Do families that invest together stay together?
Is investing with family members a good idea or a ticking time bomb waiting to go off? Co-ownership arrangements can actually work very well provided you follow our six golden rules to keep your family more ‘The Brady Bunch’ than ‘Malcolm in the Middle’.
With the median house price in Perth nudging the half a million dollar mark, some would-be investors might be considering the possibility of joining forces with other family members in order to buy. While pooling resources with family members has many advantages, it’s also a path that is fraught with danger for the uninitiated
Here are our top 6 golden rules for entering into co-ownership arrangements with family members:
DO make sure you’re doing it for the right reasons
Perhaps you can’t afford to buy on your own? Maybe you’ve got the money but not the time to develop property? Or perhaps you would prefer to have a diverse portfolio across a number of properties in different areas than putting all your eggs in one basket? These are all potentially valid reasons to consider teaming up with family members. But what if you’re really only doing it to help someone out? Maybe it’s to get your son or daughter on the property ladder, or to help a sibling put their income towards something useful instead of squandering it like they normally do? These kinds of reasons are dangerous when the other family members are not as committed or interested in investing in property as you are. Chances are you could end up carrying the whole burden on your own.
DO team up with those who share the same vision
Buying property is one of the biggest purchases you’ll ever make, so make sure you choose your co-owners carefully. Select family members that wish to follow the same property strategies as you, share the same kinds of goals, and have a similar appetite for risk. This should help to avoid family squabbles and make decision making far quicker and simpler.
DO treat it like a business decision
Don’t be afraid to speak openly about each other’s financial situation as well as future plans (starting a family or relocating could throw a real spanner in the works). You should even check their credit report to verify their true financial position because there are serious consequences for you if they default. Of utmost importance is having an agreement drawn up by a lawyer to specify the rights and obligations of each party and how a variety of potential situations will be dealt with. For example, what happens if one of you wants to sell? What if one of you can’t meet their repayments? How will maintenance work be handled? These are just some of a multitude of questions that should be answered at the onset.
DON’T ignore the fact that money can affect relationships
Let’s face it; money can be an area of great stress for us all, particularly when times are a bit tough. It will almost certainly cause disagreements, some minor while others much more serious with the potential to ruin what was once a great relationship. With so much on the line, arguments could emerge over selection of a tenant, getting quotes for repair work, choosing to renovate or not, or buying out someone’s share. Thinking that money will never get in the way of your family bonds, even if you are an incredibly close-knit family, is naïve.
DON’T underestimate the risks
Although you will only have a share in the total loan taken out on the property, you will have full liability for the loan. This means that if a family member can’t meet their repayments, you will be held liable to make those repayments or risk losing the property and having your personal credit rating damaged. Remember, buying property is often over long periods of time and a lot can change. Someone could fall seriously ill, get divorced, or have trouble finding a job and be unable to meet their repayments. You will also be stuck with carrying the load for any short-term costs like insurance and maintenance. It’s also worth mentioning that your future borrowing capacity will also be severely restricted even though you only have a part-share. If you go out to buy another property down the track, most lenders will take into account the full mortgage of your shared arrangement because you are ultimately responsible for that if another party defaults.
DO establish a fund to cover ongoing and unexpected costs
It seems like commonsense but many people will just wait until costs arise and then try and sort out retrieving money from co-owners then. You may be a saver, but many people aren’t, meaning they may not have the money available at the time leaving you to front the bill. Instead, arrange for each person to contribute to a fund both initially and regularly that can be used to pay bills, maintenance costs, and other unforeseen events.
In summary, entering into a co-ownership arrangement can work well for many investors, especially those who would otherwise not be able to enter the market at all. If you follow these rules, you should be well on your way to creating a successful partnership with your family. It’s also worth mentioning, that the same rules apply even if you’re thinking about a similar arrangement with friends.