[Video] Are You Buying Property With Other People?
If you are thinking of buying property with other people, for example your spouse, siblings, friends or parents, this is the blog post to read.
Before you make a commitment to buy a property with other people, here are some important things to keep in mind.
1. Ownership
Decide the ownership (tenancy) whether it’s joint tenants or tenants in common with equal or non-equal share.
Whether it’s under individual name or trust. Please seek legal and accountant advice.
2. Contribution For The Purchase
Buying property with other people involves the sharing of costs. There will be cost to pay to purchase the property including: stamp duty, inspection, solicitor fees, bank fees, settlement adjustments etc. These costs normally add up to 5-6% of the purchase price. The contribution can come from your own savings or if you need to take out some equity from your existing property, this has to be organised upfront.
Your broker will be able to help you in determining the best way to contribute towards the purchase.
3. Goals, Transparency & Exit Strategy
It will be easier if all parties have similar goals and expectations for the property. For example, how long you plan to own it, if you want to do future renovations, etc.
Generally, when you apply for the loan together, you would need to disclose each other’s personal details during the loan application. It is a good idea to let your broker know in advance, if this is going to be an issue.
It’s advised to discuss your exit strategy early on in the process. What happens if one party would like to sell the property and the other does not want to sell? Perhaps, you might consider getting a legal agreement too to avoid any disputes/misunderstanding in the future.
4. Loan Repayments, Account Keeping & Credit History
It is a good idea to discuss together which account the loan repayments will be debited from, how you will keep track of the expenses and property maintenance paper work. If you are a co-borrower with another person, you are jointly liable to pay the mortgage. So, if the other party cannot pay the mortgage, you have to step up to make the full repayments.
If one of the borrowers has bad credit history, it can impact the future refinance / potential purchases of all borrowers in the future. Make sure you discuss in advance, what happens if one party cannot pay their portion of the mortgage repayment for that month. It’s crucial that all parties keep their credit history clean and all the repayments are made on time and are up to date.
5. Mortgage Repayments, Ongoing Costs & General Maintenance
What will each person be responsible for? For example collecting rental, paying income taxes, organising maintenance or insurance etc. Have a clear plan for how you’ll split expenses and responsibilities. This includes everything from mortgage payments and property taxes to repairs and maintenance. You may want to consider setting up a joint bank account to manage these expenses.
6. How Does Shared Debts Affect Your Own Borrowing Capacity?
Buying property with other people involves shared debt. If you have a shared debt with someone else, say the debt is $500,000 together for an investment property (50/50) that generates a rental income of $400/week, the banks have the following rules when it comes for you to borrow on your own:
Rule 1
Most banks work on the rule that each party owes 100% of the debt but will receive 50% of the rent. This will result in lowering your own borrowing capacity.
Rule 2
A very small number of banks can take 50% debt and 50% rent providing you can show that the other party can service 50% of the debt. Therefore, you have to ‘ask’ the other party to provide income evidence when it comes for you to apply for the loan! Some banks will ask for a statuary declaration to be completed from the other party.
7. Loan Structure
When buying property with other people, there are a number of loan structures to consider. For simplicity’s sake, let’s say we have 2 people that need a loan of $500,000.
Structure 1
A single loan in joint name, of $500,000
Structure 2
A joint loan but split into 2 loan facilities:
- Loan 1: $250,000
- Loan 2: $250,000
Both loans are under joint name but you can say it is Loan 1 is for person A to pay, and Loan 2 is for person B to pay.
Structure 3
Here we have a property share with 2 people, A and B:
- Loan 1: The Borrower is A and the Guarantor is B
- Loan 2: The Borrower is B and the Guarantor is A
Structure 4
The property’s title can be under 1 borrower, but the loan can be under both names. This is only used for a spousal relationship.
Some people do this for a tax benefit and asset protection.
8. Can You Taken Equity Out Of a Shared Property?
In general, if the equity release is to be used to buy another property or investment with the same group of people that own the property, YES. If not, the answer is NO.
Scenario 1
You own a property with your friend jointly and you would like to take out the equity to be used to buy a property under your name only.
Answer = NO because your friend does not have a financial benefit to increase the joint loan he/she has with you, and the funds are to be used for your own purpose
Scenario 2
You own a property with your friend jointly and you would like to take out the equity to be used to buy a property together again.
Answer = YES because both of you stand to financially benefit from this transaction.
Scenario 3
You own a property jointly with your spouse and you would like to take out the equity to be used to buy an investment property under your name only.
Answer = YES because both of you are in a spousal relationship and your spouse benefited from creating wealth with you.
With this structure however, you will have to answer some standard bank questions that there is no financial abuse, your spouse understands that the funds taken are to be used to buy a property under your name only, and that your spouse is responsible for paying this mortgage if you are unable to pay the mortgage (joint liability).
