In a buyers’ market with a low interest rate environment, ‘buy-to-let’ partnerships can fast-track your investment portfolio and spread your risks says Paul Stevens, CEO of Just Property.
“I have always seen property as one of the best ways to create wealth and to leave a legacy. There are opportunities out there and if you are young or do not have the capital to take advantage, then co-buying, a buying partnership, or a syndicate could help you to get a foot on the property ladder”.
Property syndicates have been a popular method of investing in commercial, retail, industrial, rural, and residential real estate since the 1980s. For any investor, diversification is a way of spreading risk and while a single property can provide cash flow, tax benefits and an asset that grows in value, the advantage of a property partnership is that it allows a group of investors to build a property portfolio they would not have been able to acquire on their own.
Another motivation for forming a property partnership is to acquire and then share the responsibilities of a holiday home or a collection of homes. Such partnerships usually include friends and/or family members who use and share the property according to the agreed rules.
“The more people involved in a syndicate; the more complicated decision-making processes can be” says Stevens “but the risk is also more widely shared. There are a number of factors that should be considered and weighed up against the unique compositions of the syndicate”.
Open communication and commonality regarding investment goals and operating principles are vital. Like-minded investors and agreement over who is responsible for what are critical success factors and if the syndicate was formed for investment purposes, the members need to be clear on their investment strategy.
“Even if they know they are planning to focus on residential property, they will need to agree on the direction,” notes Stevens. “For example, are they looking for immediate capital growth on a property they can ‘flip’ in the short-term; high occupancy and rental returns to cover their bond repayments; or are they planning on prospecting in a new area that may take years to fully develop?”
If the property is being bought for shared use, the number of investors can impact the extent to which use of the property can be allocated and, for example, access to use a holiday property during high season may be limited. A schedule, allocating specific weeks or holidays to each of the investors would need to be agreed upon in advance.
“If the investors are still trying to figure those things out, looking at trends in the property market may provide some direction” says Stevens who offers some statistics from Lightstone’s Residential Property Index, July 2021:
- National year-on-year house price inflation is at 5.07%, a five-year record high, but there are regional variants that need to be considered. For example, the current inflation status in the Western Cape is lowest at 4.8% and the Eastern Cape tops the performance stats with an inflation rate of 8.3%.
- Coastal properties are outperforming non-coastal properties but “we are already seeing a rationalisation of the ‘run’ on coastal “Zoom” towns like Mossel Bay, Knysna and Plettenberg Bay with over-priced stock remaining on the market longer”.
- The low- and mid-value market, where properties are priced between R250 000 and R700 000, continues to be where most of the activity in the market is.
Stevens suggests investigating new developments, especially those that offer off-plan purchases: “These offer financial benefits that include savings on transfer costs that otherwise apply to properties that have already been registered with the Deeds Office. Distressed property sales, including repossessed properties or those on auction, can provide an opportunity to buy immovable assets at a discounted price”, he adds.
“But cheapest may not always be the best option,” he warns. “Look for the opportunity to create value. For example, where a property can be subdivided or rezoned for alternative use, or where there is scope to extend the size of the dwelling.”
Another factor in deciding what opportunity is ‘best’, is to consider the knowledge and reach of the syndicate of investors. They may feel most comfortable investing in an area or type of property that they are familiar with. Sectional title properties (like apartments and townhouses) come with complexities that need to be understood, such as house rules that restrict how the property may be used.
Once a decision has been made on the nature of the property to be purchased, a clearly documented and signed agreement between all parties is essential as it removes doubt and the risk of miscommunication. Stevens recommends that the following questions be addressed in the agreement:
- How will the property be financed?
- What costs need to be covered, including bond repayments, operating costs (maintenance, levies/ taxes, cleaning etc.)
- What is the repayment schedule?
- How will missed or part payments be handled?
- How will the property be used?
- What access to/ use of the property will be allowed and how will it be allocated?
- What options will be available if a member of the syndicate wants ‘out’?
- How will deviations in the agreement be handled?
- How will the portfolio be managed?
- How will the members of the syndicate communicate?
Stevens strongly recommends getting sound legal advice, independent financial guidance and when it comes to the purchase, help from an astute property professional.
“Whether the investment will be made via a family trust, whether you set up a company to do so, or buy into an existing syndicate, there are laws that govern each as well as risks. Demand total transparency at all times, and walk away from anything vague,” he concludes.