Property syndicates in Australia have been traditionally associated with investment in commercial, industrial, retail, hotel and leisure sectors as well as development sites and mixed-use properties. Syndication offers smaller property investors with limited available capital the opportunity to invest in commercial, retail and industrial properties that would otherwise be out of reach financially.
However, with affordability becoming more and more of an issue forming a syndicate to purchase residential property and co-owning with others is something worth considering.
Starting a property collective:
1. Can make you money
Get into the market quicker than you could on your own.
How much is getting into the market quickly worth to you? The best way to demonstrate this is to work through a simple example.
- you want to purchase a $450,000 property
- this property is in an area which you think will grow at 10% in the next year and 8% in the year after
- on your own you would not be able to comfortably afford it for the next two years
- you decide to set up a property collective with 2 other friends and buy a property now
- at the end of Year 1 this property is worth $495,000 and at the end of Year 2 it would be $534,600.
As a group you have made a capital gain of $84,600.
Your collective has 3 members. So over this period you are each $28,200 better off than if you had done nothing and waited. Your decision to do something made you $1,175 per month in total.
Looking at it a different way, if you had decided to not do nothing anything and wait, that decision would have cost you $1,175 per month.
And these calculations don’t factor in either the cash flow benefit of having rental income to help pay your servicing costs or the tax benefits of investment property ownership.
What’s more, if you had waited two years, you would also have had to find extra money and income to service a larger loan as the value of your property increased from $450,000 to $534,600,which means it would have cost you more to buy.
Build a larger property portfolio quicker than you could on your own
Is it better to have 100% of nothing, or 20%, 25%, 33% or 50% of something? It’s not a trick question. But using the example above, would you rather have 100% of nothing, or a 33% share of a property worth $534,600 and a 33% claim on a capital gain of $84,600?
By increasing your financial muscle and pooling your resources with friends and/or family, you can get into the market immediately and purchase more properties than you otherwise might be able to in the short to medium term.
The more properties you have in your portfolio, the more assets you control. If you select your assets well, controlling more appreciating assets means you have more assets working for you over a longer period of time.
2. Can save you money
Reduce the amount of cash you need to purchase and hold property
Starting a property collective reduces the amount of money you need to cover property purchase, holding and other costs you may incur, say for renovations you may plan to do.
By pooling your resources you require less up-front capital to cover purchase costs, and less ongoing cash flow to cover your ongoing expenses.
Helps you be more disciplined with money
Many of us are better at spending money than saving money. This isn’t necessarily an issue unless the things that we spend our money on are productive assets. Setting up a property collective can therefore act as effectively a de facto savings program.
It can be a reasonably passive investment strategy whereby you know that each month some of your income is going toward an investment for your future.
For those of us who find budgeting a challenge, there is nothing quite like buying a property as a way to introduce some discipline into your spending patterns!
3. Saves you time
By sharing the workload with others leverage your partners’ strengths and also your time.
An important part of setting up your property syndicate is determining the roles and responsibilities of each person in your collective. Running your syndicate and managing properties can sometimes be a time consuming exercise. Market research, due diligence, property selection, finance, tax, property maintenance, dealing with tenants, organising finance, renovations etc.
By allocating specific roles to you can leverage your friends’ natural strengths and knowledge. This should all be clearly documented so everybody knows exactly what they are responsible and/or accountable for, need to be consulted on or merely informed of.
So not only can you leverage each other’s money, but you can also leverage your collective’s knowledge, experience and time.
4. Manages your risk
Build a more diversified property portfolio than you could on your own
The reality of property investing is that in making property selection decisions, you make the best decision you can make at a point in time based on all the information you have available to you.
Despite all the due diligence in the world, you actually don’t know how the property you select is going to perform over time. No one does. So building a diversified property portfolio makes sense as some of the properties you select may perform really well, however others may perform okay and others may perform poorly.
By controlling a greater number of properties you are more effectively managing your risk by spreading it across a number of investments rather than just one. By doing this you are effectively reducing your chances of picking a property that performs below average and increasing the chance of selecting a great investment.
Reduce the effects of your personal investment biases
Another benefit of sharing the risk with others is that when it comes to property selection and strategy decisions, you have a group of people with different knowledge and perspectives to draw on.
The field of behavioural finance brings insights from the sciences of psychology and sociology to illuminate some of the mental biases that we all have that can lead to poor investment decisions.
Overconfidence, confirmatory bias, loss aversion, framing (the idea that investors make different decisions based on the way the same piece of information is presented), anchoring (our tendency to grab hold of irrelevant and potentially subliminal information and then becoming biased towards that number when faced with uncertainty) and representativeness (our bias to make decisions based on how things appear rather than how statistically likely they are) are all natural personality traits that conspire against us when making investment decisions.
So having more minds with different perspectives focused on the same investment decisions can mean that as a group you end up making better investment decisions than you could if you were left to your own devices.
5. Makes you feel good
Building something for the future…together
Typically the people who start property collectives have many shared experiences that have created a strong mutual bond. And because they intend to share many more experiences together they tend to have an open philosophy that the sharing need not stop when it comes to making money. Particularly when they are in a position to help other each open up opportunities in the short term that will allow everyone to build something positive that will create more life choices in the medium to long term.
Frees up more of your own cash flow to support a more sustainable lifestyle
Investing in property with friends and family also allows yourself to maintain your current lifestyle, rather than having to curtail your enjoyment of life because of the strain of oppressive mortgage commitments.
Many of the people that elect to start a property collective have decided to continue to rent where they want to live and build their wealth via their investments rather than via the traditional path of buying their own home, paying it off and then investing.
For those who have not yet bought their own home, renting and buying investment properties can make a lot of financial sense. From a purely financial point of view it’s better to live in a small and affordable dwelling and have your money invested in assets that generate you both a capital gain and a rental income. If you own the home you live in, you receive the capital gain benefits of property ownership, but you forgo rental income and tax benefits of owning an investment property. These benefits over a lifetime can be quite substantial.
This is an extract from my article “Your Step by Step Guide to Forming a Property Syndicate”. If you are interested in reading the rest of this article complete the form below to receive a copy: