With property prices on the rise in many areas, first home buyers are increasingly finding themselves priced out other market.
Pooling resources with family members or friends is one way to get a head start on the property ladder.
However, before purchasing a property with friends and family it’s important to be aware of both advantages and potential risks.
Advantages
Purchasing a property with the assistance of one or more family members or friends carries with it a few benefits.
You can share the cost of the property, as well as all associated fees.
The burden of on-going maintenance, loan repayments, and property management fees is also lessened by sharing these costs. Because you own a share of the property, you can sell this share or leave it to another party if you desire.
Risks to consider
This type of joint purchase can potentially change your relationship, taking it to extremes.
You’ll want to think carefully about whether or not your friend has realistic expectations about the costs involved with owning a property, and choose to invest with someone who is fiscally responsible.
One factor to consider is how a joint property purchase can impact your future borrowing power.
To lenders, each co-borrower will be liable for the full property debt.
Another factor to consider is what will happen if you choose to sell your share of the property, or what will happen to your share if you pass away.
Strategies to minimise risk
Co-ownership agreement
A way to avoid these potential problems is to sign a co-ownership agreement. The exact terms of your agreement will vary depending on your situation.
However, this could set out the specific terms of selling shares, liability for mortgage and maintenance costs, or the proportion of ownership.
Choose the correct property title
When purchasing a property with friends or family, you can choose between two main types of title with different legal implications.
One option is a “joint tenants” title. In this type of title, each party owns an equal share in the property and should one of the borrowers pass away, the property automatically transfers to the co-owner.
In a “tenants in common” title, the property rights pass on to whoever is nominated in the deceased party’s will.
Insurance coverage
Taking out insurance cover can help protect your new asset, so consider purchasing home and contents insurance, life insurance, and income protection.
Purchasing property with friends or family can be a potentially advantageous way to purchase an attractive property.
Yet before entering any investment, you’ll want to plan ahead so that you know what to do should something go wrong.
Think about what you would do if your fellow owner becomes seriously ill or dies, if you go bankrupt, or if one of you loses your job.
Will you be able to take the financial hit if the property is sold at a loss or if the relationship with your friend changes?
