Buying a Property With Friends and Family
It’s hard to buy your first property alone these days, but there are options, says Michael Vincent, of Lighthouse Financial. He looks at joint venture property investments.
6 July 2022
There are a lot of barriers to entry to the property market, so it’s smart to explore some different ways to buy a property. One is joint ventures with others.
If you’re priced out of the market and want to get on to the housing ladder as quickly as possible, buying with a friend or family member can be a good way to purchase sooner rather than later.
Common reasons for going into a joint venture are:
- Where someone can’t get a foot onto the property ladder and a friend or family member offers to help them out.
- Where one person has more deposit than the other, but not sufficient income to buy alone.
- Or individually, both parties have a good deposit and income, but still need more to buy.
We see a lot of these arrangements, between parents and adult children, brothers and sisters, friends and flatmates, and we always give the same advice.
First, you need to have some upfront conversations.
Money and family can be like oil and water – and arrangements like this can cause rifts, so think hard about this option before diving in.
An important factor is the timeline to hold the investment property or the house.
If a younger person is going in with parents, they probably have different time horizons.
The parents might want to hang on to the property for a passive income in retirement, but the younger person might want to sell it after five years to use the capital gain for a property of their own.
It can get muddy when one person tries to buy the other out. Someone approaching retirement might not be able to get a home loan to buy the younger person out.
Or single siblings who buy a house together at 25 might find one wants to go on an OE and doesn’t want to contribute any longer. Or the other might get a partner and need the equity out of the shared house to buy a home.
It’s important to discuss all these scenarios and have a clear picture on what each party wants from the investment.
Who will be living in the property and will there be flatmates to help pay the costs?
What happens if someone loses their job and can’t contribute any more?
See a lawyer
There needs to be an agreement in writing about how the investment or property purchase is to be handled.
It should be reviewed by a solicitor, even if you are very close to the other party to the joint venture.
An important issue to agree upfront is how will you value the property if one party wants to buy the other out. If it’s not decided beforehand, this can become a point of contention.
Finally, the mortgage
Some banks and lenders will treat a mortgage application differently if it involves two parties that aren’t related or in a relationship.
Some will treat the two parties as one set of financials and assess the affordability of the loans jointly.
Others will treat both buyers as separate parties on the same application. This won’t be much help if you can’t afford all of the loans on your own, so make sure you have a thorough discussion with your mortgage broker about your bank or lender.
Lastly, keep in mind that going in with someone on a property now can have an impact on your ability to borrow later.
Most banks’ default position is to look at the debt that each sibling has on the half-owned property as needing to be 100 per cent serviced by their income, when in reality two people service the debt.
How will you divide costs?
Remember that unequal inputs usually mean unequal outputs in an investment.
You should agree upfront on the share split at the start and what the profit split at the end of the investment will be. If you make a loss, the costs need to be passed on in the same way.
Michael Vincent is a financial adviser at Lighthouse Financial. Contact him at email@example.com, phone (021) 037 9572.
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