If you’re keen to buy property but don’t have the deposit and/or income behind you to do it on your own, buying in partnership might be worth considering.
This involves jointly buying a property with a family member (like a sibling or cousin) or perhaps a close and trusted friend, with the potential to access double the deposit and double the income to secure a home loan.
While it can be one way of making that all-important first move into property ownership, there’s a lot to consider.
Future borrowing power
The main negative to buying in partnership is the lenders’ view of this sort of commitment, which could restrict your future borrowing power.
Take the example of two brothers looking to buy an investment property together (as they still want to live at home for a few more years) for $400,000, renting it out at $400 per week.
The plan is to keep it for at least 20 years, with each individually buying their own owner-occupier properties in three or four years.
However, when one brother goes to purchase his own home with his new wife four years later, the bank doesn’t view him as having a $200,000 liability (50% of the $400,000 house value), it views him as potentially having the full $400,000 debt.
The brother and his wife, on their earnings and savings, were originally able to borrow $600,000 for their first house together, but now discover they can only borrow $200,000 if the husband continues to keep his half-share of the investment property with his brother – significantly impacting on their plans.
This means the brothers will either have to sell the investment property – a move the other brother may be unhappy about – or the couple may have to delay their plans, perhaps for several years.
Property partnership like a business partnership
From the outset, you’ll need to have some honest discussions about what each member of the partnership wants to get out of the purchase – such as, the proposed timeframes for holding the property, what happens if one wants to get out earlier, and what will happen in a worst case scenario.
Have similar goals
This strategy works best if the would-be partners are at similar stages in life and have similar goals.
For example, it might work well for two 23-year-olds who have just finished apprenticeships and who agree that they’ll hold the property for five years, to then sell up and split the profits, allowing each to buy their own home individually.
You also need to ensure you and the person you’re buying with have similar values around things like managing money, as problems can arise if, for example, one of the buyers manages their money well and the other doesn’t.
Also, if the other person can’t make the monthly mortgage repayments, you’re liable for the whole amount, not just 50%.
Alternative buying strategies
Other than buying in partnership, you could consider a family guarantee or buying the first property as an investment while continuing to live at home.
Investing in property while you’re still living at home is a powerful strategy as you’re effectively doubling your purchasing power as a result of receiving rental income, which should cover much of the home loan, together with the money you’re saving by living at home rent free.
While this strategy might have some impact on your ability to access first home buyers stamp duty concessions in the future (they’re still available in WA, ACT, NT and Qld), the benefits of having a tenant may negate this loss.
As with all investment decisions, it pays to seek advice. Your mortgage broker will work with you and your accountant to ensure the right strategy is developed for your unique circumstances.
Also, with responsibility for a significant debt as a result of taking out a home loan, you may want to speak with your Smartline mortgage broker about income protection and disability and life insurance, otherwise the inability to work for a short or extended period of time might result in a reluctant sale.
DISCLAIMER: The information contained in this article is correct at the time of publishing and is subject to change. It is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, Smartline recommends that you consider whether it is appropriate for your circumstances. Smartline recommends that you seek independent legal, financial, and taxation advice before acting on any information in this article.