Is buying a property with family or friends a good move?
With inner city property prices becoming out of reach for many people, there’s a growing trend for friends, siblings or a group of family members to pool resources in order to purchase an investment property. In theory it’s a great idea: by joining forces, you’ll be able to put down a larger deposit and could possibly purchase a more valuable asset. But like any investment, you need to know what you’re getting yourself into.
Here are a few questions you should ask yourself before investing in a property with friends or family members.
Is it really worth it?
Think about this: would you gamble your family or relationship just for the sake of a property? If you don’t have a long and solid relationship, don’t get into a property partnership. On the other hand, if your goals are aligned then it could be a very wise financial move.
Get it all on paper
Before you even find a property and put down an offer, make sure every expectation and role of all involved is clearly set out. Come up with a sound property investment plan, just as if you were drawing up a business plan and only go ahead with aspects that all partners agree on. These should include:
- Responsibilities – who will deal with the agents and who will deal with the banks? Who will negotiate the price?
- Goals – how many properties will you buy together?
- Profit distribution – how much will each partner receive?
- Financial contributions – how much will each of you contribute?
- Length of time – how long do you plan on holding the properties for? When will you sell, if at all?
- Legal and borrowing obligations
- Tax implications
Do you know your potential property partners well enough financially?
Are your partners as confident as you are to take on a huge financial commitment? You’ll need to have honest conversations about the situation. You’ll want to ensure they’re financially responsible because not only will you be partners in the profits but also on all the debt.
Watch out for blunders
When you decide to get together with your sibling or friend to purchase property, are you all able to contribute the same amount? And even if you each chip in a percentage, you need to be aware that you will all be jointly liable for the debt as a whole. So, if your partner decides to leave the country, for example, you’re left with the mortgage and it’s you the banks will come after. Also, you’ll be stuck owning part of a property and having to make entire mortgage repayments.
What happens when you want to take different paths?
Let’s say you grow a portfolio of four houses with two friends and they’re happy to sit on those properties for an eternity. But you feel that your third of the share isn’t exactly building a comfy nest egg for your future. The thing is, unless all 3 of you agree, you’re not going to be able to borrow against those assets to make more investments. So you’ll have to decide if you want to get out of the partnership or start from scratch building your own portfolio.
Do you have an exit strategy?
What happens if your circumstances change? You decide to start a family and you need the funds you have tied up in your property portfolio? What happens if you go through a divorce and need to liquidate your assets and need the cash from the portfolio but your partners won’t sell?
There are definite benefits in entering into property ventures with friends and family, more buying power allows you to often purchase a much better investment than you could manage on your own. But don’t go in blindly. You’ll need to consider these scenarios, amongst others, before getting into a property partnership because if things don’t go as planned, you may lose more than just a property, you may lose a friendship or relationship with a family member.