Is it wise to buy a property with family or friends?
As Australians look to the Baby Boomers with envy, because many of them have reaped the financial rewards of low interest rates and exceptional growth in the property market over the last decade or more. And – as a nation we grapple with the issue of housing affordability, (which is the result of that exponential growth) there’s still a strong desire to invest in property – either as a means to have somewhere to call home, or as a means of making money through property investment.
Many young people feel under pressure to buy a house or investment for fear of ‘missing out’ and the current proliferation of DIY TV shows have also fuelled a desire to make money ‘flipping’ houses (that is, buying something cheap and refurbishing it for re-sale).
But in real life, these things are a lot more complex than they are on TV. And the TV shows rarely mention the costs involved in transactions, stamp duty, legal fees and estate agent fees all add up when you buy and sell. Perhaps even planning permissions required from the local council too.
Innovative property buying strategies
Regardless, people are coming up with all sorts of innovative ways to ‘get into’ the highly coveted, and increasingly expensive, property market: borrowing from, or buying with friends and family, and even exploring ideas such as fractional property investment.
Perhaps the most popular strategy is co-buying, which allows buyers to split the cost of purchasing a property with friends or family, or even their partner. This is popular with first-home buyers – because they can get into the property market sooner, perhaps with less deposit. They can increase their buying power and reduce their financial commitments.
But while buying a property this way may, on the face of it, seem to be a sound idea, the dream doesn’t always match the reality.
A study by GlobalX, a Brisbane-based provider of legal and conveyancing workflow solutions surveyed 170 legal professionals, and 45% have recommended that buyers avoid purchasing property with family or friends.
This probably isn’t surprising, after all, legal professionals are on the front line when things go wrong.
Co-buying can be successful if approached with care
But that doesn’t mean co-buying should be avoided, it just means that pre-planning is crucial to its success. There are a hundred different scenarios that might cause a co-buyer to want to get out of the property sooner than planned. This leaves only a few options for the other parties involved – to buy this person out, for everyone to sell up and all release equity, or to find another person to ‘buy-in’ to the property.
And as much as these pose a solution, they inherently pose certain problems too. And more costs. If you need to buy a co-buyer out you face stamp duty implications (over and above the original transaction). There’s also the possibility of capital gains tax if the property is not your home.
When you make any big financial commitment, solo or with others, it pays to do the homework beforehand and seek professional advice to help you work through pros and cons and exit strategies …. Just in case.
Protect your financial interests first and foremost
This kind of due-diligence is crucial to not only protecting your financial interests, but also protecting your relationships. Each party entering the agreement needs to be upfront about their reasons for doing so, and the purchase and eventual sale needs to be discussed in detail so that everyone is clear about the timeframes they’re committing to, how costs are going to be apportioned, how profits will be split, their own individual tax implications and the right structure for the loan.
But even with all of this in place, and set out in legally binding contracts, life happens, things change, and that’s when you’ll be glad that you have some exit strategies in place.
The bottom line is that you can only hope for the best, but you should always plan for the worst and while that sounds pessimistic, it’s not meant to. In some cases, it may just be wiser not to buy, especially if you find yourself in a situation with lots of anomalies that you cannot reasonably foresee or control. Getting caught up in the excitement and making emotive decisions, particularly when vast financial sums are involved, can be costly.
In the meantime, there are other investments you can consider as you wait for the right property to come along.
Overall, when purchased sensibly, property can be a solid investment which will support your financial goals throughout life – but it’s not something you should enter into lightly, or under pressure from friends and family. As always, seek professional financial advice, before you proceed.
MoneyLink Financial Planning Pty Ltd is an Australian Financial Services Licence Holder. No:.247360
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