Ultimate Guide to Buying Property with a Friend or Relative

Are you considering buying a property with a friend or relative?

Anyone looking through the real estate listings of major cities to buy a home can feel a little intimidated. A median Sydney house would require $242,000 for a deposit. Combined with a number of other social trends, this has meant that there is growing popularity for family members or friends to buy a property together rather than staying as renters or moving back in with mum and dad to save up such a massive deposit.

This could be either an investment property or a place they intend to live together in.

The way to that is to set up a property share arrangement.

Let’s say that two sisters (Thelma and Louise – I know I’m bad with imaginary people’s names) are looking to buy a house to live in for a million dollars. They are both employed and can be approved for a loan. But neither of them could be approved for a $900,000 loan that either of them would need to buy the property. They have both have half the money for a deposit which means they need a loan of $800,000.

In this case neither sister could afford to live where they wanted individually but together they can. Buying a house together would mean they have an asset that is likely going to appreciate in value long term, they are living where they want to live and moving forward in their lives in meaningful ways even though there is some compromise in the short term. Longer term they will likely be able to sell the place they are sharing and move into places of their own.

The idea of co-owning a property can be exciting – it’s a way to split the costs and share the responsibilities. Plus, it can also provide an opportunity to strengthen your relationship with that person. However, before diving into this venture, there are some important factors to consider. In this ultimate guide, we will explore the pros and cons of buying a property with a friend or relative, as well as provide you with valuable advice on how to navigate the process successfully. So, buckle up and get ready to embark on this exciting journey of purchasing a property with a loved one!

What You Need to Know Before Co-Buying Property

Co-buying property with a friend or relative may seem like a great idea on the surface. After all, it allows you to split the costs and potentially afford a more desirable property. However, before you jump into this arrangement, there are a few things you need to consider.

First and foremost, it’s essential to have open and honest communication with your co-buyer. Discuss your financial goals, expectations, and individual responsibilities. This will help avoid any misunderstandings and conflicts down the line. It’s also recommended to consult a lawyer and have a written agreement in place that outlines the terms of co-ownership, potential exit strategies, and how to handle unforeseen circumstances.

One potential issue to consider is the difference in financial stability between you and your co-buyer. Are you both in the same financial position? Can both parties contribute equally to the mortgage payments, property taxes, and maintenance costs? It’s important to have a clear understanding of each other’s financial situation to avoid any strain on the relationship or potential financial risk.

Another aspect to contemplate is the long-term commitment involved in co-buying. Are you and your co-buyer on the same page regarding future plans? What if one of you wants to sell their share or if one party wants to live in the property while the other wants to rent it out? Having a shared vision of how you see the property being used in the future is crucial to prevent disagreements or hurdles along the way.

In summary, buying a property with a friend or relative can be a smart financial move, but it requires careful consideration and planning. Open communication, financial compatibility, and a shared vision for the future are all crucial elements to a successful co-buying arrangement. By taking the time to address these factors upfront, you’ll be better prepared for any challenges that may arise, and you can enjoy the benefits of co-ownership with peace of mind.

Legal Advice

Buying a property can be an exciting yet daunting task, especially when you decide to do it with a friend or relative. While the idea of shared ownership might sound appealing, it’s crucial to seek legal advice before proceeding with such a venture. One of the most important reasons to consult a legal professional is to draft a clear and comprehensive agreement that outlines the rights and responsibilities of each party involved.

Navigating the legal aspects of buying a property with someone you know can save you from potential disputes and conflicts down the road. A lawyer can help you establish how the property will be owned, how expenses will be shared, and what will happen if one party decides to sell their share. They will also ensure that all the necessary legal documents, such as contracts and titles, are in order.

Moreover, seeking legal advice can provide you with valuable guidance on property ownership laws and regulations specific to your region. A legal professional can inform you about potential tax implications, zoning restrictions, and any other legal obstacles you might encounter during the process. They can also help you navigate complex matters, such as securing a mortgage or arranging the transfer of ownership.

Drafting up an agreement upfront will help prevent any issues later on.

Ownership Structure – Tenants in Common or Joint Tenants

When purchasing a property with a friend or relative, it is crucial to consider the ownership structure that best suits your needs. The two main options are Tenants in Common and Joint Tenants. Each has its own advantages and implications, so it is important to understand the differences before making a decision.

Tenants in Common is a popular choice for individuals who wish to hold an unequal ownership interest in a property. With this structure, each owner can have a different percentage of ownership, which is reflected in their respective shares. This arrangement allows owners to freely transfer or sell their share without the consent of the other owners. It also allows for greater control over individual decisions, such as leasing or mortgaging the property. However, it’s important to note that in the event of one owner’s death, their share is passed on according to their will, potentially complicating the transfer of ownership.

