Buying property with friends

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With prices stubbornly high around the country, more under 40s Australians are teaming up with friends or family members to buy their first property. It can be a win-win for both parties. Having someone else stump up half the deposit and share the expenses and exposure may allow you to get into the market sooner, or buy a better property than you’re able to afford under your own steam.

But as with every business arrangement, the devil is in the detail. If you fail to nut out and nail down the nitty-gritty at the outset, you’ll be more likely to experience conflict and ill-will or, in the worst-case scenario, expensive litigation proceedings down the track.

Buying a property with friends

Putting everything in writing is the key to ensuring both parties are on the same page, at the time of purchase and in the future, according to accountant and financial adviser Tania Tonkin of dmca advisory.

While it may add a pessimistic flavour to the proceedings, attempting to identify future problems and coming up with strategies to solve them is the best way to ensure your joint investment benefits everyone financially and doesn’t cost a friendship.

‘Don’t assume a handshake deal is enough,’ Tonkin says. ‘For friends buying property together, I highly recommend the transaction be fully documented in terms of initial contribution, ongoing management of the property and with details around the exit process.’

There’s lots to thrash out before you start going to open houses together, let alone sign a contract. ‘You need to be clear on why you are purchasing the property, how long you want to hold it for and what will happen if one person wants to move in – will they pay rent and if so, how much?’ Tonkin says.

It’s also important to agree on your exit strategy in a variety of scenarios, including what you’ll do if one party has a change in circumstances and is no longer able to meet their share of the repayments.

Legally you’ll both be fully responsible for the entire debt, so you should feel comfortable you’re making the commitment with someone who’s financially responsible and has the capacity to meet their obligations.

Should one party decide they want to sell sooner than anticipated, a course of action should also be determined in advance, not decided on the fly. ‘What will the decision-making process be?’ Tonkin says. ‘Will you have the option to buy them out, or vice versa? How will the proceeds be divided and will your initial contributions be repaid?’

Friends buying together are best to do so as ‘tenants in common’, Tonkin says. This is a legal arrangement whereby each party’s share of the property forms part of their respective estates, upon death. The alternative arrangement, purchasing as ‘joint tenants’, sees the property automatically revert to the survivor.

Setting up a joint bank account to cover mortgage payments, ongoing costs and to receive rent is a sensible move as it keeps the arrangement on a business-like footing, advises Tonkin.

A slush fund to which both parties make regular contributions can ensure you’ve cash at the ready to cover maintenance bills and unexpected repairs.

In summary, the key to a successful property purchase with a friend is clear and open communication, properly drafted agreements that all parties understand, and a commitment to maintaining a good working relationship through the ups and downs of the property cycle.

 

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