Unless you can access existing equity, or happen to be a superstar at saving, breaking into the market can seem almost impossible for the would-be property investor. But does that mean you should share the cost with a friend?
Friendship can be a funny thing. When it works it can be both fulfilling and fun, but when it falls apart it can turn your life upside down.
Now imagine your investment portfolio is financially intertwined with that friendship. What then?
Co-ownership, that is buying an investment property and sharing the cost with a friend, can be of prolific benefit, especially given the escalating cost of property and rising cost of living.
Pooling your resources with another also assists with any additional and ongoing costs associated with investment properties like rates, repairs and any negatively geared mortgage gaps.
So if you are limited by a single income and want to get into the market, have trouble getting finance, or think it would be easier to make payments with an investment partner, then sharing the burden can be a good way to get started - as long as you know the relationship isn’t going to break down.
So, does that mean you need to be a psychic before you can make the decision to invest with a friend? No.
You simply need to make sure you are covered should something go wrong in the partnership, or should one of you need to make an early exit.
Securing your investment
Known as the pre-nuptial agreement of home ownership, a co-ownership agreement is an agreement drafted by a lawyer which states each party’s rights and responsibilities as agreed by all purchasers.
Chan and Naylor Wealth Advisory Group non-executive director Ken Raiss says one of the best ways to ensure you are covered is to create a co-owners agreement before you sign on the dotted line.
“Prepare a written plan including how various issues will be treated, who is responsible for ensuring payments are made, who will take care of maintenance, who will keep the books up to date and especially the mechanism for the unexpected exit of someone,” he says.
“It is also important to properly insure for all risks including tenants insurance, building and contents and so on.”
What kind of title will we have?
Known as a tenants in common (TIC) title, or a joint tenants with right of survivorship (JTWROS), this kind of title assumes all parties will have an equal share in the property, meaning should one investor die, the share will be divided between any other owners on the title. Should the property be held over a long period of time, the final person will inherit the entire title.
What if one of us wants to sell the property?
Life can change in the blink of an eye, so it’s important to have a plan in place in case one partner needs to sell their share.
Raiss says there are two options available should this happen; either buy the partner out, or sell the property.
“If property needs to be sold in a hurry, then the person wanting to exit may need to have their share discounted if sale is at a lower price than a sale in the normal cause,” he says.
“If you buy out the other person, the seller triggers a capital gain tax. If the property was purchased with the intention to keep, and if held for over 12 months, then a 50% CGT general discount applies to the gain.”
Overall, Raiss believes sharing the cost can be a great way to get into the market, or for more experienced investors, pooling resources can open the door for property development projects.
“If the above can be managed there could be significant benefits to joining together as this may be they only way to get started,” he says.
“It is also a good start if you wish to complete a small development of multiple properties and are happy to work with someone to build two townhouses and take one each.”
Whether you are looking to buy your first home, move home, refinance, or invest in property, a mortgage broker can help. Access loans from all the major lenders, get help with paperwork – plus there is no charge for this service. Get help from a local mortgage broker