Greg Ninness discovers that the devil's in the detail of new scheme to help newbies onto the investment property ladder

Greg Ninness discovers that the devil's in the detail of new scheme to help newbies onto the investment property ladder

By Greg Ninness

A specialist real estate agency has been set up to help people pool their money to buy investment properties between them.

Real Estate Together Ltd (RET) is the brainchild of Martin Dunn, who founded and still runs City Sales, an agency specialising in the sale of Auckland apartments.

RET will source suitable investment properties, bring together groups of like-minded investors to buy them, arrange the finance, provide a standardised ownership structure and manage the properties on the investors' behalf.

Dunn says he developed the concept because he was aware of many people who wanted to buy investment property but either couldn't afford to do so by themselves, or weren't confident enough to do so.

RET will initially concentrate on the residential property market, particularly two bedroom brick and tile home units in selected suburbs. But Dunn says the concept could also be expanded into the commercial property market.

RET will charge the investors a buyer's fee of 4% of the purchase price plus GST (4.6%) for sourcing a suitable property.

There's a maximum of four investors for each property with each paying a one-off set up fee of $2300 (including GST) to cover the legal documentation for the purchase.

Once finance is arranged (properties can also be purchased without finance if the investors have the cash) and the purchase completed, RET will manage the property, including signing up tenants, collecting rent, arranging and paying the outgoings such as maintenance, rates and insurance and also making the mortgage payments.

Because RET is a real estate agency, payments will be handled through an audited trust account.

The management fee is 8.5% plus GST (9.775%) of the rent and outgoings.

Although the intention is to retain the property as a long term investment, it may be sold when a simple majority of investors vote to do so, or investors could sell their individual share of a property to their co-investors or a third party.

Although those arrangements appear relatively straightforward, there are a number of aspects to the way RET is structuring these deals that investors need to pay particular attention to.

  • Investors will own each property as tenants-in-common, with their rights and obligations set out in a Tenants-in-Common Agreement and potential purchasers should seek appropriate legal advice about the implications of such an arrangement.
  • One of the conditions imposed by the bank providing mortgage finance for these deals includes having the mortgage paid by the property manager (likely to be RET) instead of dealing with multiple investors for a single mortgage. As part of its management contract, RET will charge 8.5% plus GST (9.775%) on the interest portion of the mortgage payments, as well as on normal outgoings such as rates, insurance and maintenance.
  • Another condition imposed by the bank for providing mortgage finance is that the investors will be "jointly and severally" liable for the mortgage payments. That means if one or more investors has trouble meeting their mortgage payments, the others will need to stump up with the shortfall. This risk is mitigated by the fact that at current interest rates and based on RET's estimates of likely purchase price and outgoings, the investments should be cash flow positive, but only just.

Dunn believes the home units RET is aiming at are likely to cost around $600,000 and should rent for around $550 a week.

Figures he has supplied show estimated annual outgoings for rates of $1500, insurance $300,and maintenance $500 which is $2300 altogether.

If there was a mortgage for $300,000 fixed for five years at 4.23%, the payments would be around $678 a fortnight or $17,628 a year, and RET's management fee would be about $4000.

Once all of those payments are deducted from the rent it would leave $4672 a year or $89.85 a week (pre-tax) before allowing for vacancy or contingencies.

So although it would be cash flow positive there's not a lot of money to play with. And it may only take an extended period of vacancy or an unexpected blow out in costs and investors might need to be dipping into their own pockets to pay the mortgage.

Which is probably why RET's promotional material focuses mainly on the potential capital gains rather than income generating ability of the arrangement.

The examples used in RET's brochures show a unit costing $500,000 today could be worth $1.3 million in 10 years time, based on 10% capital growth per annum.

Investors will need to form their own view on how realistic those projections are, but some may find them a bit too bullish for comfort.

Which of course raises the question of tax.

