places are). A potential difficult co-owner is a whole another ball of shit I would never want to deal with.

You get co-owners (and minority control co-owners at that) when you are doing big deals that require large capital that you can't borrow on your own. This project you should be able to do by yourself without a friend. You might have to spend/borrow a bit more upfront and do a bit more work but the returns in the long-run will be far better and you will have WAY less potential bullshit to deal with; bullshit that could cost you a lot of time and money.

Ultimately, if you can't afford to do 2/3 bedroom place on your own as a rental or partial rental property, you have no business doing this with a partner. For me, this particular arrangement sounds like high risk and low reward. Why would you do that?

You make some good points.

Us going ahead with this is predicated on several factors.

And just for clarity and context, our budget will be somewhere around $750,000AUD. I currently own one house and a flat. The house has made a tidy gain since I bought it and I'm trying to sell it. Sadl

I already own two properties and the my current equity sits at about 15% of the property value, mortgage insurance means I will have to front up another 5% which is something I'm seriously considering as well Both me and my mate understand it's a long game, however I understand that feelings can change and shit hits the fan etc.

Because of Australia's negative gearing rules in relation to property, I will be able to reduce my taxable income by $15-20,000 a year depending on the price of the flat and the interest rate at the time. I will starting distributing profits of my company within the next three years. I own just over 1/3 and I'm anticipating a huge bump in the income tax bracket. That $15-20,000 will be real money coming back to me. So I see immediate benefits.

Thirdly is the value of the actual property. We are looking at several locations, all of them have had modest growth in comparison to the rest of Sydney. These locations will see either a Metro or a Motorway built there in the next 10 years, positioning them within 15-30 minutes of Sydney's CBD. This positions us for good to very growth over the next decade. 5% per year should be attainable barring any real estate meltdowns, 10% is realistic and a 20+% PA increase in some years is definitely possible once the infrastructure is completed.

But the unknown is still out there and so many factors at play could see this go south very quickly.

Negative Gearing's days may be numbered
Sydney's real estate market might contract or plateau below inflation
Freeway/Metro might not be complete
I am "Inviting Offers" on both of my properties. The banks valuations seem out of touch with what is actually happening on the market, so I'm hoping to get something substantial and using it as leverage with the bank so they will lend me more money. They're rigid though. If I were to all of a sudden have equity that is or exceeds 20% of the value, I'd probably go in myself.

Thanks for the feedback. Gave me a lot to think about.

[The Black Knight]

You already have 15% equity already in your properties and you need around 20% to be willing go by yourself and get loans?

Much easier to get to 20% and get full control of your investments vs giving up control and opening up yourself to enormous hassles and headaches as well as less profits in the long run.

Regardless of the financials, I wouldn't do this with a partner unless it was absolutely unavoidable AND it was a very time-sensitive deal AND the extra potential bullshit meant MUCH higher potential profits. And even then, I generally wouldn't do it on the principle of hating to deal with business partners of any variety. When it comes to big money, I like full control.

So far you haven't really made the case why you NEED this buddy of yours. Don't take this the wrong way but it sounds like you are being impatient and wanting to make a risky deal in an effort to save a little time; despite the relative low rewards. Much smarter to get that 5% you need, get the loans, and have full control and profits for yourself. The deal you have now involves a lot of extra risk, way less control, and ultimately less profits. Makes no sense to me why you would do it.

[Onto]

These two negatives are also very important:

1) Neither party can re-finance the property at a later date without the other agreeing to it.

- Refinancing costs money. Can be a good idea or a bad idea, but it will be an option you won't have control over.

2) Can't sell or hold without the other party agreeing to it.

- You might want to sell, but he doesn't. You might want to keep it, but can't afford to buy him out.

It sounds like it's a condo which will be easier from a maintenance point of view. Maintenance choices are also important. For example, you're remodeling a kitchen/bathroom and you want to spend more for tile to attract a better tenant/more rent, but your friend wants cheaper linoleum.

It may seem like you are both of the same mind, and maybe you are, but as you delve deeper into business decisions you may find the two of you have very different outlooks.

[jumbo tron]

The idea of going into business with a friend like this is great, it should work and worth getting excited about. However, it so often doesn't. Taking the emotion out of it like you are and logically thinking about the positives and negatives is vital.

A few of points to consider, in no particular order:

I think you have to closely analyse your reasons. The line is blurred between whether it's an investment or a lifestyle endeavour. I was watching property shows years ago and one particular experienced investor said you rent your lifestyle and own your assets. May help you make clearer decisions.

Do you have to sell your existing house or flat? I'm assuming one of them is your principal place of residence ( PPOR) hence capital gains tax free, but when you take into account transaction costs selling and then rebuying is not to be taken lightly. I think building equity in this prime asset is preferable and anchoring some future lending against it.

Also, if you're spending more time overseas look into the PPOR 6 year rule. It essentially means you can turn your residence into a rental property, and claim the associated rental income and income producing expenses but not actually subject it to capital gains tax. You can live away for up to 6 years before moving back and resetting the 6 year period. Effective to try and buy some equity quickly. You can't claim another residence as your PPOR.

He sounds like a good friend and although on the same page now life can change dramatically in 5 to 10 years time. If at all possible if you can get the 20% equity, even paying loan mortgage insurance and do it on your own and subsequently maintain 100% control .

He, or someone else of similar trust could still be involved and enjoy the lifestyle benefit. They could rent as a permanent flat mate and effectively manage the air bnb rental aspect to it for a rental discount or commission, especially if you're away a lot of the time.

All the best with whatever you decide.

[Pyrrhic victory]

Many others are saying the same thing and I will repeat it. Onto has a good write up above.
Under no circumstances should you partner with a friend in real estate.

I have worked in this business for the last 15 years and have sold, renovated and rented hundreds of houses and apartment units. I have seen brothers , best friends , fuck buddies all go into business with what initially started off as a great idea of a symbiotic joint venture in real estate. Rarely does it work out that way.

1. People are greedy by nature. If your friend at any point has shown or demonstrated one iota of theft , hustling or lying he will revert to this down the road. People do not change.

2, assuming he is honest, not many people will do business the way you do. I prefer to always to full renovations. I would remove all moldy dryeall , insulate and tyvek walls etc when an old associate of mine wanted to cut corners and save money. I have minimal service calls and minimal turn over as my tenants Are happy with a quality rental.

We ended up not working with each other after this as he did his own thing. It turns out he was hit with a barrage of complaints from tenants who ended up calling the cities building departments on him and got himself into a lot of trouble. He also would offer to do certain repairs and favors for tenants and would not deliver causing more problems.

The upside is not worth the headache. Save your money and do it solo.