Investment clubs the answer to home finance problem

Ongoing comments about the difficulties encountered by property investors have highlighted a number of issues, but there is a general agreement that the lack of bond finance and capital has been the defining drawback for so many that previously regarded property as their prime investment channel.

Jason Lee, legal adviser and strategist to Rawson Auctions at the Cape, and author of ‘Making money out of property in South Africa’, says the “obvious” solution to the present difficulties and one he recommends in his book, is to form investment clubs with three to 10 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 percent below their previous list prices and achieve good rentals. The legal and 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 May 1, such clubs can use a legal entity such as a private company to hold the property and setting up such entities is simple and inexpensive. The new private company is also not required to have statutory audits until 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 individuals buying in their own names. Banks can therefore take bigger risks and advance larger outlays to such entities without incurring penalties for reckless lending. Also, in their income and bond serviceability assessment calculations, banks can take into account the combined incomes of all the club members, which is another huge advantage.”

He says there will always be some people who dislike investing with others and who 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 competent lawyers are employed at the outset to draft shareholder agreements, it is possible to avoid most contentious issues that can crop up if agreements aren’t clearly worked out at the start.

“I believe it is better to own a small percentage of something than a large percentage of nothing,” says Lee.

“When I talk to people about the advantages of property investment, I am often told that they like the concept, but they lack the cash or the ability to qualify for bond finance at present. Property investment clubs allow those with an interest in this field to get a foot on the property owning ladder for minimal initial outlays – and it is worth noting that many of the wealthiest property people of our era, such as Donald Trump, have testified that they made their money initially on borrowed cash and with financial partners, banks and others.”