In the current economic climate, many people are feeling the financial pinch due to the rising cost of living.
This has led some to consider buying property with friends or family as a way to share the financial burden.
While this approach can help you enter the property market, buy your first home, or invest in a desirable suburb, it’s important to be aware of the potential pitfalls.
The Risks of Shared Property Ownership
Financial Difficulties: Imagine if your co-owner suddenly encounters financial difficulties and can no longer pay their share of the loan. In most cases, the lender would hold you responsible for the entire loan amount, and their default would also negatively impact your credit rating.
Desire to Sell: What if your co-owner decides they want to sell their share of the property? If you cannot afford to buy them out, you might be forced to sell the property, potentially losing your investment or home.
Potential Solutions
Thankfully, there are loan options designed to mitigate some of these risks. For example, some banks offer property share loans that allow friends and family to purchase property together while keeping their finances separate.
How Property Share Loans Work: These loans enable co-owners to purchase a property using separate loan facilities. For instance, if John and Susan want to buy a $500,000 property, they can each take out a loan for $250,000. The loans can be split unevenly to reflect each individual's financial capacity. Additionally, co-owners can choose different types of loans: John might opt for a line of credit, while Susan might prefer an interest-only loan. Importantly, John would only be responsible for his portion of the loan, so if Susan defaults, it won't affect John's credit rating or the amount he owes.
Moreover, if John or Susan no longer wish to own the property, they can sell their share to another party without having to sell the entire property.
Key Considerations
While property share loans offer financial flexibility, buying property with someone else requires careful consideration of various issues:
Investment Duration: How long do you both plan to keep the property? One party might see it as a long-term investment, while the other might view it as a short-term opportunity.
Selling Costs: If only one person wants to sell, who will cover the selling costs?
Capital Gains: How will you split any capital gains—50/50 or according to each person's contribution to the purchase price?
Maintenance Costs: How will you share ongoing maintenance costs?
Income and Costs: If it's an investment property, how will you divide the income and expenses?
Renovation Costs: If you decide to renovate, how will you split the costs?
Formal Agreements: Will you formally record these decisions to avoid future disputes?
Benefits of Shared Property Ownership
Despite the potential pitfalls, there are notable benefits to shared property ownership:
Easier Entry into the Market: By pooling resources, you can afford a property that might be out of reach if purchasing alone.
Shared Financial Responsibility: Sharing mortgage payments and other costs can make homeownership more manageable.
Diversified Investment: Investing with others can diversify your financial portfolio and spread the risk.
Strengthened Relationships: Co-owning a property can strengthen relationships through a shared commitment and goal.
Increased Purchasing Power: Combined incomes can increase borrowing capacity, allowing for the purchase of a higher-value property.
Given the complexities involved, it's a good idea to seek legal and financial advice before purchasing property with another party.
At Adaptive Settlements, we’re committed to guiding you through every step of your property purchase, ensuring a seamless and informed experience. Contact us today to learn more about how we can assist you in making the right property decisions.
Disclaimer
This blog is for informational purposes only and does not constitute financial, accounting, or legal advice. Always consult with a professional advisor to address your specific circumstances.
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