Influencer and property investor Louis Barnard bought his first property with his father and sister.
It was the start of a journey that has led him to ownership of several brick-and-mortar assets, many of which were initially purchased with others.
After all, when you share ownership you also split the risks. You do, however, need to be wise about the people you club together with.
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“Everyone should bring something to the table. For example, one person brings the skills of a handyman, another brings money. “This has worked well with some of my friends who bought a property that needed some fixing and renovations. They’re currently letting it and getting good returns.”
A good-sized purchasing group involves three or four people as “more than that becomes a nightmare in managing everyone”.
But Barnard, better known as FrugalLocal, says no matter who you buy with, you need a contract with your mates as not all families, groups of friends or co-operative groups can be trusted.
My Story
“I bought my first property, in Pretoria, with my sister and father with no contract when I was 22. I was young and stupid – but it was well-played and well-managed because we valued relationships more than money,” says Barnard, now 36.
“We split all the income and expenses 33.33% each. The home loan was in all our names, though my sister and father’s income was put up for surety, as I didn’t qualify at the time.” When they sold the property, everything was split 33.33% too.
“No one exited the group but, if they had done, it would have caused chaos regarding the extra bond costs, contracts and legal fees,” Barnard says.
Your (Possible) Story
While his first joint purchase did not suffer any negative consequences, Barnard offers this advice to those looking to buy property with the help of others:
Be aware of risks
When managing the risks of buying property together, he says you need to think about the terms beforehand, during and after. You also need to consider how you will handle a crisis, financial or otherwise. “Managing risk is vital in any property deal. I know we don’t want to start a business with failure in mind but the cliché of ‘failing to plan is planning to fail’, rings true.”
Although he has always “chosen his business partners well”, and therefore not had many negative outcomes or difficulties when purchasing jointly, there are still risks if one party wants to sell and others do not.
“I suggest a legal contract between all the parties is drawn up by a lawyer – don’t do verbal agreements, as everyone remembers the terms differently. Cover all ends – before, during and after – and what happens to the profits and losses.”
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Clarify the terms
Before embarking on a joint partnership process, each party needs to understand their place among the partners.
For example, Barnard says:
• One person brings skill, another brings money and a third finds the excellent deal.
• Everyone brings their share of the money.
• One person brings a lump sum – a deposit, bond and transfer costs, whereas another will pay the shortfall and manage emergencies.
• All costs are split evenly among everyone. “Once you’ve pinned down what the terms are, you can proceed with managing how the property, money, bond and emergencies will be managed, throughout the ownership of the property.”
Emergency fund Not only must all running costs be evenly split, Barnard says each owner must pay a bit extra every month to save for a rainy day.
“I feel very strongly about having a property emergency fund. People are made redundant. They get retrenched. Money dries up...
“During your investment period, things might happen, such as a burst geyser. Having an emergency fund for unforeseen, unplanned emergencies can make your life a lot easier.”
Barnard suggests that a separate bank account be opened for the property to eliminate the possibility of foul play. Have an exit strategy Another reality is that people fall out – so you should always have an exit strategy.
“It is important to think about exit strategies and have a contract in place in case one party cannot pay the running costs any more or gets liquidated.”
Occurrences like these could happen at any time, including during the loan term, once the bond is paid off or when the property is on the market but not getting sold.
“As you can imagine, this can become really, really complicated. When people want to exit immediately, many people opt to sell at a reduced rate – meaning their investment is no longer worth much.”
Barnard lists some examples of rules governing the exit of a joint property investment:
• The investor needs to be invested for a certain number of years.
• If the investor exits before this time, due to unforeseen circumstances (retrenchment etc), there will be a penalty or admin charge of a percentage of the amount.
• The other parties/shareholders have first right to buy out the exiting person.
• The exiting person should find a replacement – although this is more common among stokvel members.
Green for ‘go’ or red for ‘stop’
Experience often teaches valuable lessons about the kinds of people you can and should get into business, or joint property ownership with, and those you should steer clear of.
Barnard recommends that you invest in property only with people who you both trust and enjoy being around. “If they cannot work with their money or are dishonest with other people, then it’s a ‘no’ from me.
Honest people don’t do business with dishonest people – and the same is true for property. “Trust, knowledge and boundaries are vital in business relationships,” he says.