Many people mistakenly believe that the introduction of the Bright Line Test for capital gains means that any capital gains are automatically tax free as long as the property is sold more than five years after it was purchased, but that is not the case.

The Intent Test, which stipulated that capital gains are taxable if a property was purchased with the intention of reselling it, still applies.

Given the emphasis on capital gains in RET's promotional material and the relatively low income returns the investment may generate, potential investors could find that consulting an accountant with appropriate experience in property investment matters, especially in regard to tax, could be money well spent.

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Doesn't the intent test require intent to sell it *at a profit* ?

One might argue that the investment vehicle provides a way for the investors to avoid paying income tax on their savings, much other real estate investors and owner-occupiers. If they put their cash into term deposits or shares while saving to buy a house, they pay their marginal tax rate (let's say 33%) on interest or dividends. They do not pay tax on the rent under this scheme since it goes to pay off the mortgage.

Buy a 2 bedroom unit in a "selected" suburb with a stranger and be liable for their mortgage while earning less than 5 percent gross rental and paying entry fees to the REA. I'm not in.

Nice try - but count me out.

Typically, the only people who do well out of schemes like this one are the promoters - and some of them bomb-out as well.

Caveat Emptor rules.......

TTP

Agreed HW, ultimately, the investors being burnt will only have themselves to blame for not wanting to do any of the work themselves and expect a gain for no effort. No doubt Though that people will feel sorry for "the poor buggers who lost their money" and all blame will be laid on the RET

Is the property investment landscape changing from what we operated under? New investors seeing it differently to what we think is workable. With the new companies including this one, will there be a very different way of investing in future.

More landlords? Nup

In a balanced society, everybody has 1 rental property.

"RET will source suitable investment properties, bring together groups of like-minded investors to buy them, arrange the finance, provide a standardised ownership structure and manage the properties on the investors' behalf."

Sounds just like the propaganda put about by Blue Chip before it took investors' money to the financial graveyard...The model may be 'different' but the target pool of naive investors is the same. (eg: selling 'suitable' properties already held by the managers to those who can't be bothered or don't have the wherewithal to do it themselves?). And if Blue Chip is any guide, these sure-fire schemes often rise just before the death of a Cycle.
( I wonder how many of the suitable properties will come from City Sales?! Let's hope Martin Dunn doesn't do a Mark Bryers if it all turns to custard)

Interesting model. It should do well as the ongoing financialisation of housing will only see more people trying to get a peice of the pie. In reality its fractionalizing an asset isn't it?
Much like sharesies and the like where you can buy a portion of an ultra expensive stock? So with this model you could own the front door or the gutters while your other partners have the floor or the roof?! I wonder how long the government will sit on their hands before they organise the appropriate legislation to regulate this sector...it could get messy otherwise!

Humm multiple landlord/investors sounds a bit desperate. I suspect what RET really up to is that they're trying to facilitate more overseas speculative investment and getting Chinese buyers to defy their laws on capital flight. Here's an article from the FT that highlights their attempts at property crowdfunding though I wouldn't be surprised if these channels had been shutdown by the CCP. FT Article: China’s buyers defy the law to satisfy thirst for foreign homes. https://www.ft.com/content/5dca923a-1895-11e8-9c33-02f893d608c2

Some of those numbers and costs look terrible. Your $500k property will be worth $1.3m in 10 years ? your dreaming.

FYI, that is 10% p.a.

Don't you know, property prices double (or more than double) every 10 years....
It's a universal law.

The fees are crazy high. 4% + GST for finding a suitable property plus over 8% for management? They must be having a laugh.

8% management fee is standard

"likely to cost around $600,000 and should rent for around $550 a week."
Buyers agent and sellers agent together charge 55k approx on this 600,000 unit. They are doing well out of this The new owners get a return of 3.3 percent net after property exps and management fees before mortgage interest cost. Sounds like a a good way to lose money for the suckerz who buy in. From memory Martin Dunn has put up other similar uneconomic schemes over the years which never got backing in the end.

