Investment options

2012-03-09 07:00

A Fin24 reader asks:

I am interested in joining an investment club, particularly in the property sector. What are the advantages and what does it entail? Does it need to be registered or not?

Jason Lee, the national head of Rawson Commercial, responds:

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 (an association), but 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.

Clubs of this kind can do exceptionally well in SA at present because they are able to buy – and sometimes renovate – properties at 30% to 50% 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, these clubs can use a legal entity such as a private company to hold the property, and setting up this kind of entity is simple and inexpensive. The new private company is also not required to have statutory audits until fairly high turnovers are reached.

However, as successful clubs almost always end up owning a total portfolio of properties, the returns are likely to grow year by year.

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.

The Association for Saving & Investment in SA adds:

Collective investment schemes are also investment clubs because they are a group of people investing for a common interest. They also provide a means for ordinary people to invest on the stock exchange and beat inflation by getting good returns.

 - Fin24