The tips and traps of buying an investment property with someone else (week 1)
It is a generally accepted rule of life that you shouldn’t mix business with friends. Too often what starts as a friendly loan or a business deal can quickly turn sour resulting in not only a financial loss but also a friendship loss.
Despite this, I hear a lot of people talking about going in with a friend or family member to buy an investment property. I don’t blame them, with rising property prices it is getting harder and harder to get into the market.
Tip 1: Get it right at the startThere are two main types of property ownership, Joint Tenancy and Tenancy in Common.
Joint Tenancy is usually appropriate for couples. In theory each Joint Tenant owns the whole of the property jointly with the other owner. No party has a specific share in the property and should one die, the entirety of the property would pass onto the other.
When investing with a friend or family member, you will usually want to do so as Tenants in Common. Tenants in Common have fixed undivided shares in the property (for example 50% each) which they can each deal with in the way they see fit.
This means the other owner can sell their 50% if they choose to do so without your permission. See where the problems can arise?
If you’re going to make such a large purchase with a friend, you should spend the money up front and have a solicitor draft up a co-ownership agreement. This will lay out the ‘ground rules’ as such and hopefully avoid costly litigation should something go wrong.
Tip 2: Get a Will
Whilst you are at the solicitor’s office, get them to update your will. You may also want to consider organising a power of attorney. This will help you to deal with the property should something happen to you.
Tip 3: Do you have enough credit for an investment property and your own home?
Investment property ownership is a long term game. You are likely going to want to hold onto that property for a number of years so that you see some profit from all your outlay. You may not be thinking about buying a home to live in right now but what about in a couple of years? If you stretch your credit capability to pay for an investment property, you may not be able to get a bank to lend you more money for your own home. The advice of a good mortgage broker can be invaluable in these situations.
Next week we will discuss the remaining tips and traps of investing in property with someone else.
This post is from Ben Brett. Check out our details in the About Us page.