By Margaret Lomas

I am often asked whether buying property with a friend, relative or other party is a sound idea. While clearly spousal relationships often result in joint buying of assets, there are many singles who are considering the option of being able to get into the market sooner by buying property jointly with someone else.

There may be a multitude of reasons for this. It could be that they cannot afford to go it alone, or can’t save enough of a deposit. Or, they might feel more confident buying with someone else than they would alone. Whatever the reason, it might seem like a good idea at the time, but like a lot of good ideas, it can all come apart later on.

If this is you, here are just a few of the things you must know:

1. You can trust yourself, but...

You know that you can afford to meet the repayments, and that in times of stress, such as those periods of vacancy, you have enough money to be able to meet the shortfall between what comes in and what goes out. You know that your job is secure, and so you will always have a steady income flow. But can you be as sure about the person you are planning to buy with?

When it comes to investing with someone else, you can never be sure how much of what they are telling you is actually true. It’s amazing how quickly someone’s circumstances can change, and the last thing you need is to be left holding all of the commitments on a property title you only half own. 

2. Difficult financing arrangements

Where all parties are bringing in the same amount of money as a cash deposit, and a joint loan, secured by only the property in question (the one being purchased) is accessed, things are relatively simple. All parties pay their required portion of the debt, receive their share of the income and complete separate tax returns claiming their own tax deductions.

Where one party has their share of the deposit tied up as equity in other property, it will need to be released, probably in the form of another, separate debt. Most banks will not like to take cross- collateralised security against a property owned by one party to buy property for that party and additional people as well, and certainly the parties involved are cautioned against doing this anyway, as it indelibly ties you to other people in a way you may not like. Therefore a separate loan must be set up, or any existing borrowings on that party’s property would need to be extended to release the equity to use as a deposit.

It is useful to note here that, when you sign mortgage documents for a debt where another party is involved, you become jointly, and severally, responsible for the repayment of that debt. If the other party takes off to Rio, you can’t call your bank and offer to repay only your half, or to keep repayments on only your half going. You become responsible for the entire debt, while at law you still only own half (or your share) of the property.

3. What’s yours is mine – including all your debt!

Since you become jointly and severally responsible for any loan you take out with other people, the commitment for the entire loan, rather than half of it, may be considered when establishing your serviceability with a bank for future loans. You may have a loan of, say, $300,000 with two other people, with your share at just $100,000, but a bank may consider that you have a commitment to the entire $300,000. Conversely, that same lender will only consider the income on your third of the property, since you only own a one third share. This may limit your ability to borrow additional funds to undertake more borrowing to buy investments in your name only, and could hamper your ultimate progress.

4. Using the growing equity

Imagine if the equity in your shared property grew so quickly that you were ready to buy again soon – but you decided that you did not want to buy with those people again. Unless you are prepared to liquidate, lose a fair portion in capital gains tax and start again, unfortunately you may have difficulty using this equity to invest further.

5. Time to get out

Your life suddenly changes and you want out. If your timing doesn’t coincide exactly with that of your fellow property owners, you may not be able to exit when you want to. Owning property with others can often prevent us from taking on a great opportunity, which may come along out of the blue.

6. You’re doing all the work

Owning an investment property is not without its hard work. There is rent to acquit, leases and property managers to oversee, repairs to approve and accounting to do. If you suddenly find yourself doing all the work, it may seem like an unfair thing that you are only accessing your title’s share of any growing equity. You may believe you’re entitled to a greater share, but at law, this is not possible.  You cannot really know the capacity of another person to do their bit until after the deed is done, and by then it may be too late.

In a nutshell

If there is absolutely no other way for you to get into the property market without another, non- spouse person, then at least sign a partnership agreement at the commencement of the deal in which you cover every possible eventuality and agree to a procedure to manage it. Going in with your eyes open may prevent a major disaster in the long term.