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Strategy | property syndicates

Property syndicates may help property investors to diversify, expand and keep on investing despite worsening housing affordability and tighter lending. Tim Riley explains how to start one and make it work

Let me explain these benefits in more detail.

1 It can make you moneyHow much is getting into the

market quickly worth to you? The best way to demonstrate this is to work through a simple example.

Assume that: You want to purchase a $450,000

property This property is in an area that you

think will grow at 10% in the next year and 8% in the year after

On your own you would not be able to comfortably afford it for the next two years

You decide to set up a property collective with two other friends and buy a property now

At the end of Year 1 this property is worth $495,000 and at the end of Year 2 it would be $534,600

As a group you have made a capital gain of $84,600.

Your group has three members. So over this period you are each $28,200 better off than if you had done nothing

Forming aproperty syndicate

investment in commercial, industrial, retail, hotel and leisure sectors as well as development sites and mixed-use properties. Syndication offers smaller property investors with limited available capital the opportunity to invest in commercial, retail and industrial properties that would otherwise be out of reach financially.

Why start a property syndicate?There are a number of reasons why co-owning property with others is something worth considering:1. It can make you money 2. It can save you money 3. It saves you time 4. It manages your risk 5. It makes you feel good

T he rapid growth of property prices since 2004, the rising house price inflation versus

income growth imbalance, the post-GFC credit squeeze, rising interest rates and the housing supply shortage are not making it easy for Australians, particularly younger Australians, to invest in property. However, there is an innovative solution to the affordability crisis – buying properties together via residential property syndicates.

Property syndicates are typically groups of two to five likeminded friends and/or family members who use a residential property investment as a vehicle to achieve their shared goals.

Property syndicates in Australia have been traditionally associated with

Your step-by-step guide

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and waited. Your decision to do something made you $1,175 per month in total.

Looking at it in a different way, if you had decided to not do anything and wait, that decision would have cost you $1,175 per month. And these calculations only consider capital growth. They don’t factor in either the cash flow benefit of having rental income to help pay your servicing costs or the tax benefits of investment property ownership.

What’s more, if you had waited two years, you would also have had to find extra money and income to service a larger loan as the value of your property increased from $450,000 to $534,600, which means it would have cost you more to buy.

You can also build a larger property portfolio quicker than you could on your own. By using the example above, you could own a 33% share of a property worth $534,600 and a 33% claim on a capital gain of $84,600.

By increasing your financial muscle and pooling your resources with friends and/or family, you can get into the market immediately and purchase more properties than you otherwise might be able to in the short to medium term.

2 It can save you moneyStarting a property syndicate

reduces the amount of money you need to cover property purchase, holding and other costs you may incur, say, for renovations you may plan to do. By pooling your resources you require less upfront capital to cover purchase costs, and less ongoing cash flow to cover your ongoing expenses.

Let’s use another example. Assume the following: You want to purchase a $400,000

property with a 90% loan-to- value ratio (LVR)

Interest rates are 7% The rental yield on the property

is 4.5% You can’t or don’t want to capitalise

any of your loan costs

What are your pre-tax costs over the first 12 months?

Well, your upfront costs will be $65,000 to purchase the property: $40,000 in equity (the bank is

lending you $360,000)

Around $20,000 to pay for stamp duty and conveyancing

Around $5,000 to cover LMI and other loan costs (however, some banks may let you capitalise these costs into your loan)

Your ongoing costs (and here I’m talking pre-tax cash flow) for the first 12 months will be around $13,000: This would include close to $18,000

in rent minus $25,000 in interest (assuming an interest-only loan)

Plus rental expenses of $6,000 (which would include property management fees, letting fees, rates, insurance, but no body corporate)

So, all up for the first 12 months you would be looking at cash flowing $78,000 ($65,000 purchase costs and $13,000 holding costs).

Now depending on your income and the structure you choose you’d get some of your ongoing costs back post-tax, but the equation starts to look very different when you divide the $78,000 cost across two, three, four or more people.

