Once again I am re-producing an article from the Vancouver Sun for your reading pleasure with my commentary after it. It was published in the Vancouver Sun on June 23rd, 2008 under the title, “JOINT HOME OWNERSHIP OPENS UP SOME PITFALLS”
RELATIONSHIPS: Get a pro to set terms down on paper
By Ray Turchansky for Canwest News Service
- Edmonton Journal
An increasing number of young people are entering the housing market by buying jointly with a friend or relative. Families banding together to buy a cottage or rental property has become another trend.
Statistics Canada reported that 70,000 young adults bought homes with a friend, sibling, parent, or other family member during 2006, a movement likely to continue as house prices stay high.
But while joint venture real-estate ownership can be highly successful, it can also be as treacherous as teaching a friend or family member how to drive a car. According to Investor’s Group financial planner Murray Pituley of Regina, the difficulty comes in separating the personal relationship from the financial one.
He said many co-owners don’t consider possible twists in life.
“What if one of the dies; what if one of them gets married; what if one of them takes a job transfer and moves out of province? You have to set out in advance what those what-ifs could be and try to document them into a co-ownership agreement. It could be a simple thing like who pays for some of the expenses.
“The best dollars on professional fees are spent up front to get things structured properly… sooner or later, things are going to have to unravel.”
Pituley said ownership structure is critical.
He said parents might have their name on the title and mortgage, but claim a child is the beneficial owner and entitle to the principal residence exemption. However, Canada Revenue Agency might argue that the parents bought the house to “flip” it and the children were little more than maintenance people, in which case the parents would have to pay capital gains.
“That’s where the legal advice comes into play. You can get similar-sounding situations with different tax results.”
In recent years there has beena rush to get into real estate, with a sense that prices always climb.
“If I were a parent helping a child get into real estate, I would be looking at where the market is at. Where did it come from and where is it expected to go? If you bought at the top end and you’ve got a high percentage of the purchase price mortgaged and the real-estate price drops, it’s something to be concerned about.”
He cautioned parents to step back and remember their own needs first.
“What happens if a child goes bankrupt or has a marriage breakdown or the parent wants a little extra to go on holiday or buy a car?”
How hands-on does a parent want to be, or need to be in the event of an overflowing toilet at midnight?
Getting involved in the purchase of a house for a child working or going to school in another city presents other problems.
“Sometimes it’s tough to separate business from family. If you have concerns about a child in advance, you probably shouldn’t go in and help them out with a house in first place.”
As for buying a cottage or rental property with friends, many articles suggest it be done through a corporation to reduce taxes.
“A corporation can’t have a principal residence,” Pituley said. “A corporation would make sense if it’s a real estate development and a business.”
The annual legal and accounting corporation costs might outweigh tax benefits.
<END OF ARTICLE>
————————————————————————————
This article provides a very topical and unhelpful explanation of the risks and rewards of joint venture purchases. I have a number of people come to me, often advised by very adept and intelligent professionals, seeking to start a real estate empire through joint venture purchases. This technique DOES work, and CAN BE very lucrative. However, nothing with reward comes without a little risk in the investing game.
First off, what IS a joint venture purchase?
It is where two or more partners agree to purchase a property together. This can take the form of three applicants purchase a property and living in it, three people purchasing a property and renting it out, or, more commonly, three people starting a corporation, and the corporation buying a property for investment purposes. While this sounds great, and tax savings are always nice, there are very difficult consideration should one of the partners go (or already be) bankrupt, pass away, get divorced, sell their shares, disrupt the partnership, or any other manner of things. For this reason, a co-ownership agreement should be drafted by a lawyer BEFORE the contract is written to buy the property. Make sure that it accounts for all of these contingencies and how the profits (or god forbid, losses!) are to be spread around. Make sure it accounts for death, heredity, divorce, etc… If a spouse and a partner split, that spouse may have a claim on the partner’s share in the company (and therefore in YOUR investment!!!). These need to be addressed through legal counsel up front… BEFORE YOU WRITE A CONTRACT TO PURCHASE A PROPERTY!!!! Many people leave this until after the contract is written and then play “Scramble” to try and get a mortgage approved as they didn’t have their ducks in a row. Talk to me about what steps to take if this is your strategy.
Many times people will bring in a “capital partner” or someone that puts up the down payment (often from dubious or borrowed sources) and then the other partner(s) go on title and sign a contract alloting some of the interest in the property to the person who put up the money. This is sound in principle, but make sure the money and person you are contracting with has “clean hands.” If a contract agrees to something, and that something happens to be illegal, the courts will not enforce it and may turn it over in certain situations. Again, legal advise UP FRONT BEFORE YOU WRITE A CONTRACT TO PURCHASE is the key here.
All this being said, Joint Venture purchases DO offer the ability for people who couldn’t otherwise do so to get into a market that never seems to stop rising – although I suspect a turn downward is just around the corner if not already upon us!
Joint ventures also allow people to purchase many “doors” (properties) more than they could on their own, thus providing the illusion that they control more real estate than they really do. In a rapidly rising market like we have had for the past 7 years, joint ventures are a great option and many people have made a fortune using them. However, should the market go into a protracted slide, it is my personal opinion that we will see a lot more lawsuits and a lot less profits being spread around.
Bottom line: have an agreement in place to provide for all of life’s unexpected events. Have life and disability insurance in place as well. Deal with a broker knowledgeable in working with joint venture purchases (give me a call). The sky is the limit when we band together and the market rises, but the ground comes rushing up awfully fast when it falls.
~ by merc359 on July 8, 2008.
Joint Venture Purchases. Risks vs. Rewards. Is it worth it?
