Property Market Idea

Get Into The Property Market Details

Thank you to everyone who has liked the idea of pooling together to buy property.

We have had a lot of interest and several discussion points have been raised with the basic idea having merit and the following issues needing to be addressed.

1. What do the financials look like.

2. Who manages the process

3. What is the rental and how is it reviewed.

4. How does a person Exit if they need to.

5. What happens if someone stops paying their share.

6. With each property would it be a separate structure and loan

7. What will the cost be to set it up

8. Details of the property

After discussing these with a few people I am going to put forward some suggestions which are open for discussion, we are looking to make this the fairest and most equatable of arrangements.

1. What do the Financials look like.

Please have a look at the spreadsheet attached. I am not a accountant and I have put these together on my own so any feedback on the accuracy and where there are any holes in the calculations would be appreciated.

Financial Modelling

Basically the model is 

Purchase a property per year of equal value (Allowing for CPI) each year. Utilising the equity that has been built into the property to finance the next property.

Rent is at market rates and set to rise by CPI each year.

The amount of contribution per investor is fixed with all rental income going against the loan so as increases are made the principle is reduced.

This has the affect of accelerating equity.

2.Who manages the process 

We appoint a manager to manage the property and to handle the management of the unit trust etc.

We would pay the manager a fix fee this would include all financial accounting and reporting to investors.

Estimates put this at approximately $5000 per annum 

3. What is the rental and how is it reviewed

The rental is at market rates currently on the property we are using as an example it is $2050 per month we would have this set to rise by CPI on an annual bases. 

4. How does a person Exit

This is the area that would need to be discussed and agreed upon as I believe it is the most contentious.

The reason for this is that this is a long term investment and should be approached as such but as we all know peoples circumstances change.

I would suggest that we have an application process for exiting and that it needs the approval of a percentage of all the unit holders to agree. 

There are really only 2 ways a person is able to exit.

1. Sell their share to another party and that person takes on the responsibilities.

2. Sell out to other partners in the group.

The issue with the first is will the partners accept the new partner and allow the sale, (I personally dont see an issue but this may be of concern to others)

The issue with both options is how to value the price there would also be cost associated with the transfer these would have to be determined and stipulated.

Personally I think the best method would be to base the value of the property on a sworn valuers assessment then less the balance of the loans divide by the number of unit holders 

Example

Property is Bought for $800K

10 Unit Holders 

Loan of $700K

2 Years down the track unit holder wants to exit.

Property is valued at $900K loan Balance is $650  900-650=250/10=25K so the share can be purchased for 25K plus the responsibilities of the loan.

As the loan will be in name of the property trust it would just be a transfer of liability from one unit holder to another.

5. What happens if someone stops paying their share 

This is the area that appears to be of most concern to people.

We would suggest that a penalty interest is put in place for all late payments as a deterrent from people making late payments.

We would also suggest that if a person defaults for greater than 3 months it will trigger the above process to exit the unit holder as in the application is made on the unit holders behalf and the units are sold.

This will ensure that all equity they have acquired is preserved and not diminished with penalties

6. With each property would it be a separate structure and loan 

The financial modelling is based on a single structure for the whole property ownership and then individual loans for each of the properties.

There will be a need for cross collateral in the early days and this would need to be reviewed by the trusties over time to minimise exposure.

7. What will the cost be to set it up

We would estimate that the legals and setting up of the loan etc would be approximately $10K 

8. Details of the property

We are looking for properties in the inner city of Melbourne

We are open to suggestions.