3 It saves you timeBy sharing the workload with

others, you leverage your partners’

strengths and also your time. An important part of setting up your property syndicate is determining the roles and responsibilities of each person in your group. Running your syndicate and managing properties can sometimes be a time consuming exercise: think market research, due diligence, property selection, finance, tax, property maintenance, dealing with tenants, organising finance, renovations, etc.

By allocating specific roles, you can leverage your friends’ natural strengths and knowledge. This should all be clearly documented so everybody knows exactly what they are responsible and/or accountable for, need to be consulted on or merely informed of. So not only can you leverage each other’s money, but you can also leverage your collective’s knowledge, experience and time.

4 It manages your riskThe reality of property investing

is that in making property selection decisions, you make the best decision you can make at a point in time based on all the information you have available to you.

Despite all the due diligence in the world, you actually don’t know


By increasing your financial muscle and pooling your resources, you can get into the market immediately and purchase

more properties than you otherwise could

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how the property you select is going to perform over time. No one does. So, building a diversified property portfolio makes sense as some of the properties you select may perform really well, but others may perform okay and others may perform poorly.

By controlling a greater number of properties you are more effectively managing your risk by spreading it across a number of investments rather than just one. By doing this you are effectively reducing your chances of picking a property that performs below average and increasing the chance of selecting a great investment.

Another benefit of sharing the risk with others is that when it comes to property selection and strategy decisions, you have a group of people with different knowledge and perspectives to draw on.

The field of behavioural finance brings insights from the sciences of psychology and sociology to illuminate some of the mental biases that we all have that can lead to poor investment decisions.

Overconfidence, confirmatory bias, loss aversion, framing (also called prospect theory, ie the idea that investors make different decisions based on the way the same piece of information is presented), anchoring (our tendency to grab hold of irrelevant and potentially subliminal information and then becoming biased towards that number when faced with uncertainty) and representativeness (our bias to make decisions based on how things appear rather than how statistically likely they are) are all natural personality traits that conspire against us when making investment decisions.

‘Bubbles’ are the most obvious demonstration that investor psychology plays a role in markets. George Soros in his book The Crash of 2008 and What it Means: The New Paradigm for Financial Markets explores these themes through his theory of reflexivity.

The theory of reflexivity was adapted by Soros from philosopher Karl Popper. The theory suggests that the perceptions of investors have a reflexive relationship with reality – that these perceptions can inform and alter the fundamentals on which supposedly

Ownership structure

CompanyPros Tax-free amounts are returned to the partners The shareholders of the company control the asset(s) Shareholders can only lose the amount they invested Unlimited life span All profit is taxed at 30% flat rateCons The asset held under this structure is relatively unsafe as it is exposed to

future creditors of any owners/partners of the ‘company’ The 50% CGT discount (after 12 months) is not accessible and neither are

losses that an individual may wish to claim, such as negative gearing (as they are trapped in the ‘company’)

TrustsTrusts come in a few different forms and are substantially more flexible than other structures available for investors. They offer more asset protection when compared to other structures as well. Trusts usually come in the form of: Discretionary trusts – often referred to as family trusts. Beneficiaries’

entitlements are not fixed under these trusts and will be dispersed by the trustee in accordance with the Trust Deed outline. This means that all beneficiaries can get different entitlements

Unit trusts – each entitlement within a unit trust is fixed. For example, if you owned 20 units of the 40 income units issued by the trust, you are entitled to 50% of the income produced by the asset

Hybrid trusts – this type of trust is a mixture of both the discretionary and unit trusts. Entitlements can be fixed or flexible

A trust usually comes in the form of a Trust Deed and a Trustee. This written agreement essentially sets the guidelines for the holding and managing of the asset on behalf of the group of people within the trust. The discretionary and hybrid trusts require an ‘appointer’ and they have the authority to recruit and get rid of the ‘trustee’. The asset is registered and held in the name of the trustee, and this trustee can be a person or a company (corporate trustee).

