We’ve probably all been told or heard at some time that you should never go into business with friends or family. There’s no denying there are risks in investing with friends and family members. There are risks in investing full stop.
The field of behavioural finance brings insights from the sciences of psychology and sociology and tells us that some of the mental biases that we all have that can lead to poor investment decisions.
Overconfidence, confirmatory bias, loss aversion, framing (also called prospect theory ie. 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. If you are interesting in understanding more about these biases one of the best books I’ve read on the topic is “Priceless – The Myth of Fair Value” by William Poundstone.
So how do you make sure you manage these risks and ensure your joint venture is a success? What are the key things you should look out for when looking to start your own property syndicate?
1. Be honest and open with your partners
The ultimate success for your venture is how well you work together as a team. Keeping the lines of communication open and managing the expectations of the others in your collective should be your focus.
Most relationship problems are born from miscommunication. If you can try and be impeccable with your word, not make any assumptions and not take things personally you should be able to keep things in perspective and keep yourself and your collective on track.
Moreover, 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 as individuals.
2. Do your research when it comes to your finance strategy
I can’t reiterate enough how important your finance strategy is. It could mean the difference between you achieving the purchase of five properties over 10 years and only two or three.
Your finance strategy is your money strategy and it pays to spend a lot of time and effort concentrating on getting this right from the start. Once you have set up your structure it is hard to go back or start again. Investing the time in finding the right advice from the right finance professional will pay itself off in the fullness of time.
3. Pick the structure that maximises your tax benefits
As we move into an environment where it seems that future capital growth will be more subdued than what we have seen over the last 6 years, the benefits you accrue through the tax incentives for investing in property become more important.
Everyone’s situation in your collective will be different, so it’s important to select a structure that is flexible enough for the individuals in the group to maximise their benefits. Similar to my point above, devoting the time in finding the right advice from an experienced and commercially minded accountant will be well worth the investment.
4. Have a clear exit strategy
When going into business with others it pays to have a clear exit strategy. You never know what is going to happen in the future. Some of your assumptions about how the market will unfold or what is going to happen in your life may not turn out to be absolutely right. However, if you have an agreed set of contingencies and a set timeframe that you are willing to work towards then the odds are that your initial objectives will be achieved.
5. Treat your syndicate like a business
In establishing your property collective you have in effect started your own business. A property investment business.
A property has revenues and expenses just like a business. It can also appreciate and depreciate like a business. It has incoming revenue (rent) and income (capital gains) and outgoing expenses (land tax, property management fees, maintenance, expenses etc). So if the goal of your collective is to buy, renovate and sell four properties over the next 5 years, recognise that you have started a business and you need to treat it as such.
To ensure your new business succeeds it is important that you adopt a business owner’s mindset when it comes to running your collective.
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: