Q: My friend and I are both saving to buy an investment property but it’s still out of reach. Someone suggested we buy together, but I worry that it could ruin our friendship if things don’t go well. Is buying with a friend a bad idea?
A: Pooling resources to buy an investment property can be a way to achieve your property goals sooner, as long as you act smart.
Essentially, you are mixing business with pleasure so to protect your friendship, and yourself, you need to be prepared to put your business hat on when making some decisions.
You need to get expert advice to guide you and your friend through the process. A solicitor can help with the legals, structure and rules about your purchase and an accredited mortgage broker can help you get the right home loan.
Here are some things to consider and potential risks to be aware of and plan for.
Deciding what to buy
Make sure you and your friend are on the same page when it comes to your investment strategy, how much you want to spend, and where and what type of property to buy; new or old, a house in the suburbs or a unit in the city? If you don’t want the same things then it probably isn’t a good idea.
Future loan affordability
Having a loan with someone else may affect your ability to take out another loan in the future, such as for a home. A lender will look at the whole loan as your potential liability, not just your share, so you both need to think a little longer term and consider your future plans and how this purchase might affect them.
Time to sell
While it’s important to discuss your planned time commitment to the investment property, circumstances can change. You need to be prepared that you or your friend might want to sell up before the other.
Get it in writing
Avoid arguments by agreeing things in advance, and get it written up by a solicitor. Just like a pre-nuptial agreement, a Co-ownership Agreement can help protect you, and your friendship, and should cover every possible issue, rule and solution. Think worst case scenarios, and agree what happens if one wants to sell when the other doesn’t, who decides on the tenant or property manager, if either of you can live in the property at any stage, etc. A little forward thought with clear heads can help prevent dramas later on.
Type of ownership
There are two main types of property ownership or ‘title’ – tenants in common or joint tenants. Typically, tenants in common is the preferred structure when the buyers want separate ‘shares’ of the property and not to own the whole thing. A solicitor will be able to explain these to you and advise what’s best for your situation.
Your home loan
Just like your property ownership, your mortgage will be joint to, though you can have a split loan which keeps your individual amounts separate. A split loan is useful if you borrow different amounts, or want to make different repayments. However, both your names are on the full loan amount so if your friend fails to make their repayments the responsibility can fall to you. That’s why it’s important to get sound advice when setting up and selecting a home loan, including checking that you both can afford the repayments.
Getting legal advice, setting rules in writing and making sure you want the same thing in advance should help to minimise potential issues or conflicts in the future.
Have you bought an investment property with a friend? Did it turn out to be a good idea or bad idea? Share your experience in the comments below.
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