The team approach to property

Opinion: Connors. Nikki

There are some pitfalls as well as benefits when buying with others, writes

For many years, particularly as house prices have continued to rise in relation to the average household income, Kiwis have used creative means to get on the property ladder.

Many of us know people who have gone in on a property with friends or family in order to become a homeowner or property investor, and with the right choice of property and the proper legal and financial arrangements this can be a great move for the parties involved.

Formal property partnerships, commonly known as syndicates, are the next step on this continuum, and they are a valid trend in New Zealand’s competitive investment environment.

However, I also believe there is an even better way. So let’s take a look at the options, how they can work for you and where you need to be cautious.

Depending on your financial position, your stage of life or your overall financial goals, buying a whole property outright may not be the ideal course of action – but being one of several investors in a property might be a good fit, allowing you to earn a percentage of the income and capital growth of a property without putting all your financial eggs in that basket.

Diversification is a popular word in investment circles for good reason, and being part of a syndicate gives scope to spread investment funds across other asset classes. property ladder, or into the property investment market, for people who would otherwise be unable to afford it – or by the time they have saved enough to go on their own, they will have missed out on years’ worth of capital gains they could have enjoyed had they been able to get in a little earlier. Syndicates can allow people to share the responsibilities of property ownership, reducing the personal financial commitment while still enjoying a return on investment through rental income and capital gain.

They are also a good way to invest the cash you may currently have in the bank, earning a paltry 2 per cent interest rate, as the returns can be far greater.

As for pitfalls, all investors need to remember that while there is plenty of data telling us what property is selling for now, no one can predict with certainty what will happen in the future.

There is a lot of bad information floating around in the market; in my experience, around 95 per cent of people who approach my business are confused or have been misinformed about property investment.

A common mistake is investors trying to do too much themselves, so don’t fall into this trap.

Some people are better to work with trusted advisers to help sort fact from fiction in property investment, answer all questions, crunch the numbers and look at a range of projections, from conservative to optimistic, so they have a good idea of what potential rates of return will be.

It is critical that any adviser or provider of a syndicate model or service be upfront about their fees and how they select properties. Would-be investors need to understand exactly what they stand to pay for a service, now and over time, and the rationale by which investment properties come on to the books needs to be very clear. Does the provider recommend existing properties or new and off the plan? Are the properties in up-and-coming or high-growth areas? Are they in provincial towns or major centres? Are there good services and transport hubs nearby? What kinds of tenants will these properties attract, and what are the projected returns?

Failing to answer all these questions before going ahead with investment could lead to a pitfall down the track, and investors should be wary of any provider who can’t show – with evidence – how they manage the property acquisition and investment process from start to finish.

There is risk associated with every kind of investment – even just leaving your money in the bank – so the important thing is to establish what your risk appetite is and the best form of investment to match it. Good advice and the right approach can be the key to success in property investing and help you avoid wasting time and money.

Bringing a group of like-minded investors together to purchase a property for immediate returns that are higher than those from a bank deposit (in the current lowinterest-rate environment), syndicates are about access to the returns property can offer, along with diversification and risk mitigation.

Traditional property investment remains attractive to many Kiwis, but for financial, strategic, education and/or lifestyle reasons, syndicates can suit some investors better, and it is important that the appropriate vehicles exist to suit different types of investors.

Property syndicates can suit anyone who wants to invest in property but cannot or does not want to buy a property outright as the sole owner. Single ownership has advantages, such as reaping all the capital growth and potentially rental income, but also disadvantages – you likewise bear all responsibility and costs yourself.

A syndicate can help someone buy their first home if it is a property they are going to live in themselves, and it can also suit people who have their own home but want to start or expand an investment property portfolio, such as mum-and-dad investors or others who have built up some equity in their home and are looking to leverage it to build their wealth or diversify an existing investment portfolio.

It can also suit people who may have been turned down by a bank for income or equity reasons; in essence, syndicates are a way for more people to access property in a way that works for their financial circumstances and goals.

Traditionally, syndicates work as we have established – two or more people getting together to buy a single property while borrowing the major proportion of the cost from a bank, and then sharing the costs and returns. The risk for investors is in the level of cash investment usually required from the investor and the need to obtain further lending from a financial institution.

However, my company focuses on partnerships and works exclusively for Propellor clients to provide a shared ownership model. In our model, each investor raises a lesser amount than required by most partnerships (from about $40,000) and purchases an investment property outright. Their share can be sourced from cash on hand or from leveraging a small amount from the equity in the home. This investment of property equity or cash is then overseen and managed by Propellor, in conjunction with specialist solicitors from deposit right through to settlement.

A company is created specifically for the property and shares are offered to investors. The funds provided by each investor are treated as a loan to the company for which the share is issued, thus allowing us to make payments back to shareholders. These are treated as interest payments on the loan, rather than dividends, which is more beneficial to investors from a tax perspective. Returns are paid on a monthly basis. The greatest benefit is the potential capital gain on the property through the life of the investment.

Independent financial and legal advice can help you identify the risks and benefits and decide what is right for you.

Nikki Connors is the founder of Propellor Property Investments, a 10-year-old residential property investment company; Metropolis Design, which designs, sources and assembles high-quality but affordable furniture packs and items for residences; and Proportional Property Ownership, the new shared ownership investment programme for Kiwis who want to get on the property ladder or expand their portfolio.

Formal property partnerships, commonly known as syndicates . . . are a valid trend in New Zealand’s competitive investment environment.