Buying property with a friend
Buying a house with a friend can work, but you need to have a solid plan and a clear legal arrangement.
Buying a house with friends or family member has some obvious advantages. Why pay rent and live in a sharehouse with your friends if you can join forces and become co-owners of your own place?
The decision to enter into a co-ownership arrangement is a big one. You'll need to work out the exact split in costs and ownership, and work out what kind of ownership arrangement works best.
The benefits and risks of buying a house with someone else
By pooling money for a deposit between friends, you might be able to afford a much more valuable property or save a larger deposit. This can help you avoid paying lenders mortgage insurance (LMI). Co-buying also makes property ownership more affordable; council rates are shared, mortgage repayments are split and ongoing repairs, maintenance and renovations are divided between the owners.
Buying a property sooner also means you can share in future equity as prices grow (if the property market is doing well). This can work out better than simply waiting and saving more money for your own deposit. If prices are growing fast you might get left behind.
Risks of buying with a friend
Property co-ownership can really test relationships and put your finances at risk. Property commentator and director of Metropole Property Strategists, Michael Yardney, cautions against co-ownership, “It is better to own the whole of a small thing than part of a larger when it goes sour. Having said that, it has worked for me in the past.
People's plans and dreams can change. You could buy a property with your best friend and then have a falling out. Or you might fall in love and decide it's time to get your own place with your partner. When this happens, someone will have to buy the other co-owner out, which can be expensive. Or you might have to sell and move out, which can also be disruptive.
But these risks don't make buying a house with a friend or family member a bad idea. You simply need to know what you're getting into. And sometimes, you may have no other choice.
"Choosing tenants in common or joint tenants can have some major implications in the case both you and the co-owner die. When I bought our first home with my partner, we chose to go joint tenants but were warned that if we both die in an accident, legally the whole of the property would transfer first to whoever died last, then to the next of kin of that person - eg. if we were in a car crash but one of us died on the scene while the other survived long enough to make it to the hospital, the entire property would pass to the survivor first then to the survivor's next of kin. Since we didn't have any kids together, it meant that if we both died, the property would go to just one of our families. It was a bit morbid to think about, but definitely something to talk over before buying together. "
Choose your co-owner carefully
Successful co-owner relationships have worked between siblings, friends, business partners, work colleagues or de facto spouses but they don’t always last. According to Yardney, you should choose a person who has a similar mindset and the same goals for the property.
"My rule of thumb is best said by Groucho Marx, 'I refuse to join any club who would have me as a member.' The relationship should be mutually beneficial and based on complementary skills. If the other party needs you then be very cautious."
According to Kim Narayan, owner of Mortgage Choice Parramatta, "Most of the co-borrowers I see are friends, but family has more of a chance of succeeding." Yardney agrees: "It is usually better with family as opposed to friends because you tend to sort your relationships out and you know their financial circumstances. Be warned though, family is much more important than money."
How to buy a house with a friend
You have the perfect person in mind to enter into a co-ownership arrangement with, so what are the steps involved in making it happen? It isn’t as simple as just choosing a house. There are some important considerations that need to be taken into account first to protect yourself and your relationship.
- Get it in writing. Each person entering into a co-ownership agreement needs to seek independent legal advice. A co-ownership agreement is a legal document that sets out the rights and obligations of each person with a share in the property. It should include a dispute resolution clause, the proposed exit strategy and a financial default plan. Michael Yardney recommends clearly defining and documenting every role and expectation. "It is vital that all partners agree on the goals, responsibilities, financial contribution, profit distribution, and time frame as well as the borrowing, legal and taxation implications before buying a property."
- Decide on the ownership structure. You can own a property as joint tenants or tenants in common. Joint tenants own the property together but as individuals, they own nothing. This means that if one party dies their share is automatically transferred to the remaining owner (this is a popular option for married couples). In contrast, tenants in common can own a predetermined portion of the property and if they die they transfer their share to their own choice of beneficiary instead of the other co-owners. This is probably a better option when buying with friends, but you should also have a co-ownership agreement in place and get qualified legal advice.
- Sort out the financials. Being clear on the numbers upfront is vital. This includes how much you've saved, how much you can afford to repay and how much you're comfortable borrowing. You also need to determine how much of the property each buyer will own (if choosing a tenants in common arrangement). It doesn't have to be a 50/50 split either. You could opt for 70/30 or whatever makes financial sense for everyone involved.
