For many investors joining forces with a business partner, friend or family member seems like a smart way make breaking into the property market a little easier.
The advantages seem obvious, teaming up with one or more people means deposits or repayments are split, in theory making buying and servicing a property cheaper, but there are some issues below the surface that should be considered before going into tenancy
with other parties.
When multiple parties take tenancy of a property, they either do so as joint tenants or tenants in common.
Tenancy in common allows tenant to hold unequal shares of a property, for example two tenants may hold a 40% share in a property, while the third tenant may hold 20%.
While tenancy in common may seem like an ideal way to allow people to pool their resources to purchase a property, it can have some negative effects on your ability to finance other properties later on.
Rebecca Hona from researched based buyers’ agent and mortgage brokers wHeregroup, gives us her expert opinion on tenancy in common agreements.
When would you recommend entering a tenancy in common agreement?
Firstly, we wouldn’t recommend this to anyone without them first speaking with their accountant. Its important to understand the pro’s and cons relating to your personal financial situation.
We do however see this very often where say a husband and wife are purchasing a property together.
Example; Husband is a high-income earner; wife works part time and earning very little per annum.
So as to avoid the higher capital gains tax (CGT) in the future and if the property is cash flow positive where there is not a lot of tax relief per annum, they would do a tenancy in common agreement that gives 99% ownership to the wife and 1% to the husband.
As the husband is the higher income earner thus the CGT is calculated on a lower income in the future.
The second would be if you bought a property with a partner or friend and you each had a different amount to put towards the property, e.g. you have $300,000 and your partner has $100,000 and you buy a house for $400,000.
That means you would own 75% of the property and the other person owns 25%.
What are the common advantages or disadvantages that come with a tenancy in common agreement?
Save on CGT in the future if you account a higher % to the lower income earner
Borrowing capacity can be increased for borrowers using two applicants and splitting the % of ownership to the lower income earner – thus the lower income earner can borrow funds they wouldn’t have serviced should they buy alone.
On the reverse, if you are high income earner and you have great tax benefits on a property, putting 99% your name, and 1 % your partners is also a way to reduce your taxable income and receiving a greater tax refund per annum.
Estate planning – you can assign your % of ownership within your estate to whom you want to receive your portion of the asset you own.
Lending/finance issues. This can affect your ability to obtain future finance depending on the ownership % and servicing requirements.
The % of ownership you choose as a tenants in common shares today is reflective your situation today. Should this change in the future; you cannot change the % of ownership in the future without incurring stamp duty charges.
What should you do before becoming a tenant in common?
Speak with your accountant.
This is always our recommendation to 100% of clients.
In fact, when you sign any property contract, your conveyance/settlement agent should also be asking the same – as your accountant can advise you best based on your personal situation.
Hypothetically, I am in a tenancy in common agreement with a business partner, my wife and I now want to secure a mortgage to buy a house with, will lenders look less favourably on me due to me being a tenant in common?
It ultimately will come down two things; lender selection and servicing.
There are only a small few lenders that will take into account your actual % of ownership of the property along with the % of rental income you own..i.e.
If you own a property with a friend , in a 50/50 share and then you want to go and buy a property with your wife the majority of lenders will take 100% of the loan repayments for that debt you own with the friend but only 50% of the rental income.
So this could impact your serviceability dramatically.
Whereas lenders such as AMP will take the actual % of ownership as the % of the loan repayments you are required to make under the ownership, and again the % of the rent from the property.
This could make a big difference down the track when you go to borrow..
If you can service the 100% loan with only 50% of the rental income, this may not be such an issue to you in the future, but very view people are that position.
If my tenancy in common agreement was impeding my ability to secure financing for other properties, what would you recommend I do?
Speak with a mortgage broker who can review which lenders will look at the % of ownership accurately and ensure you have the ability to finance your proposed purchase.
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