Are the days numbered for First Home Buyers and Investors to get into the Property Market?
Friends and family members are increasingly entering into joint property partnerships in a desperate bid to get onto the property ladder. While it can be a great shortcut, there are obvious risks.
With the high cost of housing, many people are finding it more and more difficult to save a deposit. This is forcing ‘wannabe first home buyers’ to give up their dream of owning a home and becoming content in continuing to rent. Property investors are also feeling the effects. The only hope could be for some form of extra assistance or intervention like a gift of money from a family member or using a parents property as security, or the government deciding to give away money again by doubling the first home owners grant similar to what occured a couple of years ago.
Prospective buyers are now more than ever looking to borrow with friends or family members to try and get into their first home or investment, however this could cause long term and short term issues that may not be worth it. The main negative is the way lenders view the commitment and the impact of that commitment on future borrowing.
Let’s look at this example; Two friends purchase an investment property together for $400,000 and plan to rent it out for 20 years. However, when one of the friends goes to purchase a home with his new wife five years down the track, the bank doesn’t view him as having a $200,000 loan (50% of the investment property), it views him as having a $400,000 debt. As a result, the amount he is able to borrow is limited. So the friend either has to sell the investment property (which the other friend might not want to do) or the married couple must put off buying a property until either more annual income is earned to borrow the sufficient amount or they buy a property which is much lower in value.
If you were to consider buying a property with someone else other than you partner, then I have a few tips to keep the relationship and transaction from being a disaster.
Goals & Timing
Firstly, ensure the goals that you both have are similar and this may include the time you want to hold the property for. Secondly, agree on the deposit you both want to put in and finally, the commitment level that you are both comfortable with needs to be discussed. Make sure that there is room to move for example, don’t commit to $200 per week out of your pocket for mortgage payments when interest rates are really low as you know that this will inevitably change.
Age also has a big bearing in the partnership. If you are in different stages of your life, you may find it very hard to avoid unseen conflicts. For example, two married couples decide to buy a home and both couples have older children who have left the nest. Neither have the financial burden of dependants anymore, and so the two couples buying a property together are in a similar financial stage of their life. This scenario is going to be a lot more complimentary than if one of the couples has children about to start private school which means they will be entering into an ongoing commitment that may last the next 15 years with unknown expenses.
Similar income is also something that should be taken into consideration as you may want to use that property to grow a larger portfolio of investment properties in the future. If one party on a lower income can’t go to the next stage, it may hold the other back from growing wealth.
Cover the risk
Life Insurance covering both parties is extremely important when you are buying with others. This way if one party was to become deceased, a life insurance policy would pay out the full debt against the property and make it much easier to settle on the estate with less confusion. The best option is to have both parties insured and the benefactors clearly stated to reduce any possible hardship down the track.
You should also consider income protection insurance for both parties in case one of the parties is unable to meet their commitments due to unemployment or a prolonged illness.
As always, it’s best to obtain independent legal advice and ensure the following is clearly covered:
– What happens if one party defaults on the loan?
– When it comes to sale of the property how will capital gains be split?
– Can one party buy the other party out?
– If only one partner wants to sell, who will pay the selling cost?
– If the property is an investment, who will manage it?
– How will property maintenance bills be split?
– What renovations do you want to make and who will pay for it?
Finally, keep detailed records of exactly who paid for what. This will help ‘nip any arguments in the bud’ and should any possible disagreements as co-property owners come up, you will have detailed evidence to support your position.
Until next time keep smiling.