Australians are leaving it later to get married – traditionally the stepping stone to pooling resources and buying a home. One result of this trend is that many young people face the prospect of going it alone to buy a property.
But with prices on the rise, this can be a struggle.
One emerging solution is ‘clubbing’ – getting together with friends or relatives to buy an investment property. One major bank is even advertising special loans for this.
But is getting a little help from your friends a good idea? Here are some things to consider before taking the leap.
1. Share the debt, share the responsibility
Even though it is possible to set up separate loans under separate accounts, the buck stops with every person named on the mortgage. If one of your friends or family loses their job, gets sick or for any reason can’t pay their share, you will need to pick up the slack. And if things head south in a serious way, you’ll be liable for the debt just as much as them.
The technical term for this is that a mortgage is a “joint and several liability”. Each individual is responsible for the entire debt. Sure, you can have arrangements where you pay your share, but if one of borrowers does not make their repayment, the others are just as responsible from a legal perspective.
The take-out: Choose your co-investors very carefully and make sure every one of you have appropriate protection in place. A product such as Loan Protect can help manage the risks of default, while Life and Income Protection are also viable insurance products. Speak to an expert about what’s best for you.
2. A property is a long-term investment
Buying a property has significant costs, such as legal fees and stamp duty (depending on the state you live in). Then selling it has costs, such as agent fees and capital gains tax.
All of this means that if you stump up your cash for a property, you generally need to hold it for a long time to make a good profit.
This is fine as long as you and your co-investors have the same timeframe in mind. Five, ten, fifteen years? Will everyone be happy to have their capital locked up for the same time? What if one party gets married and wants to set up home with their new partner?
Following on from the joint and several liability concept, the fact that you are responsible for the entire debt will impact on your ability to borrow for a home loan at a later stage. Given the costs of entry and exit, this is something worthy of serious consideration.
These are just some of the important questions to discuss before you go ahead. Perhaps one party can buy the other out at some point - but that will depend on finding a price you both agree on and the buyer being able to extend their loan.
The take-out: Sit down and consider a range of scenarios, then make sure you have a legal agreement in place to cover them. Set a timeframe that will make the investment worthwhile and agree on it. Life may get in the way, but at least you all start with a shared view.
3. Consider the ongoing costs and how you split them
Owning a property comes with ongoing costs, from property agents to strata fees, repairs to rental vacancies. It’s important that each person in your ‘club’ has the ability to pay for these ongoing.
Consider an unexpected, major cost – for instance, a hot water system needs replacing. If one person has a higher income, and another one can’t afford to put their hand in their pocket, will it cause issues? And if one person is handy and able to make repairs themselves, will they charge the other owners for it?
The take-out: Discuss how you will plan for ongoing costs and include this in your agreements. Consider contributing to a shared emergency fund, which could sit in the redraw or offset account attached to the loan. This has the added benefit of bring down the cost of interest, although make sure nobody can access it without the permission of other owners.
Also, make sure you have a good ‘serviceability’ buffer when choosing a loan. When you start researching, use a home loan repayment calculator to check how much your repayments would be and allow room for unexpected costs. A good mortgage broker will also discuss this with you when you apply for a loan.
Conclusion: Go in with your eyes wide open
As you can see, there is a lot to discuss before committing to a shared property investment. While it is a viable option to get onto the property ladder, you need careful planning and clear, legally binding agreements to protect yourself and your investment.