Looking to invest in property
2011/07/10

"Looking to invest in property but stymied by a lack of finance?"

Ongoing press coverage about the difficulties encountered by today's property investors has recently highlighted a number of issues - but there is a general agreement that the lack of bond finance/capital has been the defining factor in the drawback by so many who previously regarded property as their prime investment channel.

The "obvious" solution to the present difficulties is to form an investment club - with anything from three to ten members.

Clubs of this kind can do exceptionally well in SA now because they are able to buy - and sometimes renovate - properties at 30 to 50% below their previous list prices and achieve good rentals.

The legal / tax position of an investment club puts it in a particularly favourable position right now with banks and other lenders. Since the new Companies Act 71 of 2008 came into effect from 1 May 2011, such clubs can use a legal entity such as a private company (Pty Ltd) to hold the property and setting up such entities is simple and inexpensive.

The new private company is also not required to have a statutory audit until certain fairly high turnovers are reached.

Forming an investment club in the form of a private company makes it far easier to obtain bank finance. This is because the National Credit Act does not apply to juristic persons, only to those buying in their own name. The bank is, therefore, able to take a bigger risk and advance larger outlays to such entities without incurring a penalty for reckless lending. Furthermore, in its income and bond serviceability assessment calculations, the bank can take into account the combined income of all the club members, another huge advantage.

There will always be some people who dislike investing with others and that find sharing income or profits with others goes against the grain. However, as successful clubs almost always end up owning a total portfolio of properties, the returns are likely to grow year by year - and if a competent lawyer is employed at the outset to draft the shareholders agreement, it is possible to avoid the vast majority of contentious issues which can crop up if the agreement is not clearly worked out at the start.

I believe it is better to own a small percentage of something than a large percentage of nothing.

SA Property Investor