Would You Get Together with Your Friends and Buy a Property?
In our previous article, ‘Is Rentvesting Right For You?, we discussed Rentvesting, a strategy being used by young home buyers to get a foot in the door of the property market sooner in this increasingly challenging environment.
Another strategy which is gaining momentum around the country is the purchasing of properties with friends.
Our Finance & Loan Consultant, Ann-Marie Bosco, had recently recalled the refinance of a loan she assisted a group of 3 friends with. The friends had gotten together a few years back to work on a property investment project. They had purchased an old house on a good plot of land which they rented out for a couple of years until the home was demolished, the land subdivided, and two new dwellings constructed. The new homes were to be kept as rental properties.
Collaborating on this project meant the friends could:
[if !supportLists]·Increase their purchasing and borrowing capacity
Share the risks
Utilise each other’s skills which range from Finance to Construction
An additional benefit for the group was that due to other commitments, individually they were unable to embark on a project of this size but pooling together their resources meant they could seize an opportunity which they would otherwise not be able to do so on their own.
It was surprising that this group had no formal and legal written agreement drawn up to cover such things as what to do if one or more of the friends decided to sell or how they’d handle any issues or disputes that may arise. But this was a unique case as the friends have known each other most of their lives and didn’t see the need to enter into any formal arrangement. Should one want to sell or get in to financial difficulty, they’d all just sell the properties if they needed to. They were all pretty casual about things, as good friends are, and with no real attachment to the properties, selling meant they could free up some funds and move on to another new venture.
But this strategy is certainly not for everyone and despite the benefits, some of which have been mentioned above, there are a number of risks and disadvantages to be aware of too.
Although you have part share in a property, you can be 100% liable for any debt against that property. So, if one or more of your friends is unable to pay their share of the loan repayment, then you will be expected to cover the full amount.
Future borrowing capacity needs to be considered if you intend on applying for other loans. Lenders will use the whole loan that you have with your friends when assessing your affordability on the new loan
There may also be unexpected issues causing unnecessary disputes amongst the friends so having appropriate processes in place to deal with such issues is highly recommended
Thankfully, all is running smoothly for this group of friends, but it is not recommended for anyone to normally operate a venture of this type as they have.
Experts recommend that:
Anyone to commence such a venture should prepare a formal agreement
Appropriate steps are taken to reduce the risks of co-ownership by getting good legal and financial advice, speaking with a conveyancer about all your options, updating your will and getting a co-ownership agreement drawn up by a solicitor
The co-ownership agreement should stipulate things like how all parties intend on paying for any maintenance and repair costs, how long you intend on keeping the property, what to do if one of the parties wants to sell and how funds from the rent or sale are to be distributed
If you have friends that you trust that are financially secure and have the same goals and values as you do, then purchasing an investment property with them may be a strategy worth considering.
But remember, make sure you get good advice first before entering in to any such agreement.
If you'd like to know more, or would like assistance getting your foot in the door of the property market, contact us today.