‘The dream might look different for our generation, but it’s not necessarily over’.
This is a great quote I read recently in an article about how some buyers are choosing to get into the property market. Purchasing a home or investment property is getting harder, but the dream is definitely not over.
Buyers are now adopting alternative strategies such as RentVesting, asking their parents to stand guarantor on a loan, or even purchasing properties with friends.
I recently refinanced a loan for a group of 3 friends, all in their mid-40s, who had gotten together a few years back for a property investment project. The friends purchased an old house on a good plot of land that they rented out for a couple of years until the home was demolished. The vacant land was subdivided and the friends constructed two new dwellings that they kept as rental properties.
Benefits of buying property with friends
Collaborating on this project meant the friends could increase their purchasing and borrowing capacity, as well as share the risks and rewards. They also had the opportunity to utilise each other’s skills to their advantage, which ranged from Finance to Construction.
Due to other commitments, individually they were unable to embark on a project of this size. However, pooling together their resources meant they could seize an opportunity that they would otherwise not be able to manage on their own.
What surprised me was that this group of trusting friends had no formal and legal written agreement drawn up to protect themselves. A formal agreement could be used to cover such things as what to do if one or more 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 of the friends 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 tend to be.
They also had no real attachment to the properties, so selling meant they could free up some funds and move on to another new venture.
This type of casual partnership strategy is certainly not for everyone. Despite the benefits, some of which have been mentioned above, there are also a number of risks and disadvantages to be aware of when buying property with friends.
Cons – Factors that might make buying property with friends a bad idea
- 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, you will then 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.
You can reduce some of the risks of co-ownership by making sure you get good legal and financial advice before entering into any type of agreement. You should also speak with a conveyancer about your options, especially if you intend to subdivide land later down the track, as there may be stamp duty considerations to take into account
It’s also important to update your will and arrange for a formal co-ownership agreement to be 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 who are financially secure and have the same goals and values as you do, then purchasing an investment property with them might be a strategy worth considering.
But remember, get good advice first and do some more research in to the benefits and risks of purchasing a property with friends before entering in to any such agreement.
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