12 Mar Buying property with friends – Margaret Lomas
Buying a property with a friend or relation sounds like a good idea but Margaret Lomas talks about a few of the not so obvious problems that might arise.
Kevin: I guess we all do struggle to get into property in whatever way we can, and sometimes it seems like a good idea to do it with a friend or a family member. But I guess you need to structure it properly and be aware of what you’re getting into. I want to discuss this now with Margaret Lomas from Destiny Financial Solutions.
Good day, Margaret. How are you?
Margaret: I’m good. How are you going?
Kevin: I’m fantastic, thank you. This is the first time we’ve spoken this year, so Happy New Year to you.
Margaret: Same to you. What a great year it’s going to be.
Kevin: Well, I hope so, too. We’re planning it, and I know you and I have a few ambitious plans that will unfold a little bit later in the year. But I’m looking forward to working a lot closer with you, too, Margaret. Thank you.
Margaret: It’s going to be great.
Kevin: It will be fantastic. Margaret, just to answer that question – it’s a question that I get asked from time to time or I see people do it – what should people be aware of if they’re going to buy a property with a friend or relation?
Margaret: I completely understand that people get frustrated at not being able to get into the market, and it seems a wise idea at the outset, but generally, I’ve found that a lot of problems can arise when you choose to buy a property with either a relative, so a brother or a cousin, or a friend. I’ll quickly outline what those problems are from my perspective.
The first thing is it’s always great at the outset – you both agree, “Yes, this is what we’re going to do” – but circumstances can change for people as you go along. What happens if you buy a property with someone else, it’s going along fine, but their circumstances change and they suddenly need to disinvest at a time that you’re not ready to come out yet?
Your time horizons are very rarely exactly the same, and even if they are at the outset, they can very quickly change for someone else and cause a little bit of stress and anxiety when you can’t get out when you want to.
That’s one of the problems, but there’s a bigger one than that, and that is the fact that from the bank’s perspective, even if you set up two separate loans, one each, on the same security property, the bank virtually is taking a guarantee from you and a guarantee from them guaranteeing each other’s loan.
What that means is that if you go on and then want to buy a property on your own and continue your own investment portfolio, you may not be able to borrow the money because the bank considers that you’re jointly and severally responsible to the entire debt. While they’ll only accept half the rent as your income serviceability, they’ll assume you owe the whole debt, and that can eat into your serviceability.
Of course, the last problem – there are many more, but the last major problem – is that if that property grows in value really well and you want to leverage against it, you can only leverage again with that other person, because they’re tied up on the title with you and the equity is also theirs.
If you do want to be able to leverage out of equity into more property and continue to build a big portfolio, you’ll have to leave that one that you have with someone else out of the scenario. You can’t leverage with them.
Kevin: All of those problems occur no matter who you go into partnership with, but I guess it’s made even worse if it’s a friend or relation, because a great way to wreck a relationship is to go into any kind of partnership – unless it’s very clearly documented at the start, Margaret.
Margaret: I think that’s the point. The point is they’re your friends now or they’re your relatives now. If it’s a friend, okay, you might have a falling out with them – and I’ve seen many fallings out with friends over property. You might have a falling out with them. Well, that’s fine because it was a friend and now they’re no longer you’re friend.
But you don’t want to fall out with your brother or your sister over it. You know what it’s like. It’s bad enough and once things start to get hot under the collar, you feel awkward, and you can’t have very major fallings out over this – and I’ve seen that happen.
The best way to avoid it is to not do it at all. But the second way to avoid it if you’re really determined to go into this with someone else is make sure that before you even begin, you draw up an agreement that covers exactly what you plan to happen if… And you have to think about all the ifs.
Come up with everything you can possibly think of: if someone dies, if someone gets sick, if someone changes their mind and wants to get married, if someone wants to get out before someone else. Really think about all the ifs and outline how you will deal with that if the time comes. Then sign off on that document. That document then definitely can outline for you what the future will be if any of those things happen.
Kevin: Great advice. Always see a solicitor because they can foresee all those things that you won’t. In that conversation with a solicitor, too, they can broach things with the partnership that you might not be able to do individually, Margaret.
Margaret: Absolutely. There could be a whole lot of things that you have to think about. You have to go as tenants in common, and understand that if you are tenants in common, the other party technically can sell their share to anyone who they like – with or without your permission – but you still need that tenants in common.
If you’re joint tenants and one of you dies, then your share automatically goes to the other party, and you might not want that to happen if it’s a friend and you’re married to someone else. You want your portion going to your spouse and you need a tenants in common arrangement to make that happen.
Kevin: Very good advice from Margaret Lomas at Destiny Financial Solutions.
Margaret, thank you so much. I look forward to working with you this year, and thanks for your time this morning.
Margaret: Thank you for having me.