updated 15th October 2016
Four friends invested in property together in January 2006, co-buying a house in Coogee, in Sydney’s south east, with the intention of
holding on to it for the long term.
The foursome had a co-ownership agreement drawn up to define their goals, rights and responsibilities. However, as the property market began to rise and their investment increased in value, two of the owners announced that they wanted to sell.
The other two partners wanted to hold on to the property, but they weren’t in a financial position to buy out their co-owners.
“In the end, the two owners that wanted to hold gave up and they sold the property, because it all got too hard,” explains the group’s property lawyer, Edward Sunna.
The property sold and they each made a modest profit, but Sunna says the property went on to double in value.
“After that, they each went their separate ways. A couple of them used their profit from that property to buy into other property investments – but I don’t think they’re on friendly terms with each other any more.”
Decide collectively what you want to achieve with your investment property and set goals accordingly. Issues to consider include:
- What is the timeframe of your joint property investment – five years, 10 years, longer?
- What is the process if one owner wants to sell, but the other owner/s want to hold on? Will fellow co-owners be given the first right of refusal?
- Do you have a dispute resolution process in place?
- In the event that one owner wants to sell, how will fair market value be determined?
- What are the tax and FHOG implications if one owner wants to move into the investment property?
• Property 1
Two-bedroom semi detached terrace
Co-purchased with three other owners
• Property 2
Holiday home in the ski resort of Bankso, Bulgaria
Co-purchased with six other owners
Nathan Fay, 31, an engineer, has co-bought two investment properties in the last two years – one property was purchased with three co-buyers, including one complete stranger, and the other was bought with six partners, only three of whom he knew.
“The idea of co-buying particularly appealed to me because, as an investor, it reduced the risk and overall cost of the investment, but obviously I have to share all the rewards,” Nathan says.
“With both properties, the overall buying process was very easy for me – luckily, the properties had already been found and the other co-buyers were simply looking for another investor, so I came along at just the right time.”
Nathan says the process of finding and purchasing the property took very little effort from his part, and he was grateful to have co-buyers to discuss the legal paperwork with.
“As an investor, the obvious advantages of co-buying are the reduction in capital required, the reduction in costs involved in all aspects of buying a property and as a result, the reduced risk,” Nathan says.
“But, if there are many people in the co-buying group it can take a bit longer to make decisions about the property – everything from furnishings, to when it should be sold.”
Neither of his two properties has moved much in terms of price growth yet, but as they have been bought for long-term growth, Nathan says he’s not too concerned with the property’s performance in the short term.
He says all of his co-buyers have agreed, in writing, to hold their interest in each property for at least five years, so they’re hoping for some capital growth by that stage.
“So far, there have been no real issues with [co-buying],” says Nathan. “I couldn’t have afforded to enter the property market had I not co-bought. I’ll definitely be doing it again.”
Make sure you meet the other potential co-buyers several times before you buy with them. You need to find people with similar mindsets who have the same goals for the property, particularly when setting the timeframe for selling the property.
“The substantive issue with buying with other parties, whether it’s family or friends, is that legally they’re each recognised as individual parties and individuals have certain rights” Edward Sunna, property lawyer, Free Conveyancing Mortgages
“Couples, friends and family members never think anything will go wrong and don’t take the proper precautions, which can lead to problems” – Theo Michaels, Co-BuyWithMe.com
Property partnerships: sharing the risks and profits
Buying property with another person is becoming an attractive option for investors keen to simultaneously share the risk and grow their property portfolio. But does property co-ownership always come with a happy ending?
With the property market currently in the throes of a housing affordability crisis – and interest rates topping their highest levels in 11 years – investing in property is becoming an expensive enterprise.
Graham Joyce, President of the Real Estate Institute of Australia (REIA), says the Reserve Bank’s unwelcome decision to lift interest rates by quarter of a percent in August will only make things worse, as it will put further pressure on home loan affordability.
“There is no doubt that a 0.25% rate increase puts pressure on buyers already stretched to their financial limit,” Joyce says. “The critical investor segment of the market will also look unfavourably at the decision. Without more investors willing to purchase affordable properties for rent, tight vacancy rates will continue to push rents up, putting the squeeze on renters.”
With yields continuing to climb, it’s an ideal time for investors to increase their property portfolio. However, rising interest rates are forcing entrepreneurial investors to think laterally about their property growth strategies.
Buying property with a friend or family member is one approach many investors are considering in an effort to keep their property portfolio growing.
However, the process of co-buying property is much more involved than simply putting two names on the purchase contract. Aside from complex legal and financial implications, investors need to consider the impact that a falling out with their friend or relative could have on their investment and financial security.
There are several benefits of investing with other people: the lower financial contribution is the most appealing. Co-buying allows each investor to contribute a smaller deposit and share acquisition expenses such as stamp duty, legal fees and bank charges.
Theo Michaels, co-founder of Co-buyWithMe.com – an independent website that allows buyers to search for, and meet up with, like-minded property co-buyers – says that sharing the purchase is an effective solution to current affordability issues.
“With property values throughout Australia continuing to increase, many first-time buyers and investors are being priced out of the market, and they can’t afford to buy on their own,” Michaels says.
A co-purchase is also less risky, Michael says, because several pairs of eyes are on the contract.
