Tuesday, September 19, 2017

The ins and outs of Joint Ventures in property investing or development

If you think investing in property is beyond your reach, then it might be time to think about joint ventures.

Picture yourself in this scenario… you’re now in your 50s, your kids are all grown up and left home. woman property deal

You see them battling out there in the jungle and you wonder how they’re going to get ahead.

You lament to yourself: “How are they ever going to save the deposit for their first home?”

You well understand how hard that is as it has taken you more than 30 years in the workforce to get to the financial position you’re now in.

That is, your house if paid off and you’re diligently making payments into your super fund, balancing that up with the cost of your new life (travelling overseas for the first time in your life) and a new car.

If your health and job hold out you should find yourself financially independent in 10 years’ time.

You often think you’d like to help your kids get ahead, but what can you do?  


Perhaps you’re the adult child in this scenario.

The excitement of moving out of home has been numbered now by the realities of life.

“How am I going to save the deposit to get into my first property deal,” you ask.

After you pay the rent, car payments and private health fund contributions there’s previous little left.

Mum and dad have often said that they’d love to give you a “leg up” if they could, but, how can they?

Well, have any of you ever thought about a joint venture?

As the parent, your maturity and assets/money (the great thing about having money is that it keeps you close to your children) together with their youth and energy are a great combination. bank-savings-house-couple-save-property-meeting-budget-300x199

The way it usually works is that mum and dad put up the equity in their home as security for a loan which will fund the purchase and development (or renovation) of a property for a profit.

Mum and dad provide the line of credit over their house along with their house along with their maturity and education, and the kids do all the work.

The profit is then split 50/50.

You all need to educate yourselves, however, about joint ventures and how they work.

If you, the parent, are anxious about this proposal then look at it this way: who are you going to leave your assets to anyway?

Isn’t it better to give now with a warm hand rather than a cold hand, in circumstances where you can guide them?

So, let me help you get educated on joint ventures.

We’ll call it Joint Ventures 101.


Are you asset or cash flow rich but without the time or the expertise to get into a real estate deal?

Or do you have a lot of building, real estate or project management experience but are too cash flow or asset poor to venture into the real estate market? Australian Mortgage Finance

Are you asset or cash flow rich but without the time or the expertise to get into a real estate deal?

Or do you have a lot of building, real estate or project management experience but are too cash flow or asset poor to venture into the real estate market?

Ever thought about joining with someone who has the “other half of the equation” and using your combined skills, capital, expertise and cash flow to make money from a real estate transaction?

There is much upside to a joint venture between people of like minds with different skills sets or contributions.

The risk of “having a go” is also spread.

The breadth of your experience e would widen too in a joint venture.

On your own you might only be able to undertake a small duplex development at best, but in conjunction with others a three-storey walk-up or a small commercial or industrial strip development comprising ten shops/factories may now be possible.

How you will grow!

The world can be your oyster now. success invest

There are downsides too (and you must document this arrangement in a joint Venture Agreement) but if well-structured and property managed, these can be minimised.

The range of joint ventures is broad.

You can start at one end of the scale with a simple contractual arrangement between two people to buy a house, renovate it and on-sell for a profit.

At the other end of the spectrum the venture may be between a solicitor, architect, builder, town planner and real estate agent who join their skills and expertise for the development of a project to build and run a shopping centre or even construct a high-rise unit building.

The salient features of a typical joint venture, whether small or grand, are similar.

Let’s look at the features of a humble joint for a small real estate development between, say, one man who has capital assets and strong cash flow and a woman who is cash flow capital poor, but has a lifetime of real estate, trading and marketing experiences.

Join these two together in a joint venture and, as I said earlier, the world is their oyster.


One investor (let’s call them “the first investor”) is able to contribute substantial funds and cash flow towards a small project to purchase a house, renovate it and then on-sell it for a profit.

The second investor will contribute their skills to acquire the right property, renovate it appropriately, manage that process and then effect a sale of the property for a profit.

HOW DOES IT WORK? Pro 300x210

The second investor will identify a property suitable for the project and obtain approval for its purchase by the first investor.

The first investor will fund the acquisition of the property (usually in their name only).

