Getting your foot on the property investment ladder
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Articles by Nathan Budd.
Key Takeaways
- Pooling purchasing power with family or friends is one way around high buy-in costs and DTI limits.
- An informal partnership has minimal setup cost but exposes each partner to personal liability for all debts.
- A joint venture pools resources toward a shared goal without formally being in business together.
- Each JV party should participate through their own company or trust, not personally.
- An ordinary company offers limited liability and defers tax at the 28% company rate instead of up to 39% personally, until profits are distributed.
Are you interested in investing in property but find yourself locked out due to the high buy-in costs or the recent debt-to-income (DTI) restrictions? Joint ownership of property may be a path worth exploring to get in the game and ensure you don’t miss out on the next growth cycle. This approach can leverage the collective purchasing power of families, friends and wider networks to help you grow your wealth.
Joint ownership can take various forms. Below I explore some of the options we’ve seen people use.
Partnership
An informal partnership is the most basic form of joint property ownership, where two or more people buy a property in their joint personal names. Costs to establish an informal partnership are minimal, which can make them seem appealing. This is often how spouses own a rental property together (especially if they haven’t had professional tax and asset protection advice).
The major drawback of a partnership, however, is that members of the partnership are personally liable for all partnership debts. To mitigate this issue each partner would typically leverage their personal assets to free up cash to buy the partnership asset. This leaves the partnership asset free of debt.
A further drawback is that partnerships may not deliver optimal tax outcomes for high income partners.
Additionally, as the assets are in your personal names, you are personally exposed to risk if something goes wrong.
As a general rule, at GRA we don’t tend to recommend partnership structures for property investing, as they expose the partners to too much risk and are often not tax efficient.
If you do decide to invest using a partnership, then you should have a partnership agreement that stipulates the responsibilities of each partner and what happens if they don’t meet them, how profits are dealt with, and what happens if one partner wants to exit the partnership (or dies). For couples, if you don’t have a relationship property agreement stipulating otherwise, the asset will be considered 50/50 ownership and proceeds split accordingly.
Joint Venture
A joint venture (JV) is where two or more parties come together to achieve a shared goal. The parties to a JV are not in business together; they merely pool their resources. Resources typically include funding, knowledge, labour and professional expertise. JVs are common for development activities and property trading. Often, one party will provide the funds required, and the other party contributes in other ways, e.g. time, expertise, labour.
Each party participates in the JV using their own structure (e.g. company or trust). It is not advisable to do this in your personal name.
It is important to document a formal Joint Venture Agreement before activities commence. This agreement will specify how the JV operates, whether liabilities are shared, and how profits are to be split. As with partnership agreements, it will also stipulate what happens if a JV partner doesn’t meet their obligations, or if a partner wants to leave the JV.
A JV is preferable to an informal partnership, as you are not exposed to the other party’s liabilities, and is generally more versatile. Additionally, using companies and trusts provides the advantages of risk minimisation, tax optimisation and asset protection.
Ordinary Company
An ordinary company is a separate legal entity from its shareholders and enjoys limited liability. In the absence of shareholder guarantees, the liabilities of the company are limited to the company.
Companies are useful investment vehicles for parties that are looking to either invest long term in property or alternatively trade in property. The shareholding of the company is typically split based on how much each party contributes. Shareholders can buy in or sell out over time. Where profits are retained at the company level, high-income shareholders enjoy a temporary tax benefit of 11% which the company can reinvest for further gains.
Once again, if investing with others in a company structure, you need to have a shareholders’ agreement and a tailored constitution detailing obligations, profits, and what happens if one of you wants out.
Summary
If you have relatives, friends or wider associates with savings sitting around earning diminishing interest returns at a bank, collectively investing in property may be an alternative path worth exploring.
Reach out to your GRA Client Services Manager or book an initial meeting (free for new clients) to discuss what the best structure for collective investing might be for you – everyone’s situation is different.
FAQ
What are the options for jointly owning an investment property with family or friends in NZ?
The main options are an informal partnership (joint personal ownership), a joint venture (pooling resources through separate structures), or an ordinary company (shared shareholding with limited liability).
What are the risks of an informal property partnership?
Each partner is personally liable for all partnership debts, it can be less tax efficient for high-income partners, and personal assets are exposed if something goes wrong – GRA generally doesn't recommend this structure.What is a joint venture in property investment?
It's an arrangement where two or more parties pool resources like funding, expertise, or labour toward a shared property goal, typically through their own companies or trusts rather than personal names, common in development and trading.How does using a company to co-invest in property protect me?
A company is a separate legal entity with limited liability, so (absent personal guarantees) your exposure is generally limited to your investment in the company rather than your personal assets.What happens to a jointly owned property if a couple separates without a relationship property agreement?
Without an agreement stipulating otherwise, the asset is generally considered 50/50 ownership and proceeds are split accordinly
Nathan Budd
Client Services Manager
© Gilligan Rowe & Associates LP
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Disclaimer: This article is intended to provide only a summary of the issues associated with the topics covered. It does not purport to be comprehensive nor to provide specific advice. No person should act in reliance on any statement contained within this article without first obtaining specific professional advice. If you require any further information or advice on any matter covered within this article, please contact the author.
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