Should I buy a property with a friend? Six things to consider first: Ask Margaret

Hi Margaret,

I am buying my first home at 30, having rented before this with a friend.

I have got about $50,000 saved as a deposit and some other money set aside for costs, and have been given the option to either buy on my own or with the friend I’m renting with.

What are the benefits of buying with him and should I be considering it?

Thanks,

G.

Margaret's answer on the next page. Please click below.

Dear G,

I am often asked by many investors Whether or not they should be buying property with a friend, a sibling or with a group of other investors.  It’s a common thing for people to buy property with a spouse, and if you think about that, you are already taking the good with the bad when it comes to a life partner. Sharing real estate is only another facet in the complex fabric of life.

When it comes to a friend, you could be tossing up buying together for a number of reasons.  It could be that you can’t afford to go alone, or can’t save enough of a deposit.  Another reason may be that you feel more confident buying with someone else than you would alone.  Whatever the reason, it might seem like a good idea at the time, but like a lot of good ideas, it can all come apart later on.

If you are tossing up Whether or not to buy with someone who is not your spouse or life partner, it can help if you go in with your eyes wide open. 

Here are just a few of the things you must know:

1. You can trust yourself, but....
   
   You probably know that you can afford to meet the repayments, and that in times of stress you have enough money to be able to see through until the good times.  You know that your job is secure, and so you will always have a steady income flow.  But can you be as sure about the person you are planning to buy with?
   
   It is easier when it is your spouse – when you get married or choose to live together it is always for better or worse.  And it may seem easy when we are talking about a brother or a sister, a mum or dad or son or daughter (although often that is not the case).
   
   However, when it comes to friends you can never be sure how much of what they are telling you is actually true.  It’s amazing how quickly someone’s circumstances can change, and the last thing you need is to be left holding all of the commitments on a property whose title you only half own. 
   
   
2. Difficult financing arrangements
   
   Where all parties are bringing in the same amount of money as a cash deposit, and a joint loan, secured by only the property in question (the one being purchased) is accessed, this may remain relatively simple. All parties pay their required portion of the debt, receive their share of the income and complete separate tax returns claiming their own tax deductions.
   
   Where differing amounts are provided by each person, or where the other party may be borrowing against the equity they have in another property and bringing in their deposit via another loan from elsewhere, things get tricky. All bills will then need to be divided up according to the original allocation and the tile will need to reflect the different proportions of ownership. The risk increases too, if one party is using a loan for their deposit – it creates a higher risk of that person not being able to manage their repayments.
   
   It is useful to note here also that, when you sign mortgage documents for a debt where another party is involved, you become jointly, and severally, responsible for the repayment of that debt.  If the other party takes off to Rio, you cannot call your bank and offer to repay only your half, or to keep repayments on only your half going.  You become responsible for the entire debt, while at law you still only own half (or your share) of the property.
   
   
3. What’s yours is mine – including all your debt!
   
   Since you become jointly and severally responsible for any loan you take out with other people, the commitment for the entire loan, rather than half of it, may be considered when establishing your serviceability with a bank.  So, you may have a loan of $300,000 with two other people, and your share is $100,000, but a bank may consider that you have a commitment to the entire $300,000.
   
   Conversely that same lender will only consider the income on your third of the property, since you only own a one third share. This may limit your ability to borrow additional funds to undertake more borrowing to buy investments in your name only, and could hamper your ultimate progress.
   
   
4. Using the growing equity
   
   Imagine if the equity in your shared property grew so quickly that you were ready to buy again soon – but you decided that you did not want to buy with that person again. Unless you are prepared to liquidate, lose a fair portion in capital gains tax and start again, unfortunately you may have difficulty using this equity to invest further.
   
   
5. Time to get out – but do you both agree?
   
   Your life suddenly changes.  You meet the perfect partner and want to move to the country, you are offered a divine job overseas for 20 years, or you simply want to cash out and take a Harley around route 66.  If your timing does not coincide exactly with that of your fellow property owner, you may not be able to take advantage of this great new opportunity because you cannot realise your assets. 
   
   Unless you are both ready to make a major change, owning property with others can often prevent you from taking on a great opportunity which may come along out of the blue.
   
   
6. When you are doing all the work.
   
   Owning a property is not without its hard work.  If you suddenly find yourself doing all the work, it may seem like an unfair thing that you are only accessing your title’s share of any growing equity.  You may believe you are entitled to a greater share, but at law, this is not possible.  You cannot really know the capacity of another person to do their bit until after the deed is done, and by then it may be too late.

In summary:

If there is absolutely no other way for you to get into the market than to do it with another, non spouse person, then at least sign a partnership agreement at the commencement of the deal in which you cover every possible eventuality and agree to a procedure to manage it. Going in with your eyes open may prevent a major disaster in the long-term. So will not investing with others at all!

Regards,

Margaret

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