“You are able to work as a team to buy the property, and you’re not left on your own, which for many is a real benefit and takes away the fear factor of the buying process,” Michaels says. “The actual process of co-buying property is relatively straightforward.”
Michaels warns that it is important for investors to take their time to find the right person and to work out the rules or the terms of the co-buying partnership –then make sure they put it in writing.
“Couples, friends and family members never think anything will go wrong and don’t take the proper precautions, which can lead to problems,” Michaels says.
“You need to be adamant about making sure the correct contracts are in place and that you have protected your investment.”
Property ownership structures fall into two categories: tenancy in common and joint tenancy.
A tenancy in common agreement means that two or more parties each get individual shares in the property and a separate title. Each owner can sell or deal with their interest at any time, without their co-owner’s approval, unless they have a co-ownership agreement in place.
The interest of each tenant in common can be included in his or her will, so in the event of their death their interest is not automatically transferred to the surviving owners – it is transferred to their beneficiaries as per their will.
With joint tenancy titles, all owners are entitled to physical possession of the whole property and have no separate shares from the other, meaning they must act together as one when dealing with the property. If one joint owner dies, the entire interest of the deceased automatically goes to the surviving owner, even if the deceased will states otherwise.
Barry Wilkinson, mortgage broker with Refund Home Loans in Brisbane, says the best way to structure a co-ownership loan is through a split mortgage.
“A split mortgage basically means that if two people bought a property with a mortgage of $300,000, you could split the mortgage into two $150,000 loans for the two applicants,” explains Wilkinson. “If one applicant has a $15,000 deposit and the other has $50,000, the loan amounts can be adjusted.”
Wilkinson says that the loan application process for two or more parties purchasing a property is generally no more complex or different from a standard individual application.
“The process is more or less exactly the same,” Wilkinson says. “Obviously, you’re doing two or more applications instead of one, so it’s a little more involved, but it should take the same length of time as a standard application.”
Wilkinson says it is technically possible for two owners to get completely separate loans from two different lenders on the same property, but he wouldn’t recommend it.
“One of the loans would have to be a second mortgage, and it just wouldn’t make sense to structure the loans that way – the most effective loan would be a split mortgage,” he says.
Wilkinson also warns that, in a property partnership, it is crucial that you are confident in your co-buyer’s ability to service their share of the mortgage – as you each act as guarantor for the other owner. if they default on their loan payments, you will be equally accountable.
“You’re both on the title, so it can affect you if the other owner defaults on their mortgage. You’re both effectively liable – meaning their default could end up on your CRAA [credit rating],” Wilkinson says.
As with any property investment, it is important for investors to determine a clear and defined goal and exit strategy upfront.
Edward Sunna, property lawyer with Free Conveyancing Mortgages, says that this goal must be aligned between co-buyers to ensure everyone is on the same page from day one.
“What happens, for example, if one party wants to sell, against the wishes of the other parties?” Sunna says. “In a rising market this kind of situation could occur, and there may be a dispute over it that ends in neither party achieving what they wanted.”
Sunna advises investors to discuss several key issues before entering into a co-buying arrangement, such as the timeframe of investment and a dispute resolution process, which should be addressed in a regularly updated, legally binding co-ownership agreement.
It is also important to select your co-buyer wisely and approach the process as a business transaction. Sunna warns that property ownership can put a lot of pressure on the relationship – the stress of buying or selling a house has been likened to the stress of going through a divorce – so be sure your friendship can handle it.
“You need to know the person well personally and also financially,” says Sunna. “Make sure that they have the capacity to repay the loan.”
Sunna cautions that purchasing properties in joint names can bring about certain ramifications.
“The substantive issue with buying with other parties, whether it’s family or friends, is that legally they’re each recognised as individual parties and individuals have certain rights,” Sunna says.
Statutory rights exist, allowing individuals to recognise their ownership and interest in their property. “The law states that if one party wants to liquidate, they are entitled to do so,” he says.
“That means if you have two owners, one owning 1% of the property, and another owning 99% of the property, and the 1% owner wants to sell, then they can legally enforce the sale of the property.”
To balance this, Sunna says it is imperative that investors put measures in place to safeguard their investment with a co-ownership agreement, or a deed of trust that can be drawn up before the settlement.
These agreements should set out the rights and obligations of each person with a share in the property, and contain provisions on how the ownership is to be divided between the parties, how the title will be held and how disputes are handled. Most importantly, the co-ownership agreement should set out who can decide to sell and when.
“What is fundamental to these co-ownership agreements is the first right of refusal – meaning if one owner wants to sell, the partners in the property have the opportunity to buy them out,” Sunna says.
Sunna believes that co-ownership agreements are well worth the small financial outlay in order to protect each individual’s interest in the property.
“Depending on its level of complexity and the number of co-owners, an agreement could range in price from $500 to $5,000,” Sunna says.
First home owners grant (FHOG)
If the property is solely for investment, and none of the co-owners have previously received the FHOG, each individual’s eligibility for the grant in the future is not compromised.
However, according to the Office of State Revenue (NSW), if one of the owner’s decides to move into the property, eligibility for the FHOG for all of the property’s owners will be affected.
For further information on the FHOG visit www.firsthome.gov.au