Property syndicates are always an appealing investment option for investors to get exposure to properties that can sometimes be well beyond your budget or even risk profile.
But before you consider entering into a property syndicate, you need to think of a couple of some key factors to make sure that you are aware of how the investment will be managed and structured. In this way, you can have peace of mind knowing that your investment is in safe hands. This article explains the key things to consider before investing in property syndicates.
Management of Property Syndicate
It’s important to determine the people who will manage the property syndicate. Even better, try to find out if they have a track record of managing property syndicates. This involves actively investigating their qualifications and experience of the property syndicate manager. Also, look at the returns they managed to achieve for other similar property syndicates.
Besides this, you need to make sure that the individuals you want to share the investment with have a similar approach to their funds. At first, people who find it hard to save but inherited some money and want to invest in property syndicate may seem like great investment partners.
This is because they may have the money and you have an excellent relationship with them. The truth is that they may lack financial literacy which can cause problems for you in the future.
Type of Property
This involves having a good knowledge of the type of property the syndicate wants to invest in. Property syndicates can involve investing in multiple properties or even a single property. So you need to find out exactly what type of property syndicate suits you.
Once the property is chosen, make sure that they are established properties that have tenants or no tenants. You can also find out about the rental income if there are already tenants in the property.
Alternatively, you can invest in a property syndicate that wants to redevelop a property. In such a case, you need to understand that there can be no ongoing distribution coming from that property while there is still property development that is in progress.
You can also check what is unique about the type of property. In other words, find out if it’s an office, residential, retail, industrial, or any other type of property. Each of these property forms targets various sectors within the economy, so the tenant type, rental yield, and capital investment required will also vary significantly.
That said, it’s a good idea to decide on the property structure and think in the long-term. You can choose to reduce the property syndicate size to a joint venture if you want to avoid complications. However, if you choose to start with a large property fund, perhaps you may need to have a license.
It makes sense to understand the terms of the property syndicate, especially when it comes to its existence. There can sometimes be a minimum fixed term that you can hold your investment in the property.
For example, it can be 7 years for many property syndicates. Hence, you need to know the criteria for redemption, meaning you should be told if it’s before the end of the term and find out the associated fees for you to dispose of your investment.
This is the reason why it’s crucial to know the expected net yield so that you can determine if it’s worth investing in. As you can see, it’s necessary to understand the expected net yield, meaning you should know the operational expenses and interest repayments once the property is geared.
You must also understand the responsibility entity fees or what the investment manager will be. So if all these costs are more than the rental income, then you may have to inject more capital into the investment.
This is why you should always know that a property syndicate is considered to be a financial syndicate. It means that from the start you should make sure that you structure the finances of the investment.
Simply put, you need to figure out if the property owner is a partnership, unit trust, private company, joint tenancy, and many more. These options can determine how best you can use the REAL Property Funds within the investment.
Gearing and Interests
You need to have the right gearing strategy suitable for the specific property. This is in relation to what part of the property needs to be funded by debt. When the property is geared, you should find out if the gearing is at an acceptable level. If that’s the case, it means the interest payments can easily be covered by the rental income.
This is also why you need to make sure that the tenancy is strong. The yield of a property investment returns can be determined by the rental income your property gets. Hence, you need to know how appealing the property is to the tenants and what will be the expected income.
If the property has tenants, you must know the tenants. The tenants can be established organizations, such as government departments who are excellent tenants. This is because such tenants prefer to have long-term leases and their default risks are almost zero.
You should make sure that you know the structure of the property syndicate and the taxation implications once the capital or income is returned to you. Many property syndicates are formed as a unit trust structure, so the tax liability is usually passed via the syndicate and throughout the unit trust holders. Therefore, ensure that you get advice from an experienced accountant who does your personal tax structure.
You should also make sure that the syndicate manager has the right licenses awarded by reputable organizations. The manager must also abide by all government rules and regulations. This is because failure to do this can lead to large fines which can increase the risks of the investment failing.