The Pros and Cons of Buying a Property with a Friend
Should you consider buying a property with a friend? Getting a toehold on the Australian property market can be tricky, but what should you look out for before you jump into a property purchase with a pal?
As property prices across Australia continue to increase, younger Australians are trying non-traditional ways to break into the property market. Pooling your resources with a friend can be a great option to allow both of you to buy property much sooner than you could alone. Two incomes will undoubtedly make the property more affordable, but what are the potential pitfalls?
Although there are many positive outlooks to purchasing a property with a friend, there are risks for you to consider. Let’s have a closer look at the pros and cons of buying a property with a friend.
Higher borrowing power
When you combine your income with a friend, you’ll probably have a much better chance of obtaining a bigger loan, meaning that your house-buying budget will be larger than if you were looking to buy a property on your own.
A faster way into the market
By pooling deposit funds with a friend, you can both get into the market faster. As property prices continue to increase, getting in sooner rather than later could save you thousands in the long run by allowing you to purchase a property before prices go up again.
Share the bills
Homeownership comes with a lot of bills, on top of paying the mortgage. By purchasing a property together, you’ll be able to split charges such as rates bills, and any household upkeep expenses.
Difficulty selling quickly
One day one of you may want to sell the property. You will both need to agree on this because you share the house equally. This can cause delays and is likely to cause friction to your relationship if one of you is forced to either:
- Come up with funds to buy the other out; or
- Sell the property when they don’t want to.
Potential for financial trouble
When you co-own a property, you are both on the loan application documentation as joint borrowers, which means that you are both responsible for the entire debt. If your friend loses their job or can’t afford the repayments for another reason, it will be your responsibility to cover their half. If you can’t, the bank may seize the property to recover the debt.
Disagreements could lead to the loss of the friendship
The property that you bought together is likely to be a significant financial decision. It’s a huge responsibility and therefore has huge potential to cause problems in your friendship. If one of you doesn’t pay their own way or doesn’t do their part to upkeep the property, it could put a lot of strain on your relationship.
So, how can you avoid problems when buying a property with a friend?
See our checklist below.
#1 Sign a thorough legal agreement
Have a lawyer draw up a comprehensive contract between the parties to determine how this co-ownership will work before you buy the property. You could include things such as:
- How expenses will be paid;
- How you will determine the price of the property if you decide to sell;
- The minimum time you will own the property before you sell; and
- How any disputes that might arise will be resolved.
#2 Specify that you are tenants-in-common on title
When your conveyancer registers you as legal co-owners, have them specify you would like to be listed as tenants-in-common on the property title. This means that each party can select
who they want to leave their share of the property to if they pass away. Without this stipulation, if one of you passes away, the property will automatically fall into the ownership of the other owner.
#3 Buy with a friend in similar circumstances
Your best chance of a successful property co-ownership is to buy with someone of a similar age, stage of life and income as you. That way, your goals and disposable income will be similar. While this is not vital, it can go a long way to keeping harmony in the relationship as you will likely decide to move out or sell the property at a similar time.
#4 Get life insurance
As each borrower is responsible for the entire debt if the other borrower can’t afford their share, each buyer should be allowed the peace of mind of knowing that if something happens to the other party, their half of the mortgage repayments will be covered. Getting life insurance and income protection insurance is a sensible step to make to keep everybody feeling secure. It might even be a good idea to make life and income insurance a stipulation in your contract.
Buying property with a friend can be a rewarding experience and an easier way of getting into the property market. But there can be legal and emotional challenges to overcome if you want to make real estate co-ownership a success.
If you are thinking of buying a property with a friend, always seek the assistance of a reliable property conveyancer to guide you through the legal aspects of property ownership. Jim’s Property Conveyancing has offices in Property Conveyancing Melbourne and Conveyancing Brisbane and can provide you with comprehensive advice and assistance moving through your property transaction. Contact Jim’s Property Conveyancing today on 13 15 46.