Stymied by a lack of finance: Investment Clubs Are Still the Answer

The underlying problem for all property investors

Most investors are limited by how much a bank will lend them personally, not by their appetite for property.

The private company is still the vehicle of choice

An investment club — a small group, anywhere from three to ten members, pooling capital to buy property together — works best when it’s housed in a proper legal entity rather than run informally between friends. The private company (Pty Ltd) remains the standard choice. The Companies Act 71 of 2008, which came into force on 1 May 2011, is no longer new legislation — it has now governed every private company in the country for a decade and a half, and the process it created for using a Pty Ltd as an investment vehicle is well tested.

Registering one is fast and relatively cheap. Through CIPC’s BizPortal, a standard private company can be registered online for around R125–R175, usually within one to three business days, without needing an attorney. Of importance is that every newly registered company must file a Beneficial Ownership declaration with CIPC — identifying the natural persons who ultimately own 5% or more of it — within 10 business days of incorporation, and again whenever ownership changes. This is a straightforward filing, but it’s a hard deadline: CIPC will not process the company’s annual returns without it, and penalties for missing it can be significant.

Audit requirements — the current rule

 A private company is not automatically required to have a full statutory audit. But the mechanism is more precise than ‘certain fairly high turnovers.’ Every company is assigned a Public Interest Score (PIS) each financial year, calculated from a formula that weighs its number of employees, third-party liabilities, turnover, and number of shareholders. In broad terms:

• PIS below 100: an owner-managed company can usually rely on a simple compilation of its financial statements — no audit or independent review needed.
• PIS of 100–349: an independent review is generally sufficient, unless the statements are compiled internally rather than by an outside accountant, in which case a full audit is required.
• PIS of 350 or more: a full statutory audit is mandatory, regardless of who compiles the statements.

A small investment club holding one or two residential or small commercial properties will typically sit well below the audit threshold for years, keeping compliance costs modest.

The National Credit Act advantage

This remains the central financial argument for using a company. The National Credit Act does not apply to a juristic person (a company, close corporation, or qualifying trust) whose asset value or annual turnover is R1 million or more — a threshold that has not changed since it was set in 2006. Buying through a Pty Ltd that clears this line takes the club’s bond application outside the Act’s reckless-lending regime, which in turn allows the bank to lend against the members’ combined financial position rather than any one individual’s.

Worth knowing: separately from the R1 million test, a mortgage bond is automatically classed as a ‘large agreement’ under the Act, and large agreements to juristic persons are excluded from the Act even where the R1 million threshold isn’t met.

One nuance to flag for the bank conversation: while the company is the borrower, banks will typically still require personal suretyships from the shareholders or directors before advancing finance to a small private company. The NCA’s reckless-lending rules don’t apply to that suretyship in the same way they would to a personal loan, but the bank’s own risk appetite still shapes how much it’s willing to lend — the advantage is regulatory, not a guarantee of unlimited appetite.

The shareholders’ agreement is doing more work than people think

The advice to use a competent lawyer to draft the shareholders’ agreement at the outset remains the single most important piece of practical guidance. A well-drafted agreement for a property investment club should, at minimum, deal with:

• How new capital calls are handled if the property needs an injection of cash;
• Pre-emptive rights and a clear valuation method if a member wants to sell their shares;
• A deadlock-breaking mechanism for when the members can’t agree — this matters more in a three-person club than a ten-person one;
• Drag-along and tag-along rights if the group ever wants to sell the underlying property to a third party; and
• What happens to a member’s shares on death, insolvency, or divorce.

Getting these terms settled before money changes hands avoids the great majority of disputes that later derail otherwise successful clubs.

A newer alternative worth knowing about — and why it isn’t a substitute

Since 2011, fractional property investment platforms have emerged in South Africa, allowing investors to buy shares in specific properties for as little as a few rand, with no need to find co-investors or negotiate a shareholders’ agreement. These platforms suit investors who want diversified, low-commitment exposure to property as an asset class.

They are not a substitute for the investment-club model discussed here, though. A platform investor owns a small, unleveraged slice of a portfolio someone else selected and manages. A properly structured investment club owns its property outright, can gear that property with bank finance to amplify returns, and gives its members direct control over acquisition, management, and exit decisions. For investors who want to build an actively managed portfolio rather than hold a passive slice of one, the club structure still has no real substitute.

The bottom line hasn’t changed

There will always be people who would rather own 100% of one property outright than share in a larger portfolio with others — sharing profits, and control, doesn’t suit everyone. But successful clubs tend to end up owning a growing basket of properties over time, and returns compound accordingly. I still believe it is better to own a small percentage of something than a large percentage of nothing.

If you’ve been holding back from property investment because you lack the capital or the personal borrowing capacity to qualify alone, an investment club remains one of the more accessible ways to get a foot on the ladder. It is worth remembering that many of the most successful property investors of our time built their first portfolios on borrowed money and the backing of financial partners, not on cash they already had.

Important note
This article is provided for general guidance only and does not constitute legal, tax, or financial advice. Company law, CIPC filing requirements, Nadtional Credit Act thresholds, and prevailing interest rates can all change. Please confirm the current position, and how it applies to your specific circumstances, with a qualified attorney, accountant, and/or your bank before acting.