Once again I am re-producing an article from the Vancouver Sun for your reading pleasure with my commentary after it. It was published in the Vancouver Sun on June 23rd, 2008 under the title, “JOINT HOME OWNERSHIP OPENS UP SOME PITFALLS”
RELATIONSHIPS: Get a pro to set terms down on paper
By Ray Turchansky for Canwest News Service
- Edmonton Journal
An increasing number of young people are entering the housing market by buying jointly with a friend or relative. Families banding together to buy a cottage or rental property has become another trend.
Statistics Canada reported that 70,000 young adults bought homes with a friend, sibling, parent, or other family member during 2006, a movement likely to continue as house prices stay high.
But while joint venture real-estate ownership can be highly successful, it can also be as treacherous as teaching a friend or family member how to drive a car. According to Investor’s Group financial planner Murray Pituley of Regina, the difficulty comes in separating the personal relationship from the financial one.
He said many co-owners don’t consider possible twists in life.
“What if one of the dies; what if one of them gets married; what if one of them takes a job transfer and moves out of province? You have to set out in advance what those what-ifs could be and try to document them into a co-ownership agreement. It could be a simple thing like who pays for some of the expenses.
“The best dollars on professional fees are spent up front to get things structured properly… sooner or later, things are going to have to unravel.”
Pituley said ownership structure is critical.
He said parents might have their name on the title and mortgage, but claim a child is the beneficial owner and entitle to the principal residence exemption. However, Canada Revenue Agency might argue that the parents bought the house to “flip” it and the children were little more than maintenance people, in which case the parents would have to pay capital gains.
“That’s where the legal advice comes into play. You can get similar-sounding situations with different tax results.”
In recent years there has beena rush to get into real estate, with a sense that prices always climb.
“If I were a parent helping a child get into real estate, I would be looking at where the market is at. Where did it come from and where is it expected to go? If you bought at the top end and you’ve got a high percentage of the purchase price mortgaged and the real-estate price drops, it’s something to be concerned about.”
He cautioned parents to step back and remember their own needs first.
“What happens if a child goes bankrupt or has a marriage breakdown or the parent wants a little extra to go on holiday or buy a car?”
How hands-on does a parent want to be, or need to be in the event of an overflowing toilet at midnight?
Getting involved in the purchase of a house for a child working or going to school in another city presents other problems.
“Sometimes it’s tough to separate business from family. If you have concerns about a child in advance, you probably shouldn’t go in and help them out with a house in first place.”
As for buying a cottage or rental property with friends, many articles suggest it be done through a corporation to reduce taxes.
“A corporation can’t have a principal residence,” Pituley said. “A corporation would make sense if it’s a real estate development and a business.”
The annual legal and accounting corporation costs might outweigh tax benefits.
<END OF ARTICLE>
————————————————————————————
This article provides a very topical and unhelpful explanation of the risks and rewards of joint venture purchases. I have a number of people come to me, often advised by very adept and intelligent professionals, seeking to start a real estate empire through joint venture purchases. This technique DOES work, and CAN BE very lucrative. However, nothing with reward comes without a little risk in the investing game.
First off, what IS a joint venture purchase?
It is where two or more partners agree to purchase a property together. This can take the form of three applicants purchase a property and living in it, three people purchasing a property and renting it out, or, more commonly, three people starting a corporation, and the corporation buying a property for investment purposes. While this sounds great, and tax savings are always nice, there are very difficult consideration should one of the partners go (or already be) bankrupt, pass away, get divorced, sell their shares, disrupt the partnership, or any other manner of things. For this reason, a co-ownership agreement should be drafted by a lawyer BEFORE the contract is written to buy the property. Make sure that it accounts for all of these contingencies and how the profits (or god forbid, losses!) are to be spread around. Make sure it accounts for death, heredity, divorce, etc… If a spouse and a partner split, that spouse may have a claim on the partner’s share in the company (and therefore in YOUR investment!!!). These need to be addressed through legal counsel up front… BEFORE YOU WRITE A CONTRACT TO PURCHASE A PROPERTY!!!! Many people leave this until after the contract is written and then play “Scramble” to try and get a mortgage approved as they didn’t have their ducks in a row. Talk to me about what steps to take if this is your strategy.
Many times people will bring in a “capital partner” or someone that puts up the down payment (often from dubious or borrowed sources) and then the other partner(s) go on title and sign a contract alloting some of the interest in the property to the person who put up the money. This is sound in principle, but make sure the money and person you are contracting with has “clean hands.” If a contract agrees to something, and that something happens to be illegal, the courts will not enforce it and may turn it over in certain situations. Again, legal advise UP FRONT BEFORE YOU WRITE A CONTRACT TO PURCHASE is the key here.
All this being said, Joint Venture purchases DO offer the ability for people who couldn’t otherwise do so to get into a market that never seems to stop rising – although I suspect a turn downward is just around the corner if not already upon us!
Joint ventures also allow people to purchase many “doors” (properties) more than they could on their own, thus providing the illusion that they control more real estate than they really do. In a rapidly rising market like we have had for the past 7 years, joint ventures are a great option and many people have made a fortune using them. However, should the market go into a protracted slide, it is my personal opinion that we will see a lot more lawsuits and a lot less profits being spread around.
Bottom line: have an agreement in place to provide for all of life’s unexpected events. Have life and disability insurance in place as well. Deal with a broker knowledgeable in working with joint venture purchases (give me a call). The sky is the limit when we band together and the market rises, but the ground comes rushing up awfully fast when it falls.
~ by merc359 on July 8, 2008.
Posted in Market Commentary, Potential Mortgage Pitfalls and Risks, Uncategorized
Tags: buying joint venture, joint venture, joint venture partners, joint venture real estate, mortgage, mortgage broker vancouver, purchasing joint venture property, Real Estate, vancouver, vancouver mortgage, vancouver mortgage broker