Six important rules for buying a property with a friend

A study on borrowing with a friend by HomeLoanFinder.com.au has found that 83.5% of Aussies wouldn’t even conceive buying a property with on of their mates.

Of the 83.5%, 57.2% said they would worry that buying a place with a friend could ruin the friendship, while 26.3% wouldn’t dream of trusting a friend to make this high level commitment.

A surprisingly large 16.5% of Aussies think that purchasing a property with a friend is a great idea.

Buying a property with a friend will take the relationship to extremes normal friendships aren’t meant to endure. Which is why the rules of purchasing a property with a friend must be established early, with the ground rules of the process and relationship clearly spelled out.

1. Use a co-ownership agreement

Establishing the ground rules from the start will communicate very clearly to your friend what your expectations are and seriousness of the commitment. As a co-ownership agreement is a legal document, there will be clear steps to follow in a disagreement.

2. Decide how costs will be shared

Does your friend have a realistic expectation of some of the ongoing costs with property? Are they good with their money? How would you deal with a situation where your friend always says ‘I’ll get the next one’ when the bills start rolling in?

Managing a mortgage together takes maturity and strict budgeting skills. If your friend lacks self-restraint, your joint-venture could be doomed from the start.

3. Have an exit strategy

When buying property, it is worth using Murphy’s law to plan — whatever can go wrong will go wrong, in the worse possible way.

This shouldn’t be approached in a way that scares people out of borrowing, however buyers should plan properly for the many various troubles that could occur:

- one of you dies or becomes seriously ill or disabled

- a cut in pay or loss of job

- bankruptcy

- relationship changes with your friend or issues with spouses and families become harmful

- the property is sold at a loss

Have in mind your desired outcome from the beginning and how this can be realistically achieved and managed amicably.

4. Choose the correct title on the property

A word to the wise, if you ensure that you get the correct title on a property, it will make any future legal issues much easier if death, illness, debts or breakdown in a relationship occur.

There are two types of title to use which have very distinct implications in the case of death.

A ‘joint tenants’ title means that, following the death of one of the borrowers, the property will automatically transfer to the co-owner and not those specified by the deceased in a will.

Tenants-in-common is the other type of title whereby the death of a co-borrower results in the property rights passing onto those nominated in their will. This is the better situation for passing on assets to a spouse, relatives and dependents.

Each borrower should seek independent legal advice on this matter.

5. Know how it could affect your borrowing power

In the eyes of lenders, each co-borrower is liable for the full debt on the property, and with that, the possibility of servicing the loan individually may be used as the basis for your current expenses when you seek to borrow for another property.

Therefore, borrowing with a friend could reduce your future borrowing power. It is worth talking to a trusted financial planner or mortgage broker as to how this could impact the growth of your property portfolio in future.

6. Get adequate insurance cover

As your assets and financial commitments are about to dramatically increase, it is worth considering insurance cover to close this gap.

Further, if you are binded by a co-borrowing agreement, it is important that you are covered if the conditions are proscriptive during times of financial stress.

It is worth considering different life insurance options, health cover, adequate income protection and home and contents insurance are all worth considering.

Lets face it, buying a property with a friend is not a decision to be taken lightly. Do it with some careful thought and it could be a savvy move, but be prepared to face friendship tests along the way. With proper preparation, you may just find yourself gaining memories rather than losing friends in the long run.

Adrian Barclay is a personal finance writer for the comparison website HomeLoanFinder.com.au