Is it wise to buy a property with friends and family?
With property prices continually rising, there is a growing number of people who are priced out of the market as solo purchasers. It is only natural that they start looking at partnering with a family member or a friend to be able to afford to buy either a home or an investment property.
Consider John and Peter, two childhood friends who are renting in Sydney and would like to buy an investment property. They both have some savings but, individually, they don’t have the borrowing capacity. However, together they can afford a good property not too far from Sydney.
“I just couldn’t do it alone”, says Peter, “but purchasing with John, who I’ve known for years, works financially and also gives me comfort and halves the bills”.
On principle it’s a great idea, but you should be aware of the consequences of such co-ownership. Here are a few major points to consider:
Sounds scary, but ensure you make a Will! What happens if one party dies?
You will lose your decision-making power as you cannot act alone. It’s a good idea to draw up a “co-ownership agreement” to cover every conceivable issue. You are friends today, but what about tomorrow? Costly disputes can be avoided if these issues are considered and solutions are agreed upon before the property is purchased.
It is wise to use a lawyer to help you with both the Will and the agreement and it ensures you have rules and understandings worked out in advance. The agreement should cover how you deal with situations such as:
You may wish to sell your share in the property in the future. How will this work? Will the other party have veto rights over whom you sell the property to? Your co-partner will probably want to have priority over another buyer (also known as “right of first refusal”).
How will you manage the property’s expenses? Someone needs to be in charge of ensuring bills are paid. Remember that unpaid dues, with your name on them – especially the mortgage – may affect your future credit worthiness.
Should you have a sinking fund for future unexpected expenses?
One party may want to renovate the property and the other does not? What happens then?
Who decides if or when you should find another managing agent?
The lender will make you “jointly and severally liable” for the loan (even if you split the loan for ease of management). This means that you are responsible for the debt of your friend or family member as well as yours.
If you go to a bank for another loan, for another investment property for example, they will assess you on the basis that 100% of the existing mortgage is yours, even though you might only own, say, 50% of the property. In other words your future borrowing capacity will be impacted.
From an ownership point of view, you can elect to purchase the property 50%-50% (also called “joint tenants”) or any other combination, e.g. 60%-40% or 75%-25% (also called “tenants in common”). For an investment property, the split might be driven by tax considerations. In this case, who gets what, and who pays what? There are different inheritance rights to be considered depending on the chosen ownership structure.
Luckily for Peter and John, they did their homework, hired a lawyer and signed an agreement to regulate their co-ownership. When, 2 years later, Peter had a change of circumstances and wanted to sell his share in the property, John’s sister bought that share (with John’s consent) based on the formula agreed in the co-ownership agreement. Peter could then move on, without upsetting his long-term friendship with John.
This story ended up well for everyone and illustrates that, when fully thought through, co-ownership with the right people can be a positive and successful experience. However life sometimes becomes complicated and unwinding joint property can be emotive and messy.
At the end of the day, it is about making decisions with your eyes wide open and that involves speaking to various specialists to help you gather the correct information and give you comprehensive options.
Source: Multifocus Properties and Finance/Philippe Brach
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