If you are planning to purchase a property, there are so many ways to do it. One of the ways is to buy it with your friends or family members.
Yes, you can definitely buy a house with them. In fact, it is becoming increasingly common to purchase a property with friends or family members. It normally has a tenants-in-common purchase setup, wherein, two or more people have a stake in the property.
Benefits of Buying with Family and Friends
There are various benefits of buying a property with your loved ones, including friends and family. Some of the prominent advantages are as follows:
- If you are buying a property as a tenant-in-common, it allows you to share the price and other fees related to the purchase.
- In addition to that, you can also share the ongoing cost, such as management fee, repair and maintenance fee, loan repayments, etc.
- Most of all, you can sell or leave your portion of the purchase to whoever you wish to give it to.
Home Financing in a Shared Purchase
Often financial institutions will allow you to mortgage your share of the house independently, and the co-owner will not be obligated to pay any part of that mortgage payment. However, not all lenders offer these type of house loan packages. Therefore, it is important to consult with your mortgage broker in order to identify the possible financing options you have. It will enable you to make a better decision before going through with any purchases.
Being a first time home buyer, you may even qualify for the First Home Owner Grant (FHOG). Talk to your broker about it so as to figure out whether you qualify for it or not. Generally speaking, every person who buys a property for the first time is eligible for the grant, but for a single property, the authorities will only issue one FHOG.
Possible Risks of Buying a Property with Friends or Family
Although, it is exciting to buy a house and share the cost with your loved ones, yet, it is not without risk. There is a possibility that things change with time and the co-owner might want to give up his or her ownership. It can give rise to the following risks:
Having a joint responsibility for a loan may make it hard for you to get a loan in the future, because lenders assess your affordability on the basis of your individual income. It means that you may not be able to afford a future home loan; financial institution or banks will take your first loan into consideration and assess the whole loan as if it was your responsibility.
Secondly, you or your co-owner may wish to sell a property due to unforeseen circumstances. If one party wants to sell the house and the other party does not agree to that, you may end up taking the matter to court. Not only will it be expensive, but will also be stressful to deal with. If one party does not want to sell, the court will look into the following:
- Whether land is physically divisible or not
- What the cost of the subdivision will be
- The hardship on the minority, in case the majority gets the substantial benefit
How to Reduce the Overall Risk?
In order to reduce the risk of entering in such a purchase, it is important to seek advice from the solicitor or conveyancer. The case varies from person to person, therefore, it is important to consult a legal expert before making the purchase. Normally there are two things you can do to mitigate the overall risk:
Ask a legal expert to create a will that includes the detail of assets you inherit. Keep your will updated so as to include the details of the new property. You must also consider whether the co-owner would give each other the power of attorney or not in case the other one is incapacitated.
To avoid any issues in the future, it is wise to enter into a co-ownership agreement. This contract defines the terms of
- The liability, such as maintenance, upkeep, and mortgage on the house, and
- On-selling shares in a property.
If you want to protect your legal rights to the property after entering into the co-ownership agreement, you must also talk to the legal consultant or solicitor.
In addition to that, you must also set up a sinking fund to cover the repair cost when the property is not occupied. You must also have a proper plan in place to deal with unexpected maintenance cost, capital gain tax issues, and other depreciation/taxation concerns. Moreover, you should also clarify the basis for determining the sale price if the property is sold to another co-owner.
Having all these precautionary measures in place will enable you to manage the whole process successfully.