Financing a property as an Australian expat is getting harder by the month it seems. Buying an investment property jointly with a friend may make getting on the property ladder easier, but should you do it?
Benefits of buying an investment property jointly with a friend
Most of the benefits around buying an investment property jointly with a friend revolve around either
- For a given property, you need less deposit individually – this may be particularly important for Australian expats as the bank have tightened lending criteria for Australian expats and in some cases you may need 30-40% deposit.
- You could afford to buy a better property or in a better suburb – this may mean better growth prospects, or the ability to attract better tenants
- You have the ability to buy a property earlier than you otherwise might to capture any further growth in the property market. For example, if it will take you another two years to save the required deposit for a house, that may mean you miss out on say $100k capital growth if the market is growing at 10%pa and you are looking at a property for $500k.
- Less financial stress generally getting on to the investment property ladder.
Cons of buying an investment property jointly with a friend
The main disadvantage to jointly owning an investment property revolves around issues pertaining to such matters as when to sell the investment property, and what standard the house should be maintained to (eg. how often to repaint, do you replace or repair the broken oven, do you add additional security etc).
1. Different Objectives
Before buying an investment property jointly with a friend you want to make sure you have the same investment objectives. I have seen personally conflicts develop between friends because one person thought they were buying the property as a long term investment, and the other was focused on selling as soon as there was a reasonable capital gain to realise.
2. Changing Personal or Financial Situations
Even though you may have agreed on the investment objectives for the purchase of an investment property jointly, that doesn’t mean people’s personal circumstances can change. What if one person loses their job and can’t financially keep up with loan repayments – they may then want to sell the property earlier than originally planned.
3. Impacts of Borrowing Capacity
Buying and financing an investment property jointly will generally mean that both parties are effectively liable for the other party’s loan obligations. What this means is that when assessing a new loan application the bank will assume that you are liable for 100% of the debt associated with the property not the percentage that represents your interest in the property. Depending on the value of the property and the size of the loan, this could have a substantial impact on your future borrowing capacity until the loan is repaid or the property sold.
Options to mitigate the risks of buying an investment property jointly
If you are considering buying an investment property jointly with a friend, then many of the issues mentioned above can be dealt with in the form of a contract signed by both parties prior to purchasing the property. A binding legal agreement could lessen the likelihood of legal action being taken between friends when the friends cannot agree on a course of action with respect to the property.
The Law Central Co-Owners Agreement sets out the rights and obligations of each party if a dispute arises. Legal issues covered include:
- Ways to resolve disputes;
- What share each party owns;
- When you can sell;
- Who pays the bills;
- What happens when a party dies;
- What happens if a party becomes bankrupt;
- When you can exit the agreement; and
- When you can buy the other party out.
Check out the Law Central Co-owners Agreement here :
What is your experience buying an investment property jointly with a friend? Would you do it again? Share in the comments section below.
Disclaimer : This information is for educational purposes only and does not constitute financial or taxation advice. As this information is not advice and has been prepared without taking into account your objectives, financial situation or needs you should, before acting on this information, consider its appropriateness for your circumstances. Independent advice should be obtained from an Australian financial services licensee before making investment decisions, and a registered (tax) financial advisor/accountant in relation to taxation decisions. To the extent permitted by law, we exclude all liability for any loss or damage arising in any way. The Australian Expat Investor may receive referral commissions from companies referred in this article.