By pooling your resources you might be able to afford a bigger property, or one in a better location, but you’re also signing up for a mortgage that relies on another person keeping up their end of bargain.
This means you need to make sure you protect yourself, and your investment, from partnership problems. Before you agree to this type of investment, here are five things you need to know about investing in property with someone else:
1. Consider your joint and several liability
When you sign a mortgage agreement with another party, you become jointly and severally liable for the full amount of the loan and any fees and charges. That means if your investment partner is unable to fund their part of the mortgage, the full repayment amount falls on your shoulders.
You need to fully understand your legal responsibilities and the implications if circumstances change, by speaking to a lawyer and a good mortgage broker before you sign anything on paper.
2. A joint venture may impact your chances of borrowing later on
Acquiring a property in joint names is easier because the bank will use the combined income of the applicants when assessing the loan.
However, when you look at borrowing later in your own name, to mitigate their own risk, banks will assess your servicing based on the full amount of the loan against your name, even if you’re in a partnership – that’s because the debt becomes all yours if your partner(s) can’t service their portion of the loan. That could prevent you from qualifying for your own independent loan in years to come.
3. You get along today, but what about tomorrow?
Unfortunately, money issues can divide even the strongest of relationships and while it’s obviously not wise to enter a joint venture with a total stranger, it pays to be wary about partnering with friends and family too. Having to remind your property-partner sister that it’s her job to pay the bills when she continually forgets can create a long and unhappy rift between family members.
The best way to prevent discord is to carefully consider the temperament and financial history of your investment partner, and lay out all the expectations, roles and responsibilities of each party to clear up confusion and curtail future disputes.
4. You must have an exit strategy in place in case someone wants to sell
It’s all well and good to buy a joint venture property with the aim of capital growth. But what if one of the parties decides to sell earlier than anticipated?
The sudden departure of a partner raises all sorts of questions. Do you buy out your partner? What if you can’t afford to? What if their desire to sell means you’ll need to sell, too? You might be forced into a position where you have to sell, but the market may not be working in your favour at that point, leaving you with a financial loss.
Before buying the property, agree on the timeframe you both expect to hold it for. You might also consider implementing a minimum ownership time, such as five years, before either party can decide to sell – along with an outline of what the process would be if one party wants out.
5. Check your partner’s financial standing
If you’re going to go into debt with someone for hundreds of thousands of dollars, make sure you know their true financial situation.
Have an open-door policy on each other’s income, savings and other investments. Being honest means a smoother loan approval process, fewer financial issues down the track and a better chance that you won’t be left holding the bill.
Above all else, the key with any partnership is to write everything down, so you have clear guidelines and something to fall back on when needs be. With family, it’s easy to dismiss the need for legal documentation because ‘blood is thicker than water’. But having a written, signed document that specifies the agreements of the partnership can actually save relationships, if circumstances change down the track.
Like all investment strategies, it’s up to you to decide whether a partnership in property is a good fit – and to make sure all parties are on the same page before you sign it.
Philippe Brach is CEO of Multifocus Properties & Finance. He has over 15 years experience in property investment and has helped many first time and experienced investors achieve their goals. He is also the well-recognised author of the book ‘Creating Property Wealth in any Market’ which lays out in detail what it means to invest in property.
Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property