Supporting the purchase of a property alone is a demanding and taxing journey. You might not have enough money for a deposit or have enough borrowing power for the property you want. Even once immediate costs like a deposit and stamp duty are met, monthly repayments generally persist for decades.
It’s in circumstances like these, people consider buying an investment property with family or friends, also known as co–ownership property investment.
Co–ownership property investment is where you and family or friends enter into a joint ownership agreement known as a tenants–in–common. This type of agreement allows you to buy an investment property sooner and to build your asset pool faster.
The Benefits
It’s easier to raise money - Rather than years of saving for a deposit, co–ownership can reduce this to months. The 20% deposit you need to save to buy an investment property can be divided among co–owners. For instance, if you need to save $80,000 and three friends are interested in co–ownership, then you each only save $20,000.
You can collate your borrowing power - The assets, income and other financial commitments of all co–owners are taken into consideration when calculating borrowing power. This means you can possibly borrow more. Joint owners are seen as less risky by lenders as there are multiple people in an agreement who can step up should one fail.
Shared costs - The most enticing factor is the sharing of the price–tag. All costs are shared between co–owners. This includes the purchase price, legal fees, stamp duty and conveyancing, as well as mortgage repayments and maintenance.
The Disadvantages
The disadvantages can be enough to stop a joint venture altogether. Here are some factors to consider.
Legal advice is a must - Before you co–own an investment property, seeking legal advice is a non-negotiable. Failure to seek legal advice can be costly in the chance things turn sour. Therefore, make sure you have a solicitor draw up your co–ownership agreement, setting out everyone’s expectations, rights and obligations. Most importantly this agreement will be binding in court.
Less rental income - The income generated by the co–owned investment property is shared, meaning reduced profit.
Disputes - Relationships can change – and fast. In fact, many relationship breakdowns are due to money or property disagreements. For this reason, it’s best to appoint a conflict resolution manager who does not have a vested interest in the property. This will take the emotion out of disagreements and make the situation less volatile. This should be done right from the get go.
It’s harder to treat is as a business - It’s much harder to stay objective when you’re close to your co–owners. Risking hurting the feeling’s of loved ones can leave you staying silent on what you think is right or what you want.
Harder to obtain finance - It is much harder to obtain finance as not all bank treat non-spousal borrowers the same as spousal borrowers. To satisfy some lender's credit requirements, all borrowers will need to show that they can service the loan on their own without the support of the other person. This impact borrowing capacity for the purchase and also for future purchases.
Consider the risks
What if one person wants to sell and others don’t? You will need to map out potential disagreements to avoid surprise in the future.
Common disagreements are on:
selling the property
buying a party out
refinancing
splitting income and costs
mortgage repayments
one party not pulling their weight
If one co–owner falls behind on a mortgage repayment, all owners will have their credit rating negatively affected.