Legality of investment agreement between two indviduals

13 posts in this topic

Dear TTers,

 

I developed a new business plan, but I am not sure about its legal aspect. Therefore, I would like to share some details and ask your opinion about the legality.

 

In my business, I am buying small apartments and rent it. The major portion of the purchase price is financed by banks. The rest is from my personal funding and/or investment agreement with third party. So, the only difference from normal procedure is that I ask others to invest in my apartments and get some share from the rent. Since the apartments that I target have very high yields, I could easily find people to invest. 

 

Do you see any legal issue here?

 

I share a sample investment agreement below:

 

--------------------------------------------------------------

Investment Agreement

 

Between Mr. XXXX as Investor and, Mr. YYYY as Entrepreneur
 

The agreement conditions are:
 Investment object is an apartment in AAAA with current value of 35000€. The monthly cold rent of the apartment is 300€.
 Investment amount is 2000€.
 The investor’s return payment is calculated from the monthly rent according to his contribution on the value of the apartment. The current amount of payment is monthly 17.14€ (Yearly yield of 10.28%).
 The return payment is bound to the rental payment by the tenant.
 The investor has no obligation to contribute to the running costs of the building (a.k.a. Hausgeld) as well as the renovation costs.
 The change in the value of the investment object has no impact on the return payment of the investor.
 Both investor and entrepreneur have the right to cancel the contract with one month notice period to the end of the calendar month.

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31 minutes ago, Moonwave said:


 Both investor and entrepreneur have the right to cancel the contract with one month notice period to the end of the calendar month.

 

If you are using investors' capital to finance the purchase, can you pay them their investment back if they cancel the contract? And if you can do that, why would you need their investment and paying them such a high yield in the first place? Is there something I misunderstand?

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4 minutes ago, Smaug said:

 

If you are using investors' capital to finance the purchase, can you pay them their investment back if they cancel the contract? And if you can do that, why would you need their investment and paying them such a high yield in the first place? Is there something I misunderstand?

 

Yes. They get their investment back when the contract is canceled by me or by them.

I need their investment because I don't want to pay the entire Eigenkapital set in the contract with bank.

Actually I always have the money to pay back one of the investment agreements back.

Also the cancellation period is set in a way that I can even pay them back when I have nothing in my account.

For example in worst case, I can pay back max. 2000 Euro back per month. so for this contract, the cancellation period is one month.

But for higher amount, the cancellation period is also more.

 

Regarding the yield, I am paying them according to their contribution on the purchase price.

In this case, the rental yield is high, so the investor gets higher yield as well.

I try to be fair with investors.

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41 minutes ago, Tim Hortons Man said:

Where are you buying properties with high yields? 

 

In the first place, I identify the best places to invest by comparing the purchase price and rental income in this map:

http://www.immobilienscout24.de/immobilienbewertung/immobilienpreise.htm

 

Luckily there are some of them in my neighborhood. I also tried to help a friend to invest in a property in Nurenberg, but I noticed that it does not make sense at that area because the

rental income was super low. So, it highly depends on the area you target.

 

Then I set email notification for the properties on that area and wait for reasonable offers, like fisherman...

 

One more hint. Smaller apartments and furnished ones yield higher!

 

I hope you find this helpful.

 

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I can't give you any legal advice but I don't see why any of this would be illegal.

 

I can share a relevant story with you that I think you will find useful. My better half owned a property in a "high yield" area of Germany that was let for many years. The property was high yield because, although the rental income was very low, the property value was extremely low. Although he had good tenants who always paid and never gave trouble, his net income amounted to little more than pocket money. Every few years something had to be done to the house (one house split into two flats with one family in each) that wiped out the income of the last few months. One time it was the windows turn to get replaced, that wiped out the whole income from the last two or three years. My BF kept the house for many years because (a) nobody wanted to buy it, and (b) he had family living in the neighborhood who could take care of finding a plumber, electrician, roofer, etc. when one was needed, but he eventually managed to sell it and doesn't regret it.

