Brothers and sisters are doing it. Parents and children are doing it. No doubt, aunties, uncles and second cousins are all doing it too.
When an individual effort isn’t financially sufficient to break through the housing affordability barrier, no matter how hard you try to save, it makes sense to combine forces and resources in a joint venture ownership arrangement with people you trust. And who better than your friends and family?
While the actual data is a little patchy, there’s a great deal of anecdotal evidence to support some of the numbers produced by new-ish kid on the block coHome, which assists young Aussie homebuyers to, well, co-purchase a property obviously.
Late last year coHome surveyed 250 Millennials, and found that 60 per cent would consider joint ownership arrangements with friends or family. And this isn’t just about home ownership either, with many building the beginnings of a property investment portfolio through such arrangements.
But before you jump headlong into something as substantial as the acquisition of an investment property with any type of significant “other”, be it a sibling, sister-in-law, spouse or friend, there are a few considerations (or rather 8 as the title of this piece suggests) that need to be carefully weighed up…
1. Will it make or break your relationship?
Is your relationship solid enough to withstand any type of dissent in the ranks should things go pear shaped? I’m not suggesting it’s a given that they will. But if you want to take on friends as business partners, you also have to be prepared to lose them as friends. Remember that, at the end of the day…property investment is just another business proposition.
Relationships are much more open to change when you start to inject large sums of life savings into the equation.
2. Business or pleasure?
As per the above comment, you need to be honest with yourself and your co-owners about your intentions when it comes to the proposed partnership. This is an agreement that should be planned and executed with the same acumen as you would a business plan.
Everyone needs to be in mutual agreement and happy with the co-ownership terms…everything from the breakdown of dividends accrued through the portfolio’s short and long-term returns, to the percentage of financial contribution, taxation and borrowing implications, each investor’s financial goals, and administration responsibilities.
3. Talking money with your ‘team’
If you cannot be open and honest about your own financial situation with friends and family, and they’re struggling with the same level of personal disclosure, drop the entire idea of investing with others.
There’s no room for dinner party politeness in a property investment joint venture. This is the time to lay your cards on the table and ask your friends to do likewise.
4. Co-borrowing blunders
Most lenders are cracking down on cross-collateralisation structures that involve securing a loan against one person’s property to find the acquisition of another property investment with other parties to the transaction. Hence, if anyone has their equity tied up, this would likely need to be released beforehand.
Whatever you do, don’t think you can traverse the increasingly tricky home loan landscape yourself when co-investing with anyone…particularly if you want any ounce of flexibility to go your own way down the track.
5. Will it compromise your personal credit position?
As above, the other serious consideration when it comes to being jointly and severally liable for a mortgage is that all of the associated debt, in its entirety (not just your agreed portion), could be deemed your sole responsibility when it comes to future loan applications.
Hence, while you might only have a 30 per cent share in a $400,000 investment loan, some lenders could attribute the entire $400,000 commitment as your mortgage, meaning your future borrowing options could be seriously impacted.
6. Go your own way
Imagine a scenario where you successfully grow a property portfolio of ten, high growth assets alongside three of your best buddies. You decide after a time that you’d like to expand that asset base, borrowing against the equity to purchase more housing investments. But your friends are content to sit on those ten properties indefinitely.
What do you do? Unless all three partners agree, you can’t go off and borrow the cash anyway. Now you have to decide whether to hang in and hope that when it comes to a four way split, those ten properties will pay sufficient dividends to meet your nest egg dreams. Or, consider some type of exit strategy…
7. It’s been fun but…the exit strategy
So who decides how it all ends my friends? Let’s say you enter into a joint property investment ownership arrangement when you’re young, footloose and fancy free, and then you meet the man or woman of your dreams and decide it’s time to settle down.
What if you want to release the money from your portfolio to buy your family home and start a life with the love of your life, but your still single friends won’t have a bar of it? These are the sorts of things you need to really think about, before working a well thought out exit strategy into your arrangement.
8. Have you covered everything?
As with any property investment endeavour, make sure you are adequately covered in case something goes awry. Have up to date and well structured policies in place for income protection insurance and life insurance just in case, as well as the obvious landlord’s insurance.
While there are many potential pitfalls to consider when investing with friends and family, this is undeniably a clever and plausible option, worthy of investigation. It could mean taking a few steps up the property ladder sooner and with less risk exposure, if approached in a businesslike manner, with careful planning and good communication.