The second investor will offer suggestions and submit a proposal to the first investor for the renovation of the property and its eventual sale for a profit to be shared equally between the two (i.e. the overall scheme of things with a simple joint venture).

Let’s look more carefully at the specific contributions of each of the investors.


The first investor will acquire the property in their name and provide all of the funds necessary to do so together with funds necessary for its renovation or development including:

  • The deposit and purchase price; piggy bank
  • All Funding costs;
  • All legal fees and stamp duty including any building and building reports, survey reports, town planning searches and the costs of any other enquiries;
  • Payment of all rates, taxes and levies on the purchase of the property;
  • All insurances for the property.

This contribution by the first investor will be typically called the “Initial Contribution”.

All other continuing costs (called the “Continuing Contribution) during the ownership, development and sale of the property including payment of interest and loan expenses, renovation works and sale costs will typically be met by this first investor.

In short, all purchase costs and expenses, development costs and sale costs are met by the first investor and are commonly called “Join Venture Expenses”.


The contribution of the second investor to the project will usually be as follows:

  • Identification of an appropriate property to buy for the development project, including negotiating the terms of the purchase, arranging for appointment of lawyers and engagement of any others to carry out due diligence enquiries before settlement of the purchase. property buying costs
  • Selection of builders required, preparation of plans, obtaining approvals and quotes for renovation and development work.
  • If requested by the first investor, assistance with sourcing appropriate finance to fund the development.
  • Payment of all project expenses incurred in relation to the property’s development and sale.

Typically, there’ll be no charge by the second investor for providing their contribution to the project, as it’s understood that they are to be remunerated from their share of the net profits on the eventual sale of the property.

So, what if there’s some disagreement or dispute between the two investors about whether the property should be sold after it’s developed and if so, at what price?

As this issue falls within the province of the contribution of the second investor, they will usually determine these issues after consultation with the first investor.

That is, the second investor will decide the matter but in making such a determination, the Joint Venture Agreement between the parties will usually provide that the second investor must act reasonably and with a view to achieving a net profit for both parties.

THE NET PROFIT  property

When the property is sold the sale proceeds are usually paid as follows:

  • repayment to the first investor of their Initial Contribution;
  • repayment to the first investor of their Continuing Contribution (i.e. investment project expenses); and
  • sharing of the balance (i.e. any rental received from the property during its ownership and renovation equally between the parties as “net profits”).


The typical term for a joint venture of the style outlined above is a maximum of 12 months unless a property is sourced, purchased, renovated and sold earlier, in which case the term comes to an end on the settlement of the sale of the property, the repayment of the first investor’s contributions and division of the net profits between the parties.

SHARING OF THE RISK 9337186 - risk insurance

Although it’s expected at the time of entry into the agreement that a profit will be made, the reality is that sometimes there’s a loss.

Even though the property is purchased in the name of the first investor, the Joint Venture Agreement will provide that the losses are shared equally between the parties in the same way they share between the parties.

A common joint Venture Agreement will also provide that although the first investor owns the property, they grant to the second investor the right to lodge a caveat (a freeze on the title to the property) in order to protect the interests of the second investor.


The Joint Venture Agreement will usually provide that either party shall have the right to offer or sell their interest in the property to the other at a price nominated as being the anticipated net profit of the project, or if there’s some disagreement about this amount, at an amount set by an independent valuer.


This is particularly important in joint ventures with family members.

The relationship with your family is a precious one and the joint venture experience should foster this relationship, not undermine or destroy it.

Particular care needs to be taken with these types of joint ventures.

You must agree at the outset about how private the project is to be. Handshake

That is, are all parties free to share with all and sundry details of the development, or is it only to be made known to their professional advisers and lenders in the transaction?

I recently received a call from a distressed client.

She was at a party on the Saturday night before and was horrified when a friend revealed to her full details of a development my client was undertaking with a local builder.

My client was mortified when her friend disclosed what she thought until then was a private arrangement between her and the builder.

Her friend told her and everyone else in the group at the party full details of how much money they were borrowing, the estimated profit from the transaction and other personal information which would have been protected by the Privacy Act if you had provided it to a real estate agent or lender.

What could have been a series of successful developments with this builder had now turned sour and had basically ended before it had even started.