 

I am just trying to illustrate that the 10% you are quoting is gross, but the net amount could be very different.

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9 hours ago, Moonwave said:

Actually I always have the money to pay back one of the investment agreements back.

 

What happens if more than one investor wants their money back at the same time? What happens if you end up with a Mietnomade who doesn't pay for months? What about repairs? 

 

Have you considered all these factors in your calculations?

 

 

 

 

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This may seem harsh, but you’ll need to tick a fair few more boxes in order to get that sort of business off the ground – I would strongly recommend you engaged the services of a lawyer, prior to “fishing for investment”. The simple structure you have suggested might appear fine whilst you are thinking of trying a venture with some close friends/family (although I've known enough of those sorts of venture turn sour), but not if you are after money from strangers.

Serious investors will want to know that their money is safe with you. That will also include demonstrating: that you have carried out proper checks on the investments, that you are good for the cash if their investment goes wrong due to your errors, that you are entitled to provide financial services.

I note you haven’t included a choice of law – are you really happy for German law to apply? How about dispute resolution?...oh and unless you’re willing to lose your house, perhaps some sort of liability clauses. Off the top of my head, here are a few points to consider taking the few proposed clauses in turn:

Value of property and rent – you haven’t allowed for changes to rent or value over time.

The investment amount – you haven’t said when and how this needs to be paid? Are you checking that the funds you receive aren’t paid out of a drug deal? Who is responsible if it was?

Return: who is responsible for chasing payment of rent? What day will investors get their returns?

Running costs – what about the costs of updating the apartment (rather than the building itself)?

Change in value – so, if the property becomes economically unsuitable, you have no option but to continue payment?

Termination - What happens in the event of termination? Where does the money go?

So, speak with a lawyer, and good luck with the investments. I'd be interested to hear how it goes (both in finding investors and also in getting the returns).

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No, that is legally not possible. In order to collect money directly from investors for an investment, you'll need to have a special permission/banking license from the German BaFin in accordance with § 32 KWG (Kreditwesengesetz).
Without it, the BAFIN can, at any given time, order you to desist and pay back all the money to the clients as you were not allowed to this.
It is called "Unerlaubtes Einlagengeschäft" and there are a large number of such cases reported and dealt with by the BAFIN, here are a few examples:
This is the explanaton of the BAFIN about this:  https://www.bafin.de/SharedDocs/Veroeffentlichungen/DE/Merkblatt/mb_140311_tatbestand_einlagengeschaeft.html


And here are some typical cases:

https://www.bafin.de/SharedDocs/Veroeffentlichungen/DE/Verbrauchermitteilung/unerlaubte/2017/meldung_170804_HaraldKraus.html

https://www.bafin.de/SharedDocs/Veroeffentlichungen/DE/Verbrauchermitteilung/unerlaubte/2017/meldung_170717_Anton_Westrich.html

https://www.bafin.de/SharedDocs/Veroeffentlichungen/DE/Verbrauchermitteilung/unerlaubte/2017/vm_170411_AfV_Braun_Abwicklung.html

https://www.anwalt.de/rechtstipps/emanuel-miftar-unerlaubtes-einlagengeschaeft-schadensersatz-fuer-anleger_095866.html


So, short version: it is illegal, don't do it...at least not with BAFIN permission, which is very complicated to get, requires a lot of money and, among other things, proof of education and training in banking/insurance/finance...

Cheerio

 

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18 hours ago, Moonwave said:

apartment in AAAA with current value of 35000€. The monthly cold rent of the apartment is 300€.

 

Is this realistic? Seems a little stretched...

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19 hours ago, Moonwave said:

 apartment in AAAA with current value of 35000€. The monthly cold rent of the apartment is 300€.

 

 

 

1 hour ago, Gambatte said:

 

Is this realistic? Seems a little stretched...

 

 

It actually is, Gambatte. That's what my better half was getting in rent for each of his two apartments in his house. He ended up selling the house for less than 60K.

