Investing in property with friends or family - a match made in heaven or a fast track to hell?
Are you thinking about investing in property with family or friends? There are some great reasons to invest as a team. Pooling your resources can:-
Teaming up with family or friends to invest in property can be an astute financial move as long as you work out a plan for the potential pitfalls.
- get you started in the property market;
- increase your buying power;
- increase your borrowing capacity;
- widen the knowledge, skills and expertise you have access to;
- reduce your overheads such as mortgage repayments and maintenance costs.
If you can get the right group of people together, investing with others can be an exciting and profitable experience.
However… although there are many tempting reasons to invest with others, it pays to be aware of the possible pitfalls and plan around them.
Here are some things you must consider if you are contemplating investing with your friends or loved ones:-
Think through all possibilities
Life often throws us curve balls (and sometimes, a few lemons). Have you planned for unforeseen contingencies that may crop up? What happens if:-
- one person needs to get out early for any reason?;
- a party dies?;
- one person can’t make repayments or meet costs;
- you can’t seem to make a decision about an issue that needs to be addressed.
All of these things should be talked through and addressed before committing to the project.
Before going ahead with your investment, you need to decide how long you will hold the property. Is it a short term venture, aimed at getting in, redeveloping or renovating, and getting out? Or will you hold the property long term? This all needs to be decided before you buy.
You should also address what will happen in the event that one person needs to sell up their share before you had anticipated. For example, if one party is experiencing financial distress or have married/had children and need to free up cash for a family home.
Do the remaining parties have a right of first refusal, giving them the right to purchase an outgoing member’s share at market value before it can be on-sold to another? These are all issues to think about.
Protect yourself – get insurance
Our Tenants in Common Agreement envisages each of the co-owners taking out insurance over the live’s of the other co-owners.
This ensures that you will not fall into default on the death of a party, and that the remaining owners can buy out the deceased owner’s share from the Estate, rather than it being distributed among the beneficiaries and possibly sold to liquidise the investment.
It is important that you are aware that, even though you have split the percentage ownership between yourself and your partners, the bank will generally not recognise the percentage split. This means that ultimately, you will be responsible for the entire debt, should your investment go sour and/or your other partner or partners not have access to sufficient funds to pay their share.
Some banks have the ability to split loans, so that each parties “share” of the debt is allocated to separated accounts. Each party makes repayments directly into his or her account, which makes accounting and tracking the loan a breeze. However, this is provided as an extra feature for customers to separate their percentage of the loan and repayments, from the other joint owners. Ultimately, each party will still be jointly, and severally liable for the whole amount, unless expressly agreed to and documented by the bank.
So be aware that you are ultimately liable for the whole loan amount – especially if you have other assets that are easy to liquidise and access, while your partners do not. You will be taking a higher risk.
Tying up equity
Being jointly and severally liable in your bank’s eyes for the whole amount of the loan (rather than just your share), will limit your borrowing capacity. You will be recognised by financiers as being ultimately responsible for the whole amount of the loan, so this will limit what you can do in the future, until the loan is paid out.
Get everyone’s agreement on the details
You don’t want to lose friends or family over a property deal gone bad. But…. you don’t want to miss out on a good opportunity to make some money, either!
To help keep your deal on track and everyone happy, make sure you discuss all aspects of the investment, including any unforseen contingencies, such as those discussed above.
Ensure everyone agrees to the details, and any potential issues are addressed before they arise. Have pre-agreed back-up plans in place to minimise any disputes or disagreements in the unfortunate event they materialise in the future.
Get it in writing
Once you have worked out the nuts and bolts of the project and everyone is satisfied - put it in writing. This saves alot of "he said / she said / you didn't say that / I didn't understand what you meant / I didn't agree to..." arguments.
When you are talking about hundreds of thousands of dollars – even with family and friends (or perhaps more appropriately, especially with family and friends!) – a hand shake is just not good enough.
We’ve thought of everything for you, in our professionally drafted Joint Ownership (tenants in common) Agreement. This pack is for all those who are thinking about purchasing a property with others.
If you are starting a one-off project with another person, such as a property development, then this is the Agreement for you.
If you are conducting an ongoing business with a partner, take a look at putting a formal Partnership Agreement into place.