The question I'm often asked, “Should I buy a property with someone else?”
Because I mean, it sounds like a good idea.
It is a high-value transaction, and it can seem a little bit daunting to do it on your
own.
So we've got to have a look at our options.
The first one is, if I buy it with someone else I can buy it as Joint Tenants.
The most obvious example is as a Husband and Wife.
They purchase a property, they have equal shares, and if one was to pass away, the rule
of survivorship applies.
Where automatically that person's share goes to the surviving partner.
So that's number one.
It's the most common and it's really the default decision.
The second option is what's called Tenants in Common and this is what's more like a business
relationship.
So there's shares which can be equal but they can also be unequal.
A business partner or a friend for example, might want to buy a property 70% in one person’s
name, and 30% in another person's name; and the easy way to do that is through Tenants
in Common.
Then there's actually a third option where you actually get a combination of both.
Think, for example, husband and wife want to help a younger brother get onto the property
ladder.
They're going to have a 60% share in the property and the brother is going to have 40%.
So that relationship is Tenants in Common, but the 60% between husband and wife can be
a Joint Tenant relationship where the rule of survivorship will apply in that scenario
so you can actually combine them.
So the question is, “When would you actually do Tenants in Common?”
And the most obvious one is when there are tax considerations.
What if you've got a high-income earner and they want to take advantage of negative gearing?
They may want to have a higher percentage in their name versus the lower income earner
that won't get as many lower gearing benefits.
Or, they may have a short-term view where they're going to sell the property in a short
period.
So they may want to put a high ownership in the lower income earner's name, for capital
gain's tax purposes and pay less when they sell.
It can get a little bit complex, so you definitely need to get your accountant's involvement
in this.
The other time you'd use tenants in common is essentially when you've got friends or
relatives or business partners who want to buy property with you and you don't necessarily
share that light agenda.
You might want to have that formalised agreement before putting everything in place.
Another case will be if you have unequal contributions.
What if I'm buying with you and you've got a $200,000 deposit, and I've only got $100,000
deposit.
We could put two-thirds in your name and one-third in my name, so it better reflects the contribution
that we make into the property.
Or another time would be if there is an estate planning in place.
What if I have children from a previous marriage and I want to make sure that they are looked
after in my estates.
So they are the common times when you go Tenants in Common.
When would you go Joint Tenants?
It's pretty obvious.
It's when you’re sharing your life agenda.
And husband and wife again is the most common example where we're going down the same path
and that life agenda is we can make decisions together with regards to Joint tenants.
So what are the pros of buying with someone else?
The first one is, you can get into the market sooner.
Because if you're sharing your resources and you're splitting the costs and the deposits
less, maybe half, then repayments, you're only making half, that might be a really attractive
proposition for some people.
And also there's the perceived security that comes from buying with someone else.
There's also the familiarity as well.
I know this person; I'm comfortable with this person, and the financial transaction's a
bit scary, isn't it?
So that familiarity might be really appealing.
What are the cons of, in particular, going tenants in common?
It's joint and several liability, which essentially means you only own a percentage of the property.
When you speak to the bank, they consider that you own the whole property in terms of
servicing and it can actually make buying the next property in some cases, quite difficult.
And the other con is, the often forgotten one.
We go into this relationship positively but what happens if the relationship breaks down?
What if you are best friends when you start and the property transaction makes you the
worst of enemies, or you go into a business relationship and you don't share the same
agenda and you have different things you want to achieve?
How do you solve those things?
That can happen when you have a relationship breakdown.
So for me the answer of should I buy with someone else, there's no one size fits all
here, it just really depends on what you and your accountant come up with or your life
circumstances suggest that you should buy.
But there's one thing I think you should do every single time and that's to get an agreement
in place.
And assume that I need to get out of this relationship today, how would we do that?
And for me, a little tip is to assume that there has to be a minimum of 10 years for
this relationship because quite often, say two friends are going to buy a property, and
all of a sudden, two years’ time, they meet a significant other and their life agenda
changes.
All of a sudden, that's going to have an impact on you because ultimately you could sell their
share but it's a very limited market to buy in.
So you're going to have to sell the whole thing.
If you could have an agreement in place that says, if either person decides to sell within
10 years, we have the right to buy that person's share back from the original price they paid.
It's important that you have these firm rules of engagement in place from the very beginning.
But ultimately, it can be a wonderful process where you can get terrific benefits from sharing
property ownership, so you have to do what's best for your circumstances.