Property Investment +5 people

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Teetree

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I know this sound crazy involving family, but wondering people thoughts advice on suggesting the following to cousins, were a fairly close family and I know once money becomes involved that’s when families can breakdown but I’ve an idea to suggest to them.

Most of them don’t have pensions and were y no means wealthy, but I was thinking of suggesting to 10 cousins who 6 have partners, so potentially 16 people, but I’m estimating 6 of them could be interested.

We each invest 10k into purchasing a property for €200k, with the idea to rent. I’ve mixture of roofers/electricians/Service manager of apartments and one who is involved in renting of complexes’ and house for landlords and myself in accounts. So there is a good mix between us, obviously I’m think this will spread risk so financially is better, I’m not talking about massive returns but maybe in 20-25 years come to retirement we could potentially have minimum 6 properties, in that every 3-5 years maybe purchasing another property along the way with above proposal.

The above is not my question but more so what can be done on the mechanics of this, is it that we set up a trust to manage it, in that is this possible will banks listen to us if we have €50k deposit and €10k for finance costs with house/apartment. I would suggest that investment is for a period of 10 years after which if investment has made a certain amount of money then it’s up for a vote(if no increase then no vote), if enough people decide to cash in, then it’s sold and proceeds split evening, if vote is not successful then investment stays for another 10 years, basically those are only times it can happen, your investment is tied up until then no exceptions, what happens if one of them made bankrupt can the trust be liable. Can solicitor do this or would Irish Law prevent certain rules like this.

What happens to my credit rating whilst im invested in this trust and the others, let’s say they and their partner decide to buy a house themselves how much of a negative impact them investing in this would it have on them and their credit rating with bank considering exposure as mortgage of €200k - €50k investment = 150k between 6 people so ~€40k including interest? I know this is on 1st property only and over the years financial risk would increase, but1st hurdle is getting 1st property to see if it works or not…

So basically wondering if certain rules can be written into a contract, and exposure on people on credit rating if they want to get a mortgage themselves and will bank listen to us?

Thanks,

Teetree
 
There are many problems with the proposal. Here are just a few:
  • The financial needs of people are different. So it may suit you to hold on to the property. It might suit someone else to sell it. It might suit someone else to use the equity to buy another property.
  • Borrowing to invest in property is not a substitute for proper pension provision
  • Sometimes property owners are faced with difficult decisions e.g. evict a tenant or leave them there and hope that they will get back on track. With 6 people, you could have 6 different opinions.
  • When things are going well, people tend to agree. It's easy enough to split profits. But when things go badly, it can be very hard to split losses
  • If one person does not pay their share of the repayments, then the others will have to pay them or else all of their credit records will be affected.
I think it's a bad idea, but if you do decide to do it, the only way it should be done is to have no group borrowing. So, if you buy a property for €200k between 5 of you, then you each come up with €40k cash. That would eliminate a lot of the sources of problems. You will have an investment which is generating rent and making a profit. If people own their own homes, they may be able to remortgage the homes to borrow their share.

Make sure everyone is fairly comfortable with the amount invested so that they won't be under pressure to sell. It also means that if one does want to sell, the others may be able to buy out their share.

You have to buy it as a partnership. Forget about trusts and companies. They will make it very unprofitable from a tax point of view.

If it goes well and you are ready to buy another property after 5 years, then reorganise it so that each property is owned by a separate group of people. It's better to have two groups of three people owning a property each, than to have a partnership of 6 people owning two properties.

Brendan
 
Thanks Brendan for the advice, i was hoping in some way that youd say the investment is somehow separate to their personal liability's, that if it was in trust its separate and cant be touched, so that on signing to contract each of them are aware that, investment is tied in and nothing can be done to get it out apart from rule set of 10 years and option of vote if profit.

Also liability on mortgage failing not to be rented/damage/repairs etc should be manageable between 6, i know you've explained worst case scenarios which could be a problem. It makes more sense buying outright if possible as you suggested which sounds like the route to go, but im 90% sure capital is not there for that to happen...maybe have to drop to €130k house/Apt or something start small :)

Thanks again...
 
I'm with Brendan on this one - forming an investment syndicate with family members is a recipe for disaster.

If you simply want to make a relatively modest investment in Irish property, why not buy shares in one of the newly established REITs? I don't personally understand the Irish obsession with property as an asset class but at least there is some diversification with a REIT.
 
Thanks Sarenco, Reit is not exactly what i was after, i feel we 6 or 10 as a base would have a good foundation into possibly making something work ourselves as i believe in our skills/personalty etc at present however once money is in the equation it could be a different story. Would rather have an asset that were all responsible for as opposed to somebody else managing it.
 
Understood Teatree.

It sounds like you may possibly be more interested in establishing a property management business as opposed to a syndicated family investment.
 
Teetree said:
We each invest 10k into purchasing a property for €200k, with the idea to rent... I’m not talking about massive returns but maybe in 20-25 years come to retirement we could potentially have minimum 6 properties, in that every 3-5 years maybe purchasing another property along the way with above proposal.
Click to expand...

I don't get it. To buy another property after three years you'd have to have made a profit of 26% net on the first one. To do it after 5 years you'd need 15% net. How can you possibly do that, especially if you are proposing to borrow any money, which could easily send your net returns negative? Rental returns are nothing remotely like that. This sort of maths works with the type of capital appreciation Ponzi scheme that was our last bubble, if you get in and out at the right time. I can't believe anyone is proposing to get up to those sort of antics again (although, this being Ireland, I'm not actually that surprised about any property mania). Long term average returns on the capital cost of property are about equal to the rate of inflation, so you will make net zero in real terms. On rental you could make a few percent. Is such a complicated scheme worth it?
 
Even with the initial capital it's not clear if it's borrowed or not. I'd say the OP would do well to make a good informed assessment of the likely net rental returns after tax. It doesn't look easy to make a decent return from property, and in any case a REIT would allow for much greater liquidity, less management overhead, and less complications with multiple participants.
 
Teetree said:
I know this sound crazy involving family, but wondering people thoughts advice on suggesting the following to cousins, were a fairly close family and I know once money becomes involved that’s when families can breakdown but I’ve an idea to suggest to them.
Click to expand...

Even the headline on this thread tells you all you need to know.

Luckily for you there is no bank that will go anywhere near this.

If you want to go into property do it alone. Let other people fund their own retirements. They will blame you for everything.
 
I would advise OP to take the advice from Bronte very seriously. If 2 is a crowd in property ownership think of what 5 would be.
 
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