With tightening liquidity and restrictions on lending, more and more people are teaming up with friends or family to make that first property purchase or additional investment to their portfolio.
Whether it be to live in together, or as a joint investment, it’s a great way of sharing the financial burden (and reducing the downside risk of investment). But there are a few things you need to think about before taking the plunge – simple things to ensure everything runs smoothly.
We spoke to Marwan Rahme, Founder and Managing Director of Kanebridge, leading Finance Broker, Wealth Advisory, Property and Capital. He gave us his top five tips to help you avoid some of the pitfalls of purchasing property with a friend or family member.
1. Agree on a plan
Openly discuss the purpose and terms of the investment as well as the exit strategies. The parties need to be on the same page so as to avoid any arguments in the future. For example, is the acquisition to be a long or short-term investment? Will it be a positively or negatively geared property? That is, will it generate a positive cashflow or be used to take advantage of tax benefits? Obviously the type of property investment (such as a house, apartment or vacant land), the value and quality of the property, as well as the location, all need to be agreed upfront. It sounds obvious however if one of the parties has doubts about any of these issues then the arrangement is off to a shaky start.
Marwan Rahme says that all potential purchasers should do their research and speak to a number of agents and advisors before making a final decision. Kanebridge, as a leading commercial broker, is able to recommend a number of different mortgages. Marwan says that it is smart to obtain a number of quotes from brokers as the terms and conditions offered by mortgagees can vary greatly. An agreement on the selection of an insurer, lawyer and accountant to manage the structure and transaction is also wise.
2. Check your finances
Each party should review their current financial position to ensure the affordability of the new financial commitment, and at the same time obtain financial advice on how this new commitment might affect their future financial requirements. For example, buying their owner-occupied property when they become married, or upgrading to a larger house when they have a bigger family.
Ensure that there is an agreement as to what happens if one party dies or becomes incapacitated. A joint mortgage arrangement may become messy if one party is left to negotiate with the other party’s estate.
3. Cover yourself
Since both party’s income is required for servicing a mortgage, make sure you have the right insurance policy (and level of cover) in place to protect both parties in case of permanent disability or death. Ideally, you should discuss your arrangements with a reputable financial planner, and organise your insurance policies accordingly.
4. Separate bank account
Set up a joint bank account, which is to be used solely for all investment-related transactions (e.g. rental income, council rates, maintenance, mortgage repayments, etc.). This way each party can easily track the performance of their investment property, and the contributions of each party. This will help minimise disputes.
5. Be prepared to sell
Life can take many twists and turns and circumstances often arise which result in one party needing to sell prior to an agreed ‘end date’. This scenario can lead to disputes and it reiterates point one above about having an exit strategy agreed upfront.
You need to make it easy to divest each party’s interest in case of a situational change, dispute, or unforeseen events which may cause one party to have a need to exit the investment. Typically such arrangements will allow the remaining party the right or ‘option’ to buy-out the departing party’s interest in the investment property at ‘market value’ or at an agreed price.
To avoid disputes in these scenarios, the parties should have an agreement in writing on how they would like to exit the investment. Ideally, this should be prepared by a lawyer.
Importantly though, as Marwan concluded, “Never allow a dispute about your investment to affect your friendship or your relationship with a family member. It’s much cheaper to sell a property than to lose a valuable friendship.”
With careful planning and the obtaining of appropriate advice, the traps and risks to buying a property with family or friends can be reduced, and all parties can share in both the benefits (and risks) in property investment.
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Thanks to Marwan Rahme, Founder and Managing Director of Kanebridge for his insights.