Invest with others
Imagine that you’re able to buy property.
With other people.
We know that property affordability is a huge problem in South Africa. With a high barrier of entry, it is difficult for the normal person to invest in property.
I was in the same boat a few years ago. The way that I navigated around this was by joining forces with my father and sister. We bought a property together, shared all the costs, and all the income.
As a page from my journal, I would like to share some ideas, lessons and options that you have to invest with other people in property.
Why would I want to invest with others?
Here are some reasons why it makes sense to invest with other people:
- Affordability – not everyone can afford to buy property
- Risk – imagine sharing the risk of tenants not paying and initial input costs
- Skill – in many collaborations, one person brings skill, another brings money. Property is no different. If you know someone being skilled in finding tenants, handyman work, etc. then this might be an excellent find
- Diversification – don’t have all your eggs in one basket. If you share the investment, you can invest other money in other places – thereby diversifying your portfolio.
In South Africa, we have stokvels – a collective buying scheme, where everyone contributes. Though I am not an expert in property stokvels, I believe that the below points are also applicable to stokvels.
When you do buy a property with people you don’t know, there might be more complex exit clauses. For example, there might be a clause saying that you can only exit the scheme after 5 years, as to keep the investment safe from many shareholders selling and causing cashflow issues.
Sharing income and expenses
The main question when buying property together is how do you divide the ‘shares’? For example, if one person brings money, and the other brings skill – how do you decide who gets what?
This is a very complex question, but I would like to give you some guidelines. I will use the term ‘shares’ here in the context of ‘your share of the cake’:
- How much value does the other person(s) add to the deal?
- Could you do it without them? What difference would it make?
- If all parties bring finances to the table only, how could we break it down to be fair? For example, if one has capital now, and the other has monthly cash flow, will this be a loan agreement of sorts where the share becomes more over time?
When it comes to shares, splitting income and expenses, and making money, no one can claim a silver bullet. I have however thought to add some examples of how you can split it:
- 3 people each bring 33.3% of the cash – 33.3% shares each
- 1 person brings a lump sum, 2 people bring monthly cashflow – starting off 1 person 50%, others 25% each. After 5 years, 33.33% each
- 1 person brings funding, 1 brings skill on fixing and flipping. 50% each.
People are strange things. They change original agreements in their head. It is recommended that
- all communication is done in writing.
- Have a contract in place to explain the details of the deal – costs, fees, breakdown and distribution of income
When buying the property, you can buy it in your name(s), a company or in a trust. I know I’ve written an article about companies, trusts and in your own name (article found here), but really want to touch on it in this article.
If you’re planning to keep the property in the family forever, a trust will make sense. As you cannot own shares in a trust, make sure that you have a contract about how the expenses and income will be managed.
If you’re only a few people (2-3), then you can register the property in your own names. If one person decides to back out, this will be very difficult to sell their share.
A company on the other hand can also own the property. If you want to sell your shares, then you only sell the shares of the company, and not of the property itself.
With this in mind, make sure that you have a separate account for the money coming in and going out. It will just be easier if there are questions about money.
Warnings and clauses
The property with my family worked out really well and they are awesome.
Yet this is not the sweet case of everyone.
Exit clauses are important. What happens when one party leaves? What if they leave before they should, and now you have to pay for all the fees? Make sure you cover your back!
Here are some exit clauses to consider:
- An investment is only sold if the majority votes to do so.
- Any changes to the shares need to be approved by all members.
- In case of default (i.e. a shareholder cannot pay his dues), his shares are penalised by x.
- A shareholder can only exit after x time
- When a shareholder wants to sell his shares to someone else, it needs to be approved by all/some of the shareholders.
Collective buying in investment property can be very beneficial.
For peace of heart, have legal paperwork in place to protect the deal.
IF you choose to invest in a stokvel or with a property company, make sure you understand the impact of wanting to sell your part.
Frugal Local runs his own company (Effectify). He does software development and helps small businesses and startups with digital solutions. He enjoys writing articles and simplifying complex things – such as the article you’re reading!