Communication 452998829 615x571 E14943309245481 300x211

Schedule regular meetings even if there appears to be little to discuss.

This is especially important when there are more than two parties to the joint venture.

These meetings ensure that everyone is kept up to speed and communication channels are open.

Record in writing everything that’s discussed and agreed upon in the meeting and, as soon as possible after the meeting, circulate a copy of the minutes to all parties of that meeting.

If there’s some misunderstanding about an issue on the agenda as recorded in the minutes, it will very quickly be flushed out and can be dealt with sooner rather than later.

from Property UpdateProperty Update https://propertyupdate.com.au/the-ins-and-outs-of-joint-ventures-in-property-investing-or-development/

A guide to guarantors for first home buyers

Parents have helped their children buy homes for generations. iStock-92009518-e1498630910671-1024x537

Back then, it was often via a cash gift that their child – often newly married – could use as a deposit.

Today, many parents are equally interested in helping their children, especially when property prices have made saving a deposit more difficult for first home buyers.

Thankfully, our banking sector is more flexible than it once was, which means that many young people are opting for a first home buyer guarantor loan to get a break in property.

Like all things in the lending landscape, though, there are a number of home loan guarantor requirements that everyone needs to understand from the outset.

Who can be a guarantor?

Most banks prefer the guarantor to be your parent or parents.

That’s because lenders want to ensure that the parties have a long-term, ongoing relationship, which can withstand the duration of a home loan.

Some lenders may consider other close family members, such as siblings, grandparents or even adult children.

If someone other than a family member offers to be your guarantor, there are specialist lenders who may approve a first home buyer guarantor loan, but there will likely be a premium interest rate attached to it.

How much can I borrow with a guarantor loan?

First home buyer guarantor loans can be structured to represent a percentage of the purchase price which the guarantor is guaranteeing.  


In today’s marketplace where saving 20 per cent as a deposit can be difficult for many young people, a guarantor can make up the difference so the first home buyers can avoid paying Lenders Mortgage Insurance (LMI).

It’s important to understand, however, that just because you can have a guarantor, the prospective borrowers will still need to show a savings history, which often represents about five percent of the property’s price.

For example, Andrea and John have diligently saved $25,000 for a new home but are struggling to increase that figure while also paying rent in one of our capital cities. The property they are interested in buying is $500,000, so to avoid LMI they need a deposit of $100,000.

John’s parents offer to use equity in their own home to the tune of $75,000 to cover the difference, which means that the couple can go ahead and buy their first home together. 

What are the risks for the guarantor?

Some lenders may require the guarantor to be responsible for the loan in its entirety in the event of a default. iStock-180723537-200x300

That means that the guarantor will need to make the home loan repayments, which can put a strain on finances.

If the property has to be sold via a mortgagee in possession, it could even sell for less than what was originally paid, which means that the guarantor could again be responsible for clearing any mortgage still remaining.

Another risk is that it can impact your relationship with the borrowers, for example, if they don’t repay enough of the loan in the agreed timeframe to have the guarantor released from the mortgage.

These type of financial commitments amongst family members can lead to unnecessary problems, which might be better to be avoided.

That said, like with all things financial, it’s best that you understand the ins and outs beforehand so all parties go into the agreement with their eyes wide open.

What are the pros and cons for a first home buyer?

Saving a deposit takes time, and when property prices are also rising, a deposit that you thought would equal 10 percent might only reflect five per cent a few years later.

While there are certainly lenders still prepared to accept applications from first home buyers with a deposit less than 20 per cent, without a first home buyer guarantor loan you would have to pay LMI, which can add thousands to the cost of purchase. iStock-626262370-e1498632461947-240x300

One of the cons, conversely, is that you will need to ask your parents, or another close family member, to help you.

Some families are not overly good talking about money so it can seem like a bridge too far for young people to ask for financial help, especially when they’re trying to stand on their own two feet for the first time.

It will also set up a financial relationship that could last many years until you have repaid enough of the mortgage, or the property has increased enough in price, for the guarantor to be released from the loan.

Another issue could be the impact it has on your siblings in particular, who may feel that you’re being treated more favourably than they were in the past – whether they asked for help or not!

But first home buyer guarantor loans don’t need to cause family divisions.

Instead, starting the conversation from a position of honesty and agreeing to responsible repayment goals, will ensure that everyone is on the same financial page.


The information provided in this article is general in nature and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information you should consider the appropriateness of the information with regard to your objectives, financial situation and needs.

from Property UpdateProperty Update https://propertyupdate.com.au/guide-to-guarantors-for-first-home-buyers/

[Podcast Episode 8] Tips for Purchasing Land and Frequently Asked Questions

In this episode we chat to Anthony Tassone and discuss the processes involved with Land Purchases. We also address a few Frequently Asked Questions regarding property investment.

from Property Investment Blog http://blog.realestateinvestar.com.au/podcast-ep8-purchasing-land

Bill Gates – childhood nerd to multi billionaire [infographic]

How do multi billionaires get that way?

That’s what many of us want to know and that’s why we love to hear the back story of today’s successful entrepreneurs.

Adioma created the following infographic which gives some fascinating insights from his earliest days until his latest philanthropy efforts.

Things like:

  • It was a regular day in the Gates household. When the family was getting ready and Bill, known in his family as Trey, was still downstairs, his mother called down to his room in the basement, “Trey, what are you doing down there? I’m thinking, mother. Don’t you ever think?” he shot back.
  • Hacking early computers at the age of 13
  • His love-hate relationship with Steve Jobs

Bill Gates Nerd Multi Billionaire

Source: blog.adioma.com


from Property UpdateProperty Update https://propertyupdate.com.au/bill-gates-childhood-nerd-to-multi-billionaire-infographic/

Your super needs to work harder! Consider one of these two ideas…

If there’s one thing that never changes, it is the fact that the government continues to tinker with the super rules throughout federal budgets and election campaigns.

Changing the super rules is an easy way to raise tax revenue as any changes do not tend to cost votes. gold eggs in nest from hay on table

The reason for this is that for most people, superannuation cannot be accessed for many decades so it doesn’t have any immediate impact on their financial situation.

For these reasons, I believe the government will continue to make changes to super.

Many people are discouraged by the constant changes to superannuation and become disengaged.

Instead, I believe that you need to accept that change is part of the superannuation landscape, not become disengaged and look for ways to maximise your super – even though there might be continual changes in the future.

And you need help from an independent professional to stay on top of all these changes.

It is a too greater wealth building opportunity.

It is also reasonable to conclude that superannuation will always be concessionally taxed i.e. superannuation will be a lower tax environment.

Plus, 9.5% of your income gets deposited into super each year – which is a substantial amount – so you should make it work hard for you! 

Super is designed to only help you part of the way 

One of the underlying principles that is guiding both sides of politics at the moment is that superannuation shouldn’t be used as a tax haven by wealthy individuals.

That is, the tax benefits afforded to higher income earners should be proportionately the same to what lower income earners can enjoy. 


In the past, superannuation rules have favoured higher income earners.

One of the most significant changes over the past decade has been the reduction in concessional contribution limits (i.e. the amount you can contribute into super and claim a tax deduction for).

Under the Howard government, the annual concessional contribution cap was $50,000.

From 1 July 2017, the concessional contribution cap will be $25,000 per year.

This means that higher income earners can contribute considerably less into super than what they were able to do in the past.

I very much doubt that we will see any significant increases in the contribution caps in the short to medium term future. 

What can you do about it? 

As I’ve written about in the past, the quickest and easiest way to build wealth is to utilise the power of compounding capital growth.

Compounding capital growth will, in time, do all the heavy lifting in regard to wealth accumulation.

A long-term financial consequence of a reduction in the concessional contribution cap is that it will be much harder for superannuation investors to enjoy significant wealth as a result of compounding capital growth.

Perhaps, more now than ever, the strategy of borrowing to invest (in super) becomes a more valuable investment strategy. 

You will need a SMSF if you want to borrow to invest  smsf

The only way you can borrow to invest within super is if you establish a self managed super fund (SMSF).

A SMSF typically costs $2,000 to establish (with a corporate trustee).

In terms of ongoing costs, a basic SMSF costs less than $2,000 per annum to maintain (accounting, tax, compliance fees). 

