Share House: How to Minimise the Risks of Buying Property with Friends
In the Australian housing market, it’s a struggle when trying to get your foot on the property ladder for the first time. As housing prices continue to climb steadily, the window of opportunity may seem to be getting smaller.
But, if you were presented with the chance to go in with friends, would you do it? It offers first-timers a good advantage, lessening the cost and allowing them to get into the market sooner than they may have expected.
However, there are always risks when buying property with other people. The main one being a co-owner falling behind on repayments – something that will reflect on both parties. It is always good to receive legal advice before going into the purchase and to talk to a broker about how it may affect your future financial and personal circumstances.
While it might sound a little depressing, when planning out ways to minimise risk, it’s always a must to think about worst-case scenarios so you won’t feel unprepared or caught out if something happens down the track.
Some of the ways you can plan to minimise these risks include:
1. Create a co-ownership agreement
To avoid major disputes, it’s a good idea to draw up a co-ownership agreement to cover every possible issue that may arise. While it doesn’t need to be a complicated document, it will need to have rules worked out in advance. Some of the things to consider include; a joint fund to cover repairs, maintenance and property vacancy, an agreed timeframe for holding the property before selling and the penalties for selling if the agreement is broken, clarification of how taxation and capital gains will be handled, who receives the first sale option and the sale price between co-owners, rules about guests, household responsibilities, who will determine the rent and tenant and the proceeds distribution of an eventual sale.
2. Choose a co-ownership structure
You will need to decide between becoming joint tenants or tenants in common.
Tenants in common are when co-owners own individual shares of the property that do not have to be equal in value; one person could own a third of the property, while the other could own two-thirds. Shares in common tenancy can be transferred to someone else – meaning that when one co-owner dies, their shares can be passed to an heir nominated in their will.
Joint tenants, however, own the whole property together. This means that if one dies, their ownership passes to the other. This is the most common arrangement for couples who own property together.
3. Write a legal will
Depending on the type of tenancy you agree on, you will be able to get a solicitor to draw up a will so in the case where you pass away, your share can be transferred to the person of your choosing. This is only available to tenants in common, as joint tenants cannot transfer their share to someone outside the tenancy. Thought will need to given to whether you would like your co-owner to have the power of attorney if you become incapacitated.
You will also need to be aware of the legal liabilities you’ll face when buying property with a group of people. While a tenancy in common agreement allows each co-owner a share proportionate to how much they’ve contributed, enabling them to take out their own loan to purchase their share, all tenants are responsible for all loans. This means that if one person were to fall behind on their repayments, it would be up to the others to keep up the payments.
Sharing the ownership of a property with other people may also be an issue when borrowing money in the future. If you own a share in a property as a tenant in common, a lender will count the whole debt on the property as your liability – not just your share. This could decrease the amount a lender is willing to let you borrow.
The most important thing to remember is that buying a home is a costly experience – you need to be able to trust the person who you buy with, with certainty. Nevertheless, buying property with friends may be your chance to get your foot on the ladder sooner. Speaking with your broker is the best way to determine your options and whether this is the right choice to suit your circumstances.
At Select, we offer no-obligation, quality and free advice to help you reach your financial goals. Give us a call on (08) 9417 3399 to talk with one of our brokers.