Read this before you buy property or go into business with family
Investing with family is not a new concept. Indeed, huge numbers of Australians have some form of investment jointly owned with relatives.
The benefits of investing jointly with relatives include:
• Capitalising on economies of scale to purchase bigger assets for bigger returns;
• Giving singles, young people and lower income-earners a foot in the door;
• Drawing on collective wisdom to make decisions;
• Tax benefits, provided your set-up is right; and
• Building a legacy and keeping assets in the family.
As with everything in life, though, there are drawbacks, too. Investing with family can:
• Impact relationships if there are financial or strategy disagreements;
• Reduce the family support available to fall back on should investments go sour;
• Become overly complex having multiple households involved;
• Allow emotions to override rational decision-making; and
• Cause financial discussions to take over what should be quality family time.
Furthermore, the pros and cons of investing with family differ depending on the type of assets you invest in and the structure you use to manage those investments.
So, it's worth looking at the merits of each individually before making any decision to pool your funds.
Australians love property, with billion of dollars lent to investors each year. There are numerous ways families do this together, some with financial drivers and others borne out of necessity.
Many parents, for example, contribute funds to help their children onto the property ladder, either as a loan or with the aim of splitting profits once the property is sold in future.
Pooling funds to invest, meanwhile, allows families to buy bigger assets that boost their returns.
For example, I know a family who recently purchased a suburban shopping centre by pooling their funds.
They receive roughly the same in rent from each of their retail tenants as they would have from a single residential property.
But before you rush to buy something together, consider the various ways to invest in property and the pros and cons of each:
Perhaps the "traditional" investment property, that is, becoming landlords. Incoming rent can be used to pay off any mortgage, supplement your respective incomes or be reinvested.
Renovating for profit: Commonly known as "flipping
A particularly attractive option if at least one of you is a qualified tradie and/or you can get discounted materials. The downside is that you're in for a lot of hard physical labour! Also, this approach may be considered a business activity if you flip multiple properties or don't live in them while renovating, demanding you navigate business registration, GST reporting and other business administration.
A great option for a holiday home that the extended family can enjoy, and you can offset the costs by renting as a short-term let when it is not in use. But you can't claim tax deductions for any time you spend in the property.
This could be buying one large house for the extended family to live in, purchasing or building a duplex as separate but adjoining family homes or adding a granny flat for elderly parents/in-laws to downsize into. More money means more options and potentially more space. But one or more of you may be forced to sell or buy out another share should someone want or need to leave.
Regardless of your approach, remember this basic fundamental: property ties up a huge chunk of funds. Unless you own it outright and can derive ongoing income from rent, the only way to access profits is by selling.
And you can't just sell a bedroom. Plus, selling property takes time, especially in a soft market.
There are also complexities about borrowing for a property that is jointly owned, including where each of your contributions to the deposit comes from (savings or equity) and your joint ability to meet repayments.
And you are jointly liable for the associated costs of buying, selling, maintenance, council rates and capital gains tax (CGT).
Self-managed superannuation funds (SMSFs)have exploded in popularity in recent years, partly because they can invest super in a broader range of assets - including property - than retail and industry funds. And partly because they allow people to combine their super and create a bigger pool of funds.
The major benefits of super are that it is taxed at a lower rate than other investments and it enjoys tax offsets not open to other assets. However, there are various restrictions on super and SMSFs, regardless of whether it is combined with relatives or solely your own.
That includes eligibility restrictions on accessing funds (being retired or over 65, becoming disabled/incapacitated, or dying), specific tax laws and a ban on personally benefiting from super-owned assets (such as occupying a property it owns). There are also strict rules around contributions as well as both concessional and non-concessional caps.
In terms of SMSFs, which relative you invest with matters, too. For couples or siblings close in age, you will likely retire and be eligible to start drawing down funds around the same time.
For multi-generational SMSFs, however, things get particularly tricky. Are the super contributions of the still-working younger generation effectively going straight to the retired older generation, limiting future growth? Is the older generation sacrificing earnings from their own super to retain funds for the younger generation? How are debt liabilities of the SMSF split fairly between you?
It's worth getting tailored advice not just about the general set-up and running of an SMSF, but also about the intricacies associated with the particular relative(s) you intend to be trustees with. For instance:
Spousal contributions are still possible in an SMSF, growing your super faster and saving up to $540 in tax for the partner earning the highest income. But dividing the assets and closing an SMSF can be complex should your relationship break down in future.
Parents and adult children
Have a clear exit strategy once it comes time for the parents to retire and begin drawing funds. How much income do they need to live comfortably? How much needs to be retained so the SMSF continues to grow and leaves enough for the children's retirement?