Pros Discretionary trusts: allow all income and capital gains to be dispersed to a

variety of beneficiaries (by the trustee) as detailed in the trust deed. Creditors cannot gain access to the asset held by the trust and refinancing equity is available. There is the potential to distribute income in a tax effective manner. The trust is entitled to the 50% CGT exemption

Unit trusts: beneficiaries have predetermined entitlements and can claim negative gearing. The trust is entitled to the 50% CGT exclusion. In some states ownership of the property can be transferred without any stamp duty being charged

Hybrid trusts: flexible allocation of income and gains to those in the trust. There is the opportunity to gain from the negative gearing benefits in the initial phase of the investment life cycle and the trust can be switched to a discretionary trust at any time

Cons Discretionary trusts: the trust cannot allocate a loss and therefore forfeits

some tax benefits (eg this form of trust doesn’t allow beneficiaries to claim negative gearing. Trusts can generally only be held for 80 years. An upfront cost is incurred in setup, as are annual accounting fees)

Unit trusts: trusts can generally only be held for 80 years. Any profits not handed out to beneficiaries will be taxed at the peak marginal tax rate

Hybrid trusts: increased land tax may apply in some states or territories. Potentially less asset protection. Any profits must be distributed to one of the trust’s beneficiaries

Source: Capital 360

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rational markets are based. In other words, financial trends start from rational causes but are often prolonged to a point where prices swing far into the irrational.

So, having more minds with different perspectives focused on the same investment decisions can mean that as a group you end up making better investment decisions than you could if you were left to your own devices.

5 It makes you feel goodInvesting in property with friends

and/or family also allows you to maintain your current lifestyle, rather than having to curtail your enjoyment of life because of the strain of oppressive mortgage commitments.

How to set up your property syndicateStep 1: Find your partnersThis is probably the most important step to navigate. Money is a very emotive and personal thing for many

people, so investing with others isn’t going to be for everyone. You have to be prepared to be a little bit flexible and recognise that you aren’t going to be in control of every decision. You also need to make sure that the people in your property syndicate have a similar relationship with money and are open and genuine people that you can trust.

For that reason it helps if the members of your property syndicate are friends and/or family members. All but one of the property syndicates I have been involved with have been between friends. The ones that have worked best have been those formed between groups of friends and family

members. I think this is purely because friends and family members trust each other more than they do acquaintances or strangers and are more in tune with the way each other operates and communicates. This reduces the chances of any misunderstandings developing.

Because starting a property syndicate is typically a long-term venture, the dynamics of the group need to suit having a long-term relationship. Typically most people in a property syndicate look at committing to a five- to 10-year horizon. So it does take a particular type of person to make a venture like this work.

You need to make sure that the people in your property syndicate have a similar relationship with money and are open

and genuine people that you can trust




However, if you are in the position where you don’t have enough friends or family members to achieve what you want to achieve, you could look to find additional partners by: asking your inner circle to

recommend your idea to their friends or family members. Chances are that the person you are looking

for is only one or two degrees away posting your idea on a property

investment discussion forum and seeing who responds

Typically the people who suit a property syndicate: are a little bit entrepreneurial have good communication skills

want to build a property portfolio believe that residential property is a

good long-term investment are having difficulty accessing

finance because of tighter bank credit restrictions

can access at least $20,000 have an income of around $70,000 have some regular disposable

income that they would like to devote to building a property portfolio

have a group of friends and/or family members who they can trust to commit to keeping their promises to each other

have a ‘can do’ attitude

Step 2: Agree on your objectivesThe goals of your syndicate might be to buy, renovate and hold one, two, three, five or more properties, over a period of three, five, 10 or more years.

Or it might be simply to purchase a holiday house for you all to enjoy.

There are plenty of property strategies out there: investing in


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apartments versus houses, positive cash flow versus capital growth, new versus established, etc. The objectives of your property syndicate are limited only by your group’s timeframes, property strategy and the level of commitment you are all comfortable with.

Typically the main thing to agree on at this early stage is the broad strategy. It is only once you have completed the next two steps that you will refine your strategy and start to really understand your specific objectives.