On the other hand, Joint Tenants is commonly employed when co-owners want equal ownership interest in the property. Under this structure, each owner has an undivided interest in the property, and all owners must agree to any transfers or decisions made regarding the property. Joint Tenants also have the right of survivorship, meaning that if one owner passes away, their share automatically transfers to the surviving co-owner(s). This can simplify the transfer of ownership and ensure the property remains intact.

Joint Tenants is a structure more commonly used by spousal couples.

Ultimately, the choice between Tenants in Common and Joint Tenants depends on your specific circumstances and preferences. It is advisable to consult with a legal professional who can provide guidance tailored to your situation. Regardless of the ownership structure you choose, open communication and thorough consideration are essential when buying a property with a friend or relative to ensure a smooth and mutually beneficial partnership.

Deposit Requirements

When it comes to buying a property, one of the most important aspects to consider is the deposit requirement. The deposit is the upfront payment made by the buyer as a percentage of the total property value. While the specific deposit amount can vary depending on various factors, a minimum deposit of 5% of the property price plus additional funds for costs such as stamp duty and Lenders Mortgage Insurance (LMI) is typically required.

For first-time buyers, saving up for a deposit can be daunting. However, there are various options available to help make this process more manageable. One such option is the government’s First Home Guarantee scheme, which provides assistance to first home buyers. This scheme allows buyers to put down a 5% deposit, with the government acting as guarantor to allow the borrower to avoid paying Lenders Mortgage Insurance.

When buying a property with a friend or relative the deposit requirements can be split between the buyers, making it easier for both parties to meet the necessary amount.

Co-Ownership Responsibilities

This decision to purchase a property with a friend or relative can have its advantages, such as shared expenses and increased purchasing power. However, it also comes with its fair share of responsibilities.

One crucial aspect of co-ownership is establishing clear and detailed agreements right from the start. This includes outlining each person’s financial contributions, as well as defining how the property will be shared and managed. It is crucial to have these agreements in writing, as they can help avoid potential conflicts or misunderstandings in the future.

Another responsibility that co-owners should consider is the maintenance of the property. Both parties must contribute their fair share towards upkeep and repairs. It is essential to set up a system to manage these expenses and ensure that everyone is accountable for their part. Routine inspections and regular communication can help address any issues promptly and prevent small problems from escalating into major ones.

Lastly, it is essential to have an exit plan in place. Buying a property with a friend or relative is a long-term commitment, but circumstances may change over time. Having clear provisions for how the property will be divided or sold if one party wishes to exit the arrangement can help prevent conflicts and legal disputes down the line.

Exit Strategy in Joint Ownership

While joint ownership can have its advantages, life circumstances and individual goals can change over time, making it necessary to have a plan in place for moving on.

One of the best ways to establish an exit strategy is to have a clear agreement in place from the beginning. This agreement should outline the terms and conditions for selling the property, including how the sale price will be determined and how the proceeds will be divided. It’s important to consider factors such as how long each party intends to hold the property and what would happen if one owner wants to sell while the other doesn’t.

For example, it may be agreed that if one person wants to sell their share the other person has the first right to purchase that share. There may also be an agreement on how the value of that share will be determined at that time such as using a licensed valuer.

It’s also crucial to regularly reassess the situation and communicate openly with your co-owner. Life can be unpredictable, and circumstances can change, which may lead to a need for a buyout or to sell the property entirely. Regular check-ins can help you stay on the same page and ensure that everyone’s goals and needs are being considered.

Lastly, it’s wise to consult with a professional, such as a solicitor or financial advisor, who can help you navigate the legal and financial aspects of an exit strategy. They can review your agreement, offer guidance, and help you understand any tax implications or legal obligations that may arise.

Overall, having an exit strategy in place when buying a property with a friend or relative is essential for ensuring a smooth and amicable transition when the time comes to move on. By establishing clear agreements, regularly reassessing the situation, and seeking professional advice, you can navigate the joint ownership journey with confidence and peace of mind.

Securing Home Loans for Joint Property Purchase

Buying a property with a friend or relative can be an exciting and financially viable option. However, securing home loans for joint property purchases can be a complex process. It’s important to consider a few key factors before embarking on this journey.

Firstly, it’s crucial to have a clear and open conversation with your co-buyer about your financial situation, goals, and responsibilities. This includes discussing how the mortgage will be split, who will be responsible for the deposit, and how the monthly repayments will be managed. Having a written agreement in place can help alleviate potential conflicts down the line.

Secondly, it’s essential to do thorough research on lenders who offer home loans specifically for joint property purchases. Some banks and financial institutions have specialised loan products tailored to this situation.