- Choose a property. Now that each party knows exactly where they stand and you have a water-tight co-ownership agreement in place, it is time to find a property to buy. This is a ripe opportunity for disagreements so consider your options. You could nominate one co-owner to be in charge of this task or you could use a buyers agent. This can help keep the emotion out of the decision and limit the opportunity for disagreements. A buyers' agent will work with your goals and within your parameters to come up with a short list of suitable properties.
Questions to consider before writing up a co-ownership agreement
The "jointly and severably liable" clause has major implications in a co-ownership arrangement, so keep these last few considerations in mind:
- What if you enter into a co-ownership agreement as a single person and then later find a person you want to settle down with and buy your own house with?
- Co-owning a property can restrict your future borrowing power. Even though you might only own a 30% share of the property, a lender will most likely see you as liable for the entire property debt and may limit how much you can borrow for a different purpose.
- What if you went in to the property co-ownership when you were married but now you are getting a divorce and need to liquidate your assets?
- If you have financially viable partners they might try to buy out your share of the property. This is a neat and tidy answer but real life can be messy. Your co-ownership agreement should outline exactly what your options are in this circumstance.
- What happens if you get sick or are suddenly out of work and can't meet your share of the repayments?
- Again, your co-ownership agreement will come into play. It should have a financial default plan. Protect yourself with life and income protection insurance to avoid this issue and prevent putting the pressure on your partner or partners.
Getting a loan with multiple borrowers
According to Kim Narayan, "A common reason for people buying as co-owners is that one party has a deposit and the other party has the consistent income to get approved for a loan so they team up."
In your discussion of finances you may come across a few potential road blocks but working with a mortgage broker before you even start looking for a property can help you know exactly what your borrowing capacity is as a team.
If your friend has bad credit, you are not necessarily out of luck. "The first thing you need to do is get a credit check," says Narayan. "A broker can access your Equifax report within 24 hours. Most defaults occur because people have moved address. If the default is under $500 and it is a telco or electricity bill that is noted as paid, you can still be accepted if you include a letter stating the reason for the default."
When looking for the best home loan, there are an increasing number of lenders who are willing to work with co-borrowers. Narayan says there aren’t really any differences from a normal loan but they can be structured so each person knows their own liability.
She recommends split loans for co-owners. “This means the one loan will be split depending on the portion you are liable for. You can’t usually get two separate loans with different lenders because there is one security on the loan but a split loan is a good option. Each split will still have both names on it but it makes the responsibility and liability very clear.”
More useful guides and help
- How to buy someone out of a joint mortgage
- Buying a house with your parents
- Getting a home loan with a guarantor
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My wife and I purchased a unit in NSW with my best mate and he now wants to cash out and transfer the unit to us. How do we do this the most affordable way? Do we need to pay stamp duty again as we both paid stamp duty 4 years ago when we purchased the unit together?
Hi Fred,
Thank you for getting in touch with Finder.
According to our guide about buying out someone’s property share, changing property ownership will often incur stamp duty, which is usually a charge of around 3.5–5% of the property’s value. However, stamp duty can be waived in certain circumstances, for example if you’re getting divorced and you and your partner have a formal separation agreement.
I suggest that you contact the NSW Revenue office for further info on stamp duty and how you may process this at the most affordable way.
I hope this helps.
Please feel free to reach out to us if you have any other enquiries.
Thank you and have a wonderful day!
Cheers,
Jeni
Hi, I bought a property with my parents and we are tenants in common. The mortgage however is only in my name and my parents now want to remove themselves from the title. Will they need to pay stamp duty or any other fees to have their names removed from the title?
Hi Michelle,
Thank you for getting in touch with Finder.
According to our research, the cost to remove someone’s name from a property title would depend on what state the property is in. The minimum fee payable when changing the title to have someone removed from a property title in NSW for example is $133.48. This fee must be paid to the NSW Government Land & Property Information Department. If you choose to get a property lawyer or licensed conveyancer to carry out this task, you will need to factor their fees into the equation. Speak with your chosen property law expert to get an accurate quote for their services.
Learn more about the fees and stamp duty as well as the steps to remove your parents’ name from a property title.
I hope this helps.
Have a great day!
Cheers,
Jeni