Borrowing to invest in the share market 

Typically, superannuation investors can leverage to a maximum ratio of 50% into the share market.

You can invest your super in various low-cost, passive (indexed) investments.

Click here for a blog about why that’s a smart thing to do. 

Borrowing to invest in the property market 

In terms of leverage ratios for property, most investors can borrow up to a maximum of 70% of a property’s value. property investment

You need to have a total superannuation balance of close to $300,000 to be able to consider an investment property strategy.

If you have materially less than $300,000, then it is very likely that you won’t have a high enough borrowing capacity to be able to afford an investment grade property.

Instead of investing in a non-investment-grade property, you are better off considering an alternative investment strategy. 

Warning: borrowing can magnify losses 

If we borrow to invest in appreciating assets it will magnify our returns.

However, the reverse is true also.

That is, if you gear up your super and invest in something that falls in value the borrowings will magnify your losses.property investment

Also, investment returns are uncertain.

However, borrowing costs (interest) and investment income (dividends or rental income) are more certain.

Therefore, if you are considering borrowing with your superannuation please ensure you have a considered a low risk investment strategy.

Importantly, a borrowing strategy must be underpinned by the highest quality assets. 

Consider your overall gearing ratio 

It is important to consider the amount of borrowings that you currently have outside of superannuation.

That is, if you already have substantial borrowings in your personal name then I would be less inclined to recommend to you to leverage your super also.

If you are taking higher risks in your personal name then arguably you can counteract that by taking lower risks inside superannuation.

Gearing is a very effective strategy but only when used carefully. 

Case Study: what are the potential outcomes  

Ryan is 38 and is employed as a lawyer with a large firm earning $150,000 per year.  smsf

Ryan has two children and a spouse, who is a stay-at-home mum.

In terms of surplus cash flow, Ryan estimates he can save $5,000 to $10,000 per year.

He doesn’t feel this is sufficient enough cash flow to be able to afford to buy an investment property in his personal name.

Ryan’s super balance is $200,000 and his spouse’s is $100,000.  

I have compared three scenarios that Ryan could consider:   

  1. Don’t change his super except for making additional contributions of $5,000 per annum (i.e. shifting most of his surplus cash flow into super); or 
  1. Establish a SMSF with his wife and borrow to invest in property for $500,000; or 
  1. Borrow to invest in the share market at a gearing ratio of 40% for his balance (nil gearing for his wife). 

The chart below sets out Ryan and his spouses projected combined super balances (expressed in today’s dollars) by the time Ryan is aged 60. 

Projected value of family’s super by age 60 (in today’s dollars) 


But the numbers may have lied to us! Maybe property is $2.1 million? 

To ensure that I compared apples with apples, I assumed the long term returns from property and shares to be the same.

For property, I assumed a gross rental income yield of 3% p.a. of the property’s value plus a capital growth rate of 7% p.a. (total return = 10%).

For the share market, I assumed a total income yield of 4.5% p.a. (with 50% franking credits) and a growth rate of 5.5% p.a. – so the same 10% p.a. total return.  40327469 - graph of the housing market

I believe that if you apply the right asset selection principals when selecting an investment property, you should be able to achieve a capital growth rate of 5% to 6% plus inflation (which I assume is 2.5% p.a.) – so a nominal growth rate of 7.5% to 8.5% p.a. 

The capital growth generated by the All Ordinaries Index since 1980 (past 37 years) averaged out at 6.8% p.a.

The dividend yield of the All Ordinaries is currently approximately 4% p.a. so the total return over the period is approximately 10.8% p.a.

Therefore, my assumptions above for the share market are broadly in line with long term returns. 

However, you may take a different view i.e. that returns in the property and/or share markets might differ from what they have been in the past.

Of course, any change to these assumptions will significantly change the result. 

For example, increasing the property’s capital growth rate from 7% p.a. to 8% p.a., increases the value of Ryan’s family’s super to over $2.1 million. 

Borrowing can be a substitute for additional contributions 

It may not be appropriate for you to make additional contributions into super (i.e. over and above the 9.5% p.a. your employer contributes).

