Things you should know about co-invest property with others.

We have come across a few cases of co-investment in the past years. The co-investors share the same investment goal, pool money together and take up the mortgage together. Co-investment could be an option for enhancing your investment portfolio. Usually, co-investment are formed by family members, relatives, friends & business partners; in recent years, we have assisted clients co-investing with strangers. Let’s explore how to do co-investment:

1. Method to hold the property
You and the other co-investor shall determine the method to hold the property. Property could always be held under an individual name (natural person) or an entity name. Both types are governed by different sets of rules and both have pros and cons.

We highly recommend to hold commercial property with an *investment holding company among friends, business partners or strangers. Your corporate secretary will assist you to organize the account and to ensure decisions will be made according to a proper procedure and protocol.
*An investment holding company is a company for doing nothing but to hold an asset. 
 
2. To know other co-investor
Making investment in a property is an exciting event. If you are not investing it alone, it is crucial to have a better understanding of who you are dealing with, even if they are your family members.

Generally, you shall have a picture of the co-investors’ financial status, occupations &  marital status. These few key pieces of information will form 90% of the person’s decision making pattern. You do not have to worry about the method of obtaining the personal’s information . Let someone work for you.

A person’s financial status could be easily assessed by the bank during mortgage application. You do not need to do it yourself. The bank will assess all borrowers’ financial status, including credit bureau and litigation. To a large extent, banks only accept those borrowers or personal guarantors with clean records and consistent income. Banks will not disclose respective borrowers’ financial status and record to you. However, in case the banks reject the joint-application of the mortgage, you shall reconsider the co-investment, as you know that, for sure, one of the investors’ records is below standard.  

A person’s occupation or profession will tell his estimated income range. The bank will take care of this as well. He has to disclose truthfully to the bank. The bank will conduct KYC (as “Know Your Client”) including making a call to the applicant’s company HR for verification.

Marital status and its potential implication. The spouse or future spouse of the co-investor may create disruption of the co-investment. We strongly encourage the co-investors to inform their spouse about the investment and some of the key criteria of the co-investment property and mortgage. With proper documentation and consent, it will reduce potential negative impact toward the investment.    

3. Getting mortgage for the investment
Can a newly setup investment holding company be eligible for bank mortgage?
The answer is “Yes”. 
The bank will approve the mortgage based on the personal’s financial strength of respective shareholders, not the performance of the company.

4. Shares Distribution
In the case that all investors could not contribute the investment equally, by then, the investors shall establish a mutual agreement on the share distribution depending on the financial contribution.

In our opinion, the financial contribution could be partly by cash and partly by loan. RICHCO-SPACE has created a unique share distribution template for co-investment reference. This function is available in our Pooling.

5. Handling of Income – shortfall & Surplus
Upon consideration of an investment property, the investors shall conduct research on the rental rate of the area. The most ideal scenario is the rental income able to pay for the bank mortgage monthly installment and other costs.

If there are two storeys, you can rent to different parties for different purposes, one for staying and the other for business. If the upper and ground floor are both can be used for commercial use, you can always rent to different businesses.

– Shortfall
The co-investors shall have a mutual agreement for dealing with shortfall between rental income and overall cost. No one can guarantee your rental income.
Shall all co-investors top up the difference? Or co-investors shall together set aside a lump sum of money for any unforeseen circumstances?
There are no hard-and-fast rules for bridging the gap. It is all about negotiation and setting rules.

– Surplus
We would suggest any surplus shall be accumulated in the company bank account for future expenses or to reduce the principal amount. 

6. Cost for the shophouses.
The main cost is for the maintenance fee and costs to prepare the place before renting to the next tenant.  

7. Mechanism to solve disagreement
Co-investing in a property is similar to co-invest into a business, but it is more straightforward, with fewer decision making. The common issues are the rental rate and the investment exit criteria. It is advisable to insert all these criteria in the holding company constitution or in a shareholders agreement.  

8. Use RICHCO-SPACE Pooling
Our pooling functions come with Private & Public mode. The difference is Private is a close-door type investment, you may invite people you know to participate in; whereas Public is an open-end type, the host of the Pooling could publish his initiative in RICHCO-SPACE for other investors to explore the opportunity. The Public pooling will be turned into Private mode once the Pooling reach their investment objective.

We will deploy an experienced consultant to facilitate your Pooling initiative and organize lawyers & corporate secretary to assist you & co-investors for the conveyancing, shareholder agreement and incorporation of the company. 

Click here to explore or to initiate a Pooling today.