Buying property with friends
After sharing a video of a man dancing with his puppet friends on a televised talent show yesterday (Facebook post here) and noting that I hadn't written anything for a little while I've decided to discuss some of the pros and cons of purchasing property with friends or family. It has obvious risks as does any property purchase but there are also great rewards but you need to plan ahead to make it successful.
The reasons why you may do this
It is absolutely no secret that purchasing property is incredibly difficult regardless of where you buy and the first hurdle is getting a large enough deposit together. If you work on getting a 10% deposit together, in Sydney, you need almost $100,000 just to be in contention to get a mortgage. Adding one or two friends to the scenario means you only need to come up with between $33,000 and $50,000 each. Still a tonne of money but it does bring the goal posts a little closer.
Paying a mortgage is incredibly expensive and banks don't really like giving out money to anyone they don't think earns enough and to be frank, the high paying jobs aren't always the easiest to come across. If you go to a bank alone you may have an annual income of $40,000. Go with a couple of friends and all of a sudden the bank sees an income of $120,000 or more.
The things to consider
Not everyone follows the same path. Once you own a property you're pretty much in it together. Leaving the wolf pack can be tough and it will require the other members to be able to cover for you. If one leaves the others need to be able to prove to the bank that they can afford to not have that persons financial assistance to pay the loan. On top of being able to pay the loan without the other friend or friends if the value of the property has gone up they are entitled to their portion of the capital gain. This gets a little complex but the basics of it are that if there are two owners and the property increases in value by $100,000, you are each entitled to $50,000 of that growth.
Everything is fine while everyone is earning money but if the worst was to happen and one of the owners was all of a sudden unable to pay their share of the expenses how do you deal with that? That's up to you and whoever you own the property with but it is something to be prepared for just in case. In the last 2 months I've had 2 separate situations where friends have owned property together but have decided they were ready to move on and spread their wings as such, one owner bought out the other and her partner became the other owner so that they could prove to the bank they earnt enough to pay the loan. It can be done but these are the sorts of things that happen down the track.
The appeal for this
In the above scenario the girls discussed selling the property and just splitting the profits. If they did that they would have split $430,000 and had all of that to use as a deposit for their next properties. They lived in the property together very successfully for many years but they've decided to start familes and need more space.
If you don't want to live with your friends you can buy investment properties together. The rent will help cover expenses and you get to keep your lives separate as well as the tax deductions that are available to you and the break up is usually a lot less messy this way due to no change in living arrangements.
The wrap up
I like this idea a lot but there are obvious risks and you need to make good decisions and get good advice. There are ways to have one mortgage but have it split into portions so that each owner can pay more or less as they see fit and have their own offset accounts and redraw facilities also and is a great reason why getting good advice can definitely help in the long term.