Property syndicates typically offer higher returns but can be riskier than other forms of property investment. High returns aren’t guaranteed and your money will usually be locked in.
What are property syndicates
A property syndicate pools money from individual investors to buy property and share the rental income. Syndicates are set up through a formal legal structure.
Investors in the syndicate buy something that might be called ‘units’ or ‘shares’ that represent a portion of the property. The number of units available depends on the price paid for the property and you can buy more than one unit. The unit cost will vary but is typically about $50,000.
Investment returns are based on the property’s rental income, minus the costs the syndicate has to pay. One of these costs will be for a property manager to take care of the management and maintenance of the property.
A property syndicate is different from a listed property trust (LPT). LPTs usually invest in multiple buildings and their shares are traded on the New Zealand stock exchanges.
Understanding the risks
Your investment returns are not guaranteed and can vary. The return you receive on your investment may be different to the rate advertised by the property syndicate.
Reasons for this include:
- tenants move out of the property and there is a delay finding new ones
- tenants can’t afford to pay their rent and outgoings
- the property manager or others involved in the syndicate increase their fees
- interest rates change and this affects the syndicate's mortgage payments
- the property needs repairs or maintenance work.
While property syndicates may be suitable as part of an investment portfolio, there are other options that enable you to invest in property, such as managed funds or listed property funds like listed property trusts.
Things to look out for
It can be hard to get your money back if you need it
Property syndicates don’t usually have a fixed term. This can make it difficult to get your money back if you need it, as there is no active market available for on-selling your investment.
Syndicate managers don’t have to return your money if you need it, but they might help you sell your unit(s) to another investor. If you do this, you may have to pay fees. You may also have to sell them for less than you paid, especially if returns have dropped since you first invested. Otherwise, you’ll need to wait until the property is sold, any loans repaid and the syndicate is wound up.
You may have to invest more money
As a part-owner of the property, you will share responsibility for its costs and debts. These are divided by the number of units in the syndicate, and investors pay their share based on how many units they own.
If there isn’t enough money in the syndicate pool to meet these obligations, you may need to invest more money. For example, if tenants can’t pay for essential maintenance, or if there are other fees or costs the syndicate can’t meet. In some cases, you’ll need to make this payment quite quickly.
Inland Revenue is usually able to pursue individual investors for the full amount of any GST owed if the syndicate doesn’t pay.
Fees can be high and may increase over time
Investors in property syndicates pay fees to cover specialist services such as property management, legal and financial services. This can result in high fees that could increase even further over time.
How to reduce risk
- Look for a licensed provider - some syndicate managers are licensed by us, which means they need to meet certain minimum standards.
- Make sure you read and understand the investment information. When you’re looking to join a property syndicate, you will receive documents explaining how the syndicate operates and what the risks are.
- Read these documents carefully, including the 'product disclosure statement', ‘deed of participation’ and valuation report for the property.
- The product disclosure statement should explain how the syndicate operates and what the risks are.
- The deed of participation should include the terms and conditions you will have to follow if you join the syndicate.
- The valuation report will help explain how the property’s value has been calculated.
- We recommend you ask yourself the questions covered in our property syndicate investing checklist, and strongly recommend you get professional financial advice before investing.
- A financial adviser can help you understand whether a property syndicate is right for you, and give you advice about how much to invest.