Property Share loan products allow each purchaser to have their own separate loan account. Please note that each borrower will act as a guarantor for the other borrower’s loan account. This means that if one of the property owners fails to make repayments on the loan the lender can seek payment from the other owner.

There would be 2 separate applications. For example, an $800k loan split 50/50 would look like this:

Application 1 – Borrower is Thelma, Guarantor is Louise. Thelma would borrow $400,000.

Application 2 – Borrower is Louise, Guarantor is Thelma. Louise would borrow $400,000.

Like any guarantor loan, there are risks. The biggest risk is one of the sisters defaulting could cost the other sister a considerable sum of money. You need to get professional advice before considering such a proposition. Be careful who you buy with…

Mortgage brokers such as us can provide valuable guidance on navigating the loan application process, ensuring that both buyers understand their rights and obligations. These professionals can also help in assessing the affordability of the property and determining the suitable loan amount.

Securing home loans for joint property purchases requires careful planning, communication, and research. By considering these factors and seeking professional advice, you can ensure a smooth and successful purchasing process. Remember, buying a property with a friend or relative can be a wonderful investment opportunity, but it’s crucial to approach it with diligence and caution.

Borrowing Power Considerations

If you’re considering buying a property with a friend or relative, it’s important to understand how this can impact your borrowing power. While pooling resources with someone else may increase your overall buying power, you’ll also need to consider the potential implications. Lenders may assess the financial position of all parties involved and any existing loans or liabilities they have may affect your borrowing capacity.

It is also important to understand the implications on your future borrowing capacity. If you wish to purchase another property later in your own name or with a future spouse the joint loan you hold with your friend or relative may impact your borrowing power. Most lenders will consider 100% of that joint mortgage with your friend when calculating your borrowing power later.

Having said that, there are some lenders that will apportion that joint debt held with your friend under a “Common Debt Reducer” policy.

Managing Finances and Selling Co-Owned Property

​Managing your finances can be a challenging task, especially when it comes to selling a co-owned property. Buying a property with a friend or relative might seem like a great idea at first, but it can quickly turn into a complicated situation if proper precautions are not taken. One of the most important aspects of managing finances in such a scenario is ensuring open and transparent communication between all parties involved.

Before entering into any property purchase agreement with a friend or relative, it is crucial to establish clear guidelines and expectations. This includes discussing how the mortgage repayments are to be made and how much of the repayment each buyer is responsible for.

If there is just one joint loan account and one repayment each month it is common for borrowers to open a joint bank account where both of them deposit an agreed amount on a regular basis. The repayments and other expenses will be debited from this account.

When it comes to selling a co-owned property, it is vital to have a united front and make decisions collectively. This involves determining the asking price, selecting a reliable real estate agent, and agreeing on the appropriate marketing strategies. Establishing a timeline for the sale and allocating responsibilities among co-owners can also help streamline the process.

Additionally, managing finances requires careful consideration of tax implications. Selling a co-owned property can have capital gains tax implications, so it is advisable to consult with a tax professional to understand the potential tax liabilities and explore any available exemptions or deductions.

If you need more information on what you’d need to do to make a property share purchase, then go to https://www.mortgageworldaustralia.com.au/contact-us/ and fill in the form or call 1300 661 211 for a no obligation, no cost finance strategy session. We’ll talk you through the process so you can make an informed decision.

Frequently Asked Questions

Q: What are the benefits of buying property with a friend or relative?

A: Buying property with a friend or relative allows you to share the financial burden, pool resources, and potentially enter the property market sooner than if you were to buy on your own.

Q: How can I protect myself when purchasing property with a friend?

A: To protect yourself, it is important to have a detailed legal agreement in place outlining each co-owner’s responsibilities, rights, and obligations. You may also consider taking out protection insurance.

Q: What is a split loan when buying property with a friend?

A: A split loan is a financial arrangement where each co-owner is responsible for repaying a portion of the loan based on their share of the property. This can help manage finances and responsibilities effectively.

Q: What factors should I consider before purchasing property with a friend or relative?

A: Before entering into a co-ownership agreement, it’s important to discuss and agree upon goals for the property, financial responsibilities, exit strategies, and how any potential disputes will be resolved.

Q: What are the risks involved in buying property with a friend?

A: Risks include disagreements over property management, financial strain if one party cannot contribute, and complications if one co-owner wants to sell or move out before the other.

Q: Do I need a financial advisor or mortgage broker when purchasing property with a friend?

A: It is highly recommended to seek advice from a financial advisor or mortgage broker to ensure that you can afford the property, understand your financial responsibilities, and have all legal aspects taken into account.

Q: What happens if one co-owner cannot afford to repay their share of the property?

A: In the event that one co-owner is unable to make repayments, the other co-owner(s) may be held responsible for the entire loan amount. It is crucial to have a plan in place for such circumstances.