 

The problem with these low rents is that repairs cost the same whether the property is worth 35k or 750k. The properties might have similar characteristics and the difference in value is simple their location.  So with very low rents a lot of the rental income gets wiped out whenever a costly repair comes up. The OP needs to consider that.

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23 hours ago, Smaug said:

I can't give you any legal advice but I don't see why any of this would be illegal.

 

I can share a relevant story with you that I think you will find useful. My better half owned a property in a "high yield" area of Germany that was let for many years. The property was high yield because, although the rental income was very low, the property value was extremely low. Although he had good tenants who always paid and never gave trouble, his net income amounted to little more than pocket money. Every few years something had to be done to the house (one house split into two flats with one family in each) that wiped out the income of the last few months. One time it was the windows turn to get replaced, that wiped out the whole income from the last two or three years. My BF kept the house for many years because (a) nobody wanted to buy it, and (b) he had family living in the neighborhood who could take care of finding a plumber, electrician, roofer, etc. when one was needed, but he eventually managed to sell it and doesn't regret it.

 

I am just trying to illustrate that the 10% you are quoting is gross, but the net amount could be very different.

 

6 hours ago, Gambatte said:

 

Is this realistic? Seems a little stretched...

 

 

As mentioned by Smaug earlier, there are some locations in Germany with such characteristics.

The 10% mentioned is gross yield. I have to pay the running costs of the building and take care of the internal repair.

To minimize the repair costs, the best is to only target apartment in houses with more apartment units because the repair costs are divided.

Also during purchase, I pay special attention to things that could be very costly to repair such as windows,

In summary, I see a net yield of around 6% which is still good because most of the financing is coming from Bank with interest rate of 1-3%.

On top of these 6%, over the last three years, I had on average 4% annual price increase.

According to my experience, in some regions, it makes sense to invest in small apartments but it is also very important to know how to choose the one that you want to buy.

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7 hours ago, Starshollow said:

No, that is legally not possible. In order to collect money directly from investors for an investment, you'll need to have a special permission/banking license from the German BaFin in accordance with § 32 KWG (Kreditwesengesetz).
Without it, the BAFIN can, at any given time, order you to desist and pay back all the money to the clients as you were not allowed to this.
It is called "Unerlaubtes Einlagengeschäft" and there are a large number of such cases reported and dealt with by the BAFIN, here are a few examples:
This is the explanaton of the BAFIN about this:  https://www.bafin.de/SharedDocs/Veroeffentlichungen/DE/Merkblatt/mb_140311_tatbestand_einlagengeschaeft.html


And here are some typical cases:

https://www.bafin.de/SharedDocs/Veroeffentlichungen/DE/Verbrauchermitteilung/unerlaubte/2017/meldung_170804_HaraldKraus.html

https://www.bafin.de/SharedDocs/Veroeffentlichungen/DE/Verbrauchermitteilung/unerlaubte/2017/meldung_170717_Anton_Westrich.html

https://www.bafin.de/SharedDocs/Veroeffentlichungen/DE/Verbrauchermitteilung/unerlaubte/2017/vm_170411_AfV_Braun_Abwicklung.html

https://www.anwalt.de/rechtstipps/emanuel-miftar-unerlaubtes-einlagengeschaeft-schadensersatz-fuer-anleger_095866.html


So, short version: it is illegal, don't do it...at least not with BAFIN permission, which is very complicated to get, requires a lot of money and, among other things, proof of education and training in banking/insurance/finance...

Cheerio

 

 

 

Thanks Starshollow,

The data that you provided was exactly what I was looking for,

Recently I had the feeling that some part of this has to be illegal, otherwise many people will do this. According to these data, I will cancel the existing contracts over the time. The good thing is that now I have the minimum investment contracts which is just 2000. There was a period that I had more than 30K contract.

 

However, I thought maybe the illegal part would be the contract with bank. In the contract, the money that I pay is seens as my own share while it is coming from other resources.

Also, the money that I got from others cannot be seen in Schufa. So, this could be the case that I owe a huge money while banks has no clue about this.

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