Maybe you have a home loan and you would rather direct your cash flow towards debt repayment (not super) – which is often a rational decision.

If you are not in a position to make additional contributions then you should consider the appropriateness of a borrowing strategy within super. 

Not for everyone  Piggy Bank with retirement savings super message

The point of this blog is to get you thinking about how the reduction in contribution caps can have an impact on your retirement savings and to suggest you might be able to take action now to offset this negative impact.

Of course, you must get independent financial advice before making any changes to your super.

Any super decisions need to be considered in the context of your overall investment/retirement strategy. 

from Property UpdateProperty Update https://propertyupdate.com.au/your-super-needs-to-work-harder-consider-one-of-these-two-ideas-2/

Australia’s jobs growth is good for the economy and good for property

Australia is creating more jobs –  that’s good for the economy and is good for property. Australia Economy Concept

Last week the ABS  reported strong employment growth for the 11th consecutive month.

We created 54,200 new jobs in August, and more importantly 40,100  of these were full-time jobs.

This suggests that more than quarter a million jobs were created created in  the last six months:

Total Emplyment

Source: Pete Wargent

But it gets even better: 


These figures also show that thus far in the 21st century (between May 2000 and May 2017) the Australian economy added 3.4 million jobs in net terms.

In aggregate terms:

  • the Australian economy lost 294,000 jobs mainly agriculture (down 128,000 jobs), manufacturing (down 123,000 jobs) and wholesale (down 42,000 jobs.)
  • But we created 3.6 million jobs with most net growth being in healthcare, up 735,000 jobs, professional services, up 460,000, and construction up 414,000.

This equates to an annual average of 200,000 jobs over 17 years comprised almost equally of full-time and part-time jobs.

Recently demographer Bernard Salt discussed this topic in his usual lighthearted way in the Australian and illustrated his points with the following graphics:

Screenshot 2017 09 17 14.07.30
Screenshot 2017 09 17 14.07.42Screenshot 2017 09 17 14.07.52 1160x1068

from Property UpdateProperty Update https://propertyupdate.com.au/australias-jobs-growth-is-good-for-the-economy-and-good-for-property/

Kippers and Nettles – another way demographics drive our property markets

Have you heard of KIPPERS? urban

Nearly 1 in 4 (23%) of people aged 20-34 continue to live in a parental home according to the latest Census data.

They’re called KIPPERS – Kids In Parents Pockets Eroding Retirement Savings.

In Sydney and Melbourne this figure is even higher (27%)

That’s probably one of the reasons their parents, the NETTELS (Not Enough Time To Enjoy Life), are working so hard.

Screenshot 2017 09 02 22.50.00

Source: The Australian

Demographer Bernard Salt wrote a great piece on this trend in The Australian

Some interesting points he made include:

  • The census shows it is boys who are likeliest to remain at home — the split is 28 per cent of males and 21 per cent of females aged between 18 and 35.
    The difference? 

    Women “partner up” younger, forming relationships with older men that enable them to leave home earlier.
    Males partner later and while they wait they live with their parents. In Italy this concept is known as “hotel mama”.
  • A logical explanation behind the rise of the KIPPER generation is ethnicity.
    In the 20 to 29-year-old group 40 per cent of the Australian-born population live in the parental home.
    But for young people with a Vietnamese heritage this proportion is 68 per cent.
    For young Filipinos it is 66 per cent and for Chinese it is 65 per cent.
    The ethnicities that are least likely to support adult children in the parental home are those with a Dutch heritage (22 per cent of 20-somethings) and a German heritage (24 per cent). Other groups least likely to support adult kids in the parental home are the indigenous (28 per cent), Americans (28 per cent) and Irish (30 per cent).

Kippers and ethnicity

Source: The Australian

  • KIPPER clusters form a ring that extends between 20km and 40km from the Sydney and Melbourne CBDs. KIPPERs need precisely the right conditions to flourish: not too close to the CBD, nor too far away.

The picture emerging is one of a powerful new social group that is unique to the 21st century, at least on this scale.

And demographic trends are the driving force of our property markets

Read more at The Australian

from Property UpdateProperty Update https://propertyupdate.com.au/kippers-nettles-demographics-drive-property-markets/