There may not be a RE agent, id guess these are sold from developers. A 3.3% yield sounds really solid, about as good as cash and maybe 50% better than the S&P?

Gotta say that i am a novice regarding any type of property investment schemes.The only properties i have ever owned are the ones that have put a roof over my families head.
However i have read the above information and also read The Property Crowds promotional material and of the 2 of them,imo,The Property Crowd wins.Thats not to say i would invest in any of them.

The Property Crowd use a Ltd company to hold each residential investment property.
Question 1: Is this property subject to Bright-line test if sold within 5 years
Question 2: if investor buys shares in the property company but then later (within 5 years) have to sell up the shares, would the investor pay Bright-line tax on the share price capital gain, assuming of course there is a gain... The share price reflects the value of the property.
Question 3: if the answer to Q1 is yes then how would this work should the shares have changed hands over the time.

It makes me wonder whether you could just sell the shares in a company that you own instead of sell the property

Bright-line triggers on a fundamental change in the underlying ownership, sale of shares would trigger it.

Also gotta question that price to rent ratio.. A couple of units we've looked at in blockhouse bay have gone for above $600k, and a quick trademe search says that 2 bedroom units in blockhouse bay have asking prices around $500-$520 per week. So 10% low on the buy price, and 10% high on the rental rate..

You would have to be pretty uninformed and a poor investor to go into this so-called investment.
Firstly the rental yield is poor and secondly the fees being charged are blatantly ridiculously high!!!

That just illustrates the poor yields typically on offer in Auckland. Around 4% gross.
With limited capital gain potential.

Great, everyone become a property investor. Hooray, everyone can earn money without having to work. The best thing about it is anyone can invest in property, it doesn't take an ounce of sophistication.

Meanwhile:
https://www.interest.co.nz/opinion/94767/productivity-low-reasons-are-ha...

Low Productivity,a major concern of Don Brashs for years.

Professional Property investors do work!
Firstly they get off their butts and buy.
Secondly, there are plenty of things that they need to do to ensure that their business is profitable.
Many as you know need to prop up the weekly expenditure, so any capital gain is deserved.
It is not just a matter of buying and sitting back and doing nothing and that is why so many get in and then get out!

Of course professional property investors do work but most don't (want to) understand that. The central point of RET is to attract the large crowd who think they can get something for nothing, i.e. invest in property and not have to find it, finance it, manage it, deal with tenants, lawyers, bankers, valuers etc… Of course these people will get burnt. Judging by how many on this site believe that property investing = not working, RET will have a large pool of potential investors

TM2,

I was sobbing as I read this. My heart bleeds for poor property investors like you-working their fingers to the bone-getting no thanks from others and almost single-handedly keeping our economy afloat. Should we start a hardship fund for you?

of course there are naysayers who insist that selling ever pricier property to each other is not that flash for the economy,but what do they know?

Bring back Mark Bryers.

Sounds desperate.
Perhaps an indication of how bad the investment landscape has got in Auckland.
Although the spruikers would deny that :)

only one sure winner in that property owning structure,more snakes than ladders.dont propellor investments already do this?but adding multiple owners and another level of fees to pay the mortgage is clever.

Sounds like a business model which has been used before, with forests, commercial buildings, houses, and farms and with similar fees, with mixed results.

If you can't buy the property on your own, manage it yourself, and with enough equity to weather the times it will be empty, forget it, the only one making anything out of this wont be you.

Have to agree with the BULLs comments. Is it just me or does this look like a way for support Mr Dunn in his Apartment sales, and make a big commission, and a big management fee for no risk down, while the "investor" takes all the risk?

Anyone silly enough to do this, just like Bluechip, deserves to be fleeced.

$500 a year for maintenance - total joke.

yeah sounds too high risk entirely with too many things going wrong

More financialisation of the real estate market. Great (...sighs) Just what we need. What next? Perhaps blackrock or some other private equity firm going to come and "invest" in NZ real estate.