Step 3: Work out your finance strategyAfter finding the right partners, this is probably the most important part of the process. This is because property investors are not actually in the business of property, they are really in the business of finance.

What do I mean by this? Well while property selection is obviously very important, if you think about it, ultimately it is the ability of a

property investor to use finance and leverage to acquire a property (and/or properties) and hold it (or them) over the long term that makes that investor their money.

So you have to be extremely careful when it comes to incorporating the finance strategy into the design of your property syndicate. Your guiding principle in designing your strategy and the structure of your syndicate should be that the finance or money strategy comes first.

Particularly if the structure you are looking at involves a group finance solution where parties become jointly and severally liable for the full amount of the mortgage. This may allow you to purchase a more expensive property, but it may also restrict the

ability of your collective to achieve its ultimate objectives.

The structure of the syndicate should ideally be flexible enough for all members of the collective to achieve their shared goals for the syndicate, but also allow members the freedom to achieve their personal goals outside of the syndicate.

This is because forming a property syndicate is normally a long-term venture. And while you can do a lot of work to manage your risk, no one can really know what is going to happen in the future. Things change. So you want to build flexibility into the design of the structure.

Finding a mortgage broker with a lot of experience with financing property investments is a good place

The structure should be flexible enough for members to achieve shared goals, but also allow freedom to achieve personal goals




to start. These professionals are in the best position to provide you with practical and unbiased advice on your finance options based on your current situation and what you want to achieve.

Step 4: Determine the investment structure you are going to useIn reality, step 4 is done in conjunction with step 3. Your finance strategy and your investment structure are intimately connected. The two can’t really be separated.

There are many types of structures you can use. Co-ownership of property can be done as joint tenants, tenants in common, a partnership, a private company, a unit trust or discretionary trust. It can also be done as a mix of these options.

Each of these structures has specific pros and cons. At this point it is extremely important to do your due diligence. The structure that you choose will ultimately affect your ability to leverage into more properties, and also the amount of

tax benefits you will receive personally via your syndicate.

So it will help to get your accountant talking to your mortgage broker at this stage. Between them and yourself you should be able to arrive at the most appropriate structure for what you want to achieve.

Step 5: Agree on your property strategyIt is only once you have finalised your individual and group finance strategies and know the vehicle you are going to invest through that you can narrow down and finally agree on your specific property strategy.

This is because your finance strategy will determine how much equity will be required to achieve your objectives and how much money you will each need over what period of time to maintain your property purchases.

So it’s only at this point that you can: Finalise and agree on the specific

property selection criteria, ie price, location, type, etc

Understand exactly what you can achieve, ie number of properties over what time period, how much you spend on renovations etc

It’s important that at this stage everyone clearly understands and agrees on the specifics of your property strategy. It’s also critical

1Don’t get into business with people you don’t know well

Make sure you really understand the underlying motivations of all the people who are interested in joining your group. Throughout the process you should be careful to listen to yourself and feel and trust your emotions. If it doesn’t feel right, don’t do it!

2Don’t start your property syndicate without a legal agreement

It is a truism that it’s lawyers who record our promises and it’s accountants who count our promises. The success of your syndicate depends on how well you make your promises and ultimately how good you are at keeping them.

The process of forming your legal agreement is a crucial part of the process and a critical step in setting up your collective for success. This is because it not only forms a document you can all fall back to, but

perhaps more importantly it forces you all into the act of discussing the different possibilities and eventualities that may come about over the course of your venture.

Reaching a consensus on how you will all deal with those eventualities makes sure you all start your new venture on the same page, with the same set of expectations.

3Don’t leave any questions unansweredDon’t be afraid to ask questions, no matter how silly

you may feel. The different members of your syndicate will all have different levels of experience and expertise across the wide spectrum of subjects you need to understand – tax, law, finance, accounting, property selection, negotiations, management, valuations, etc.

Chances are that if you aren’t comfortable with something, or are unclear about how something works, other members in your group are too. Better to ask and be totally satisfied with why something is being done a particular way than to not say anything and carry underlying doubts.

