As we all know, getting on the first rung of the Australian property ladder these days is tough. Astronomical prices, tightened lending and competition from cashed-up investors means fewer first-time buyers are able to enter the market, and those who do are having to take on crippling mortgages to make it possible. RBA’s May 2015 Housing Finance Commitments report showed an 11 per cent drop in the number of first-time buyers, adding to what was already a record low for first home buyer loans. In short: house price growth has dramatically exceeded wage growth and the disparity is almost definitely going to continue.
Although the dream of owning bricks and mortar may be elusive to many, smart wannabe investors are looking at other options, and one in particular: buying with friends, otherwise known as “co-owning”. Most of us are used to the idea of buying property with our spouse or partner, but co-ownership is where two or more people buy a property and own separate and defined shares, which can be equal or unequal depending on the agreement reached. In addition, if one party dies, their share of the property can be passed on or left to whomever they like. Sounds simple, right?
“One of the biggest advantages is that you can combine and pool your financial resources to significantly increase your purchasing and borrowing power.” Says Peter Boehm, financial editor at Onthehouse.com.au. “This will help you buy in more established and/or expensive areas where price growth potential and longer-term profitability is likely to be greater.
“You’re also able to enter the market earlier. For instance, you won’t have to wait to save the full deposit or cover all the purchase costs (because your friends or co-owners are covering any shortfalls), which enables you to become a property investor or owner-occupier sooner.”
The benefits of purchasing in a group are obvious. Firstly, increased finances, which equates to a strengthened loan application and an increased deposit. Secondly, the day-to-day costs associated with owning a property are shared.
Despite buying in a group being advantageous, it doesn’t come without potential pitfalls. Firstly, each co-owner will be individually and collectively responsible for meeting all loan repayments and other obligations. The fact that you may own a greater or lesser share of the property than your partners is irrelevant. If one or all of them skips town, unfortunately you’ll be left holding the bag. And though you may be BBFs when you sign on the dotted line, further down the road that may not be the case. As with financial woes being a big contributor to marital breakdowns, the same principles apply when it comes to friends in a co-ownership arrangement. And exiting such an arrangement is problematic, as Boehm warns: “In a worst-case scenario the property may have to be sold, even if it’s not in the best interests of everyone involved. Remember, you’re financially committed to the venture and to your co-owners as well.”
So, before you schedule a house hunt with your posse of friends, tread cautiously; buying together is a big commitment and as such, there’s a lot to consider. To safeguard both your investment – and your friendship – Boehm advises any potential co-owners to consider five key points before making the leap:
1. Buy with as few friends as possible
“Keep the numbers to a minimum – no more than three or four – to help reduce complications and complexities.”????????????????????????
2. Choose your partners carefully
????????????????????????”Look for those you can trust and who share your views and passions about property (if you’re investing), or that you could live with if the plan is to become an owner-occupier. Always look to protect friendships and relationships.”
3. Take the emotion out of the equation
“You have to be objective and think with your head and not your heart. Make sure everyone gets independent legal advice and draw up an agreement that sets out everyone’s expectations, rights and obligations. A formal agreement is a great way to put issues on the table, identify problems you may not have considered, and to map out the way forward if things go bad.”
4. Consider the risks????????????????????????
“There are a number of things that could go wrong and you need to be comfortable these problems can be dealt with amicably and sensibly. What happens if someone wants to sell and you don’t, or someone doesn’t meet their share of the mortgage payments and you’re the one who has to pick up the slack? These can be serious issues not easily resolved that could put you in a great deal of difficulty both personally and financially.”????????????????????????
5. Buy and borrow sensibly????????????????????????
“As with any property purchase, choose wisely and borrow wisely. The same rules apply whether you’re buying on your own or with others.”