You grew up playing in the cubbyhouse, navigating pirate ships in the living room and playing ‘family’ in the playground. Why on earth would you balk at the idea of buying property with family such as your siblings and/or your parents? Surely, they are the perfect choice!
Well, not always. Some families may not work together too well once money comes into the mix. There is a reason for the adage ‘money corrupts’. If it doesn’t corrupt it can definitely complicate.
But there are some very attractive reasons for buying property with family, the most obvious being affordability. By pooling your resources, you have the opportunity to either enter the property market (where you might not have been able to do this on your own) or invest in a better property in a better location and save on the ongoing costs of owning a property.
So, what are the risks and how can you avoid them?
You need to look at your family objectively. Is there agreement about the type of house/budget involved in the purchase? How will the family deal with the management of an investment property or a permanent place of residence? Different generations may have different views and these need to find some common ground to move forward. For instance, older generations may be more cautious/wary of debt compared to younger generations.
Lastly, communication is key to successfully buying property with family. The above concerns need to be talked about openly, and the following considerations set out both verbally and written down so that everybody knows where they stand.
Key considerations when buying property with family
- What type of loan will you use?
While previously rare, Property Share loans are becoming increasingly popular. In this scenario, each borrower must usually be on the title of the property, while acting as each others’ guarantors. The benefit of this type of loan is that, compared to a typical loan with one mortgage and one share of the property, a Property Share loan allows for multiple and varied shares in the property. For instance, a 60/40 per cent split in ownership between siblings. The greatest benefit of this is a smaller loan for each individual, meaning lower monthly/weekly payments as well as the chance to borrow again in the future without risk of reaching the maximum of their borrowing capacity with a lender.
Trusts: it is possible to take out a loan with a family trust. The trustee or director of the trustee company can often have their name on the loan, while the trust acts as the mortgagor to monopolize on negative gearing benefits. However, trust applications are more complex than typical loans and you may come across some hurdles and even lack of interest by lenders towards this option.
- How will you manage the property?
Beyond coming to an agreement on your property manager, you and your family need to decide who the ‘project manager’ of the investment will be. This person is who the property manager contacts regarding the property, as well as contractors etc. While each person on the mortgage has equal say in decisions related to the property, there does need to be a person who leads the implementation of these decisions and may even make smaller less consequential decisions based on their own discretion.
- What about the legal stuff?
A co-ownership agreement is paramount to successfully buying property with family. While you may not think that you and your siblings could ever come to blows about anything, there are other risks that could affect your investment. For instance, any possible reason why one party may not be able to pay their share of a mortgage (job loss, sickness, or literally any other situation in life that can change an individual’s direction). A co-ownership agreement sets out what would happen in particular situations when either party can’t pay, how the property will be managed (especially as an investment property), in what proportion it is owned by either party (so that there can be no disputes about this in the future), title attributions, how decisions will be made and possible scenarios where one person may require the property be sold.
- Differences of opinion
Before buying property with family or even starting you research, come to an agreement on the following:
- The extent of the debt you are both comfortable taking on.
- Your payment schedule/expectations for your loan.
- Who you want to manage your property if it is an investment.
- What you want to do with the property in the short and long term (renovations in the short term/future investment opportunities in the long term).
- The ratio split in the mortgage (50/50, 60/40 etc.).