Investing with friends 101: Achieving success and avoiding common mistakes
While many Australians would run from the idea of investing with their friends, Michael Jeffries said that if it was done properly, it could become a fruitful investment.
It was around a traditional weekly Aussie barbie that Michael Jeffries chatted with his friend about the property market and how people were “cashing out” when the idea of investing together popped up in both men’s minds.
“We thought instead of wasting money, go out drinking each weekend or having barbecues, we should chuck some money in a bank account, and that eventually turned into buying a first property,” Jeffries said.
In total, Jeffries bought three investment properties with his close friend, which he still holds today and has built millions in equity.
Like Jeffries, millions of Australians have thought about investing with their friends to either get on the property ladder or boost their finances.
An ING survey released in April revealed that about 3.5 million Australians would consider purchasing a dwelling with a friend, allowing them to own a home while sharing mortgage responsibilities.
Additionally, the survey showed that 46 per cent of Australians believe being “property pals” would become a common practice in the next decade, with 50 per cent of the Australian Gen Zs being open to the idea.
Yet, buying a home with a friend can quickly become challenging, especially if the friendship turns sour.
So how can we make “mate-investment” successful?
For Jeffries, the first thing mates should discuss, even before considering buying a home, is to work out exactly what everyone wants to achieve, including goals and expectations.
“If you are not aligned at the start, you are setting it up for failure – as the saying goes: ‘Failing to plan is planning to fail’,” Jeffries said.
Following the talk, Jeffries recommends setting up the right documentation to ensure all parties are protected.
“I own an accounting firm, and it’s not unusual for friends to come to me wanting to do something together, and I’ve seen it all too many times – friends who start a business thinking it’ll be smooth-sailing, only to find themselves caught up in arguments and disagreements,” he said.
Jeffries recommends friendvestors to document all operational agreements, including responsibilities, investment guidelines, investment structures, decision-making processes, exit strategies, and conflict resolution.
“If things go sideways, then you’ve got a clear reference point to turn to.
“This will formalise the agreement, help avoid any misunderstandings, and help manage conflict situations and exit strategies calmly and fairly,” Jeffries said.
The accountant said the type of documentation required will depend on the legal structure investors are looking at.
“Friends setting up a unit trust will require a unitholders’ agreement; friends setting up a company will need a shareholders’ agreement, while individual investors will require a partnership agreement,” he said.
Additionally, when multiple investments or legal structures are involved, Jeffries said it is important to have an overarching operational agreement to ensure everything “runs smoothly”.
“It is really important to have the right documentation in place from the very beginning, even if you’ve been best mates for years,” he said.
While setting the right paperwork is essential, Jeffries believes that mates should do their due diligence together, ensuring all friends are on board with decisions.
“Engage the right advisers where needed and make sure you have the right team together,” he said.
Once the friendvestors are set to start, Jeffries recommends starting small to see how the relationship evolves before buying properties.
“Start small and build up your portfolio from there; this might mean just opening a bank account and contributing on a regular basis.”
Once friends have taken the leap and bought an investment together, Jeffries recommends protecting one’s assets, as life can sometimes take an unexpected turn.
“Engage an adviser who is a specialist in asset protection; there are various structures that can be put in place.
“It is also important to ensure you have valid succession and estate planning strategies in place as well to protect your assets and your investments with your friends,” he said.
According to Jeffries, the key to investing with friends is keeping the communication line open at all times.
“Be transparent – you are friends for a reason,” he said.
“If you want to exit out or you are having financial difficulties, chat about it and work out the best options for all,” Jeffries concluded.