Seven things to talk about before you invest with friends and family

There are plenty of benefits to co-investing with friends and family rather than doing it solo. Ask yourself these questions first to ensure everyone enjoys the proceeds and the relationship stays intact.

Pooling finances can help you purchase more expensive investments (such as property) that you may otherwise not have access to. It also means the risks are divided should things go wrong. And more pairs of eyes crunching the numbers mean more chance of spotting mistakes to fix and opportunities to embrace. However, it’s important not to rush into anything where money is involved, especially when relationships are concerned.

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Why are we investing?

Ensure your reasons for investing are aligned. Not only will this help everything run smoothly, it will determine things such as where you invest and for how long. For instance, tensions are bound to arise if one of you wants to buy an asset for long-term capital growth while the other wants short-term options. Consider each person’s unique situation and what they want to get out of investing. Anyone in or close to retirement is probably risk-averse and wanting to beef up their nest egg; young people may see investing as a way to build their first home deposit; others may want to create passive income to help pay off school fees and the mortgage.

What structure should we use?

The type of structure you use can directly impact how much tax you’ll pay, how much compliance and accounting costs you will incur, and your ability to access your share of the equity. For some couples and families a self-managed super fund (SMSF) may be the way to go. Intergenerational relatives may look at a family trust to build wealth as well as a long-term legacy. Friends or siblings may look to joint ownership of a single asset (like property) while keeping most of their finances separate.

What should we invest in?

Property, shares, bonds, ETFs, cash, cryptocurrency, start-ups, collectables – there is virtually no limit to what you could invest in. Weighing up each person’s risk appetite, investment preferences, tax situation and savings balance will lead to you favouring some investment options over others. Remember that some investments are easier to divvy up and to sell off in portions (if needed) than others.

Who owns what?

A 50-50 split (especially if there are two of you or two couples) may seem like the logical means of dividing ownership. However, it isn’t the only approach. You may opt for another percentage split that reflects varying amounts contributed to the upfront purchase costs. Alternatively, if one of you has more in savings to invest but the other has a higher income, perhaps the latter could assume more of the ongoing costs.

What is our exit strategy?

How you plan to exit your investment, when, and under what conditions are essential considerations from the outset. The goal is to ensure each of you extracts maximum value from your investment. Include contingency plans should one of you unexpectedly need to access your money. Conflicts arise when only one person wants to sell but the other(s) can’t afford to buy out their share. Investments sold during a market downturn could lose money or, at the very least, not return as much profit as they could have. In the case of a business, ownership uncertainty can drive away customers, staff and suppliers, eroding its value.

What advice do we need?

It’s important that you each get independent advice. Because what works for you may not be best for your co-investors, or vice versa. For investments, accounting and financial advice are the big two. Depending on the type of investment and the structure you use, you may also need the expertise of a lawyer/conveyancer, mortgage and/or insurance broker, lender, property agent, assessor/dealer, business adviser or SMSF specialist.

Do we have it in writing?

Yes, you’re investing with people you love and trust, but this is still an investment, so it needs to be documented. Partly for tax and accounting purposes, partly as proof of your ownership share, and partly to minimise disputes. While it may feel awkward drawing up paperwork with family or friends, the peace of mind that comes from knowing everything is well-planned and documented will help both your relationship AND your investment tick along smoothly.

Helen Baker is a licensed Australian financial adviser and author of On Your Own Two Feet: The Essential Guide to Financial Independence for all Women. Helen is among the 1 per cent of financial planners who hold a master’s degree in the field. Proceeds from book sales are donated to charities supporting disadvantaged women and children. Find out more at www.onyourowntwofeet.com.au

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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