4 things you need to know before buying a property with family and friends?

4 things you need to know before buying a property with family and friends?

Three years ago I bought a property with my two best friends. We had always talked about getting ahead together and property seemed to be the logical first step. After saving $36,000 and a trip to the mortgage broker, we were now property owners.

Three years down the track and my decision to purchase a jointly owned property has began to catch up with me for a number of reasons.

 1. First Home Owners Grant

Our decision to purchase our first home together enabled us to get into the market quicker and gave us the feeling of safety. Unfortunately it also resulted in all three of us loosing our first homeowners grants, which at the time included $10,000 cash back and free stamp duty.

2. Serviceability

For those of you who have been through the property market before you will realise the only thing that really matters to the banks is your ability to service a loan on paper. By serviceability, I mean your ability to repay your loan.

How we saw our property:

As a group:

  • We owed $324,000
  • We received $400 a week rent

As individuals:

  • We owed $108,000
  • We received $133 a week rent

How a bank saw our property:

As a group:

  • We owed $324,000
  • We received $400 a week rent

 As individuals:

  • We owed $324,000
  • We received $133 a week rent

As you can see, the bank does not consider your true ownership when assessing risk. If you are a guarantor on the property or your name is on the contract the bank will see you as liable for the entire loan. This gives them security should your family of friend default on the loan.

3. Friendships

When I was 25 years old and ‘knew everything’ about property I thought the friends and I would be buying, holding, renovating, developing and selling property together forever. We were on the same page and we wanted the same thing.

Three years later with some more experience under our belts and we are now on completely different pages. Because of my passion for property I was the first to receive a big fat NO from the bank because of my inability to service another property.

My natural reaction, like 99% of people was to find out why I was told no. Turns out our first property looks extremely bad on paper (as you can see above) and they thought it was too risky to lend me more money.

4. Strategy 

Property like any area of life is extremely easy to see clearly looking backwards. At 25, I thought my strategy was fool proof, at 28 I can see the gapping holes.

Had I spent more time researching and learning a few years ago things may have looked different, but it’s easy to say that now. This said we are about to sell this first property and stand to make a $65,500 profit.

What did I learn?

1. Don’t waste your first homeowners grant. If it takes you a bit longer to save for your first property or you have to make more money to service a loan then that’s the way it has to be. If you do decide to buy your first property with a friend or family member make sure you only put one name on the contract so you don’t lose multiple first homeowners grants like we did.

2. If you want to get ahead through property serviceability is everything. You can increase your serviceability by earning more, reducing debt and buying positively geared properties. Remember each property you buy will effect your borrowing capacity so make sure you have a solid strategy and you look at each property as part of an overall plan. I am personally selling two of my properties this year so that I can re-build my portfolio with positively geared property. I suggest you take a serious look at the properties you are holding and see if they fit into your end goal.

3. For me making money isn’t worth loosing my family and friends. If your going to buy with family or friends make sure you both want the same thing, but more importantly assess each other’s risk profile and strategy. I know my two friends and I are all moving towards the same destination, we just have completely different methods of getting there. I honestly believe if you can afford to buy property on your own, or with a long-term partner, seriously consider this option before you look to family and friends.

4. Before you buy any new property you need to know if it’s contributing to your bigger picture. At the end of the day your strategy is everything.

Property strategy should be simple.

For example:

  • Buy and sell a principle place of residence every two years
  • Build and hold a passively geared property every 18 months
  • Build and sell a property every 18 months
  • Sell one property every 5 years to pay down debt on other properties

If you have any property success stories please let me know in the comments below…

Ben

 

 

Ben Everingham

About

Ben founded Pumped On Property after building a multi-million dollar property portfolio over a 5 year period. His mission is to show you how to replace your income through property investing so you can do what you love…full time.