Rental costs are soaring, and affordability is shrinking, according to the latest Rental Affordability Index report, released this week. Would you buy a home with friends, if it meant you could escape the current rental market?
It might seem like a good idea to buy property with family or friends – sharing the expenses and repayments with others can certainly make property ownership more affordable. But how do you make it work for everyone involved?
There are clearly some benefits to co-ownership, such as:
– Being able to pool resources for the deposit means you can buy now, rather than waiting;
– Having a deposit over 20% of the purchase price negates the need for lenders’ mortgage insurance (LMI);
– Greater buying power gives you more choice in location, size and style of property;
– The ongoing costs of owning a home (rates, repairs, insurance) are halved, at least
– After a few years you’ll have built up enough equity to be able to buy your own place.
But on the other hand:
– Unless you have established clear guidelines, co-owning property can become difficult if someone defaults, or it’s perceived to be inequitable;
– Will you all be living in the property? Shared accommodation strain the best friendships, so you’ll need to establish ground rules for privacy, pooling and sharing of resources, and how to deal with maintenance and financial issues;
– Life changes, so it’s critical that there is clear understanding and documentation between all parties concerned. What if someone gets married and the spouse doesn’t want to share house; or someone gets offered the job of a lifetime overseas, is injured or becomes unemployed?
– Most lenders require that all borrowers take responsibility for the entire debt, which means that if one person defaults, the others will be expected to make up the difference. How will you cover that?
As a first step, it is crucial to sit down together and clarify what, why and where you’re buying. Who is going to live in the home, and under what arrangement?
Draw up a legal co-ownership agreement that clearly sets out the rights and responsibilities of each co-owner and deals with all the issues you can think of, such as division of ownership and what happens if one party wants to sell. For clarification of ‘tenancy in common’ and related issues, check out what the ATO says about joint ownership of an asset for capital gains tax purposes.
Be aware that when you finance through a co-ownership agreement, lenders often consider each borrower separately; some even allow the loan to be split so each party can make separate repayments.
If you’re house-sharing and the arrangement starts to deteriorate, be prepared to move and rent out the property so that it’s a straightforward financial arrangement.
Joining forces with family or friends can be a great way to get your collective feet onto the property ladder. But if you’re to come out of the experience with friendships and finances intact, make sure you set the ground rules first.
Before committing to any shared commercial venture, borrowers are advised to consult with their financial and legal advisors.