Most people think that investing with family and friends is safe and is a comfortable way to go in property investment, but many successful investors could tell you that it could be just as complicated as co-investing with an acquaintance.
The younger generation of property investors are often seen joining forces to be able to climb the property ladder steadily. While it can be productive at times, there are also chances that this kind of partnership end up as an absolute nightmare.
According to The Smart Property Investment Show’s co-host Vivienne Kelly, other than having common goals and clear parameters, investors who are looking into co-investing must also lay down an exit strategy.
“You might not even think you’re ever going to need or want to exit, but that’s why you end up in court. If something goes wrong, it can all fall apart. You know, family is family, but also money is money, and it can be quite a distracting force. I think you really, really need to be clear and just plan for everything. If nothing goes wrong, great. But if it does, you’re ready to go and you’ll know how to tackle it,” she said.
Hank Hong, who has been investing with a few of his family members for greater serviceability, also advises investors to be careful of dealing with shared investments, even with close relatives or friends.
He explained: “People believe that family will always be there for you, but people’s lives change. As it changes, it’s going to affect your investment situation. What I’ve got, I’ve got exit ramps every single year. ‘If you want to get out, we’ll do this, we’ll pay you out for this’ or ‘If we haven’t got to this situation, then we’ll pay you out for this side of things.’”
“Luckily, I have a great family—a great mum, great sister. They love me, and they just go, ‘Take the money. Do what you want to do.’ But with the professional side of things, we’ve got exit ramps every single year. If we’re aiming to build the 10 townhouses by this period of time, and it doesn’t go between this time and you want to jump, sure. We’ll pay you back this, and you get this, and you get out,” Hank added.
Smart Property Investment’s Phil Tarrant suggests that all co-investors sign a documentation of their agreement, as in the case for most professional deals and transactions to avoid any difficulty in the event of unexpected hurdles.
Phil concluded: “It can be, sometimes, quite a painful thing to actually sit there and say, ‘If and when this all goes wrong, this is what happens.’ So I would recommend that you document this in many ways and actually get a letter, some sort of deed or some sort of agreement in place that says, ‘Here’s the situation, if x happens, this is what we do.’”
Tune in to Hank Hong’s episode in The Smart Property Investment Show to know more about his tips on interest rates, fixed loans, co-investing, and how to build wealth through borrowing money.