Look beyond your current lifestyle to what the future will likely bring. Are one or all of you partnered? Will current and future partners be included in the SMSF? Who are the beneficiaries for each of you and does that change if you have kids? What is the difference in your incomes now and how will that likely change over time?
More trustees equals more money in the pot. But it also means higher compliance costs, greater difficulty in reaching consensus on investment decisions and more room for error.
An estimated 70% of the more than 2.4 million businesses in Australia are family owned. Many others are funded in some way through investments made by relatives.
One of the key factors to analyse when considering investing in a business with family is the degree to which each of you want to participate in its everyday operations.
Another is your exit strategy, as any transferral of ownership can affect ongoing operations and the business's value.
Family-operated businesses can be spouses/partners working together or multi-generational businesses. Doing so requires not just capital but an investment of time and skills, too.
Also, determine whether you plan to continue trading under family ownership (like many high-profile Aussie brands including real estate networks Ray White and Raine & Horne, electronics retailer Bing Lee and vehicle/equipment supplier Kennards Hire).
The alternative is to build a business for future sale/public listing. Both can be highly lucrative, but also involve considerable unpaid hours and missed social or family engagements as the business takes precedent.
Some people launch a business or finance its expansion using one or more relatives as silent investors or equity stakeholders. This can be a win-win for everyone: the operator gets the funding they need; investors make financial returns as well as the satisfaction of helping a loved one. There are major risks, however. Relations could sour if the business performs poorly, and the operator could be left in the lurch should the investor need their money back quickly.
The least hands-on approach is to combine funds and invest in one or more businesses together. It can be a great way to cash in on fast-growth start-ups, for example. You can act as a business lender to businesses and charge a higher interest rate based on business risk or buy equity in the company. The downside is that your money is tied to a business over which you don't have managerial control. And small businesses are a much riskier investment than shares in larger ones listed on the stock exchange.
These are a popular investment option: they are easily accessible, can be quickly offloaded and have a relatively low cost to buy (some shares can be merely a couple of cents each).
So much so that you don't need to invest with family members. Sometimes it actually makes more financial sense not to!
Either way, look at your costs carefully: there is CGT on earnings as well as the trading costs on every transaction you make. These costs can quickly eat away any profits, especially on short-term trades.
Consider your focus, too: do you want shares that will increase in value to sell for a profit, or shares that reliably generate dividends to supplement your income or
With interest rates currently at record lows, there isn't much to be gained "investing" your money in savings accounts or term deposits, unless you are saving for a particular reason.
That might be a family holiday, first home deposit or a fund to gift to children once they reach adulthood. Or you may be waiting to make your next investment.
While an interest rate of, say, 1.3% delivers the same return whether you have one lump sum of $1000 or two sums of $500, by combining your money you can save on bank fees and more easily monitor your savings' growth.
Be sure to have joint access to any account to maintain fairness and transparency.
6. Family trusts
Family trusts are similar to SMSFs: both offer flexibility and the benefits of economies of scale. But trusts are free of the access restrictions of superannuation.
They can be used to provide for children under 18, as giving investments in their own name before this age can be problematic.
Trusts also allow you to distribute funds on a needs basis from year to year: perhaps Jim needs more this year because he was made redundant, while the following year Jane needs to make home renovations in preparation for a new baby.
The downside? Trust don't enjoy the same 15% tax rate that superannuation does. And as their own legal entity, they need to lodge tax returns, have their own will and be structured properly.
A range of physical goods can have considerable value as a collection. This includes art, fine wine, high-end jewellery, gold and precious metals, antiques, rare stamps or manuscripts, even classic cars.
Their primary benefit is diversification - the more types of investments you have, the less exposed you are to downturns in the value of a particular asset.
Collectables have a major downside, though: high overheads. They need to be kept in mint condition to retain and grow their value. And unlike intangible items like shares, collectables require physical storage space (another expense or use of space in your home) as well as protection against theft and damage.
When it comes to investing with family, keep your eyes wide open and scrutinise your options as you would with any other financial decision.
It is easy to let emotions take over when family and finances combine, so try to separate them as much as possible. That means keeping written records of all decisions and transactions.
Even schedule structured meetings to separate financial discussions from general family life.
Analyse not just current and projected earnings, but also your investment costs - purchase expenses, ongoing maintenance, tax compliance and any debt repayments.
And be sure to invest in some good advice - both for your investment family collectively and yourself individually. The aim is to protect against future disputes that could cost you not just money but good relations with your family, too!
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