The structure you choose will affect your ability to leverage into more properties, and also the tax benefits you will receive

Warning! 3 things to watch out for


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to really focus and be clear on what your entry and exit strategies will be

Step 6: Put a legal agreement in placeThis step is your social and business risk management strategy in one.

It’s very important at this stage to consider every aspect of the venture you are starting, to think about every situation that might unfold – no matter how crazy or unlikely it seems – and talk about it openly and honestly with your group. The more brainstorming and scenario planning you do the better you will be at managing your risk and minimising the chance of unforeseen circumstances arising.

Once you have arrived at answers that you are all comfortable with, then you can get your lawyer to document what as a group you have all agreed and committed to do.

Some of the main things you should consider are: What happens if someone can’t

or doesn’t want to honour their financial commitments?

What are the roles and responsibilities of the parties?

What type of decisions can be made by whom?

Can new participants be admitted? What if one of the parties wants to

retire before the agreed termination of the collective?

How will you resolve any disputes between the parties?

How will you agree on the appointment of third parties?

Step 7: Execute your strategyIt’s time to organise your finance and start securing your group’s first property. For first-timers it may help at this stage to consider the use of an experienced buyer’s agent. A buyer’s agent can lend expert advice on your property selection and take some of the emotion out of the process – particularly given there is more than one person involved in the purchase decision.



Tim Riley is the principal of Property Collectives. Property Collectives facilitates the end-to-end establishment of residential property investment syndicates in under eight weeks. For more information SMS your email address to 0407 846 965 or visit www.propertycollectives.com.au

Your finance strategy is of the utmost importance. It could mean the difference between you purchasing five properties

over 10 years and only two or three

1Be honest and open with your partners

The ultimate success of your venture will depend on how well you work together as a team. Keeping the lines of communication open and managing the expectations of others in your syndicate should be your focus.

Most relationship problems are born from miscommunication. If you can try and be impeccable with your word, not make any assumptions and not take things personally, you should be able to keep things in perspective and keep yourself and your syndicate on track.

2Do your research when it comes to your finance strategy

I can’t reiterate enough how important your finance strategy is. It could mean the difference between you achieving the purchase of five properties over 10 years and only two or three.

Your finance strategy is your money strategy and it pays to spend a lot of time and effort concentrating on getting this right from the start. Once you have set up your structure it is hard to go back or start again. Investing the time in finding the right advice from the right finance professional will pay itself off in the fullness of time.

3Pick the structure that maximises your tax benefits

As we move into an environment where it seems that future capital

growth will be more subdued than what we have seen over the last six years, the benefits you accrue through the tax incentives for investing in property become more important.

Everyone’s situation in your syndicate will be different, so it’s important to select a structure that is flexible enough for the individuals in the group to maximise their benefits. Similar to my point earlier, devoting the time to finding the right advice from an experienced and commercially minded accountant will be well worth the investment.

4Have a clear exit strategyWhen going into business with

others it pays to have a clear exit

strategy. You never know what is going to happen in the future. Some of your assumptions about how the market will unfold or what is going to happen in your life may not turn out to be absolutely right. However, if you have an agreed set of contingencies and a set timeframe that you are willing to work towards then the odds are that your initial objectives will be achieved.

5Treat your syndicate like a business

In the establishment of your property syndicate, you have in effect started your own business: a property investment business.

A property has revenues and expenses just like a business. It can also appreciate and depreciate like a business. It has incoming revenue (rent) and income (capital gains) and outgoing expenses (land tax, property management fees, maintenance, expenses, etc). So if the goal of your collective is to buy, renovate and sell four properties over the next five years, recognise that you have started a business and you need to treat it as such.

To ensure your new business succeeds it is important that you

adopt a business owner’s mindset when it comes to running your collective. An old boss of mine used to tell me that ‘how you do anything is how you do everything’.

So take some time out, sit down and have a think about how you do things, how you would go running your own business and who you would like to go into business with… Exciting isn’t it?

5 tips for syndicate success


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