Buying an investment property can be a smart financial move. As a tenant pays down the debt in the form of rent, you build equity in a property that, all going to plan, will also appreciate in value over time. As house prices continue to increase, those looking to invest in property for future gains are starting to look at investing with family or friends if they can’t make the financial leap solo.
This approach can have significant financial benefits but also some serious considerations and drawbacks. While you are able to share the cost of the deposit, mortgage payments, transaction costs and ongoing maintenance expenses including property management, it can also test relationships and create a strain that many would rather avoid
Owning an investment property entails significant time, effort, and money, so going in with a friend or family member can make a lot of sense. But, like most things in life, it’s not necessarily always going to be plain sailing, which is why it is important to be aware of the risks before going into property investment with your friends or loved ones. So what are the advantages and disadvantages of owning a rental property with friends and family? Below we outline our top considerations.
The home loan qualification process
Lenders have tightened their standards when it comes to qualifying a potential borrower for a mortgage. While LVRs (loan-to-value ratios) are reduced and government incentives up, the banks want to make sure their money is in safe hands. This means verification criteria are enhanced especially in regards to credit scores, debt and down payments. This is resulting in many people finding it too difficult to qualify for a mortgage on their own.
But with two people signing the mortgage application, the odds of approval increase. Even though entering into what is known as a ‘co-ownership agreement’ in these situations is a smart move, the biggest risk in partnering with someone on a mortgage is that although you will only own a share of the house, you will be liable for the whole debt. Therefore if one person can’t keep up with their mortgage repayments then the other owner(s) have to cover the shortfall. It’s also worth noting that as long as you have a mortgage together, your credit record will be linked with your co-owners, so any financial irresponsibility by one party impacts the others.
This brings us to another point, if you're planning to invest in multiple investment properties in the future it's important to be mindful that banks will only consider your share of the house as an asset, but they will take into account the entire mortgage as a liability. This is because, if things go wrong, you're liable to cover the whole mortgage, which means that the banks have to account for this in their calculations.
Ongoing maintenance
Owning an investment property with others can test a friendship quickly especially if you do not see eye to eye or worse, something was to go wrong.
Disagreements can be triggered by many factors. For example, disagreements can arise over who is responsible for finding new tenants, paying for maintenance issues on the property or dealing with unruly tenants. To avoid unnecessary stress it pays to make sure written agreements are outlined before the property ownership has been settled, and roles and responsibilities are clearly defined in the beginning. A written agreement should include details regarding the breakdown of expenses, how repairs and maintenance will be handled—who will do the work, and how the costs will be shared. Better yet, to help eliminate unnecessary stress from an investment property, hiring a property management company to deal with the day to day issues can help. In fact, there are 5 top reasons why people choose a property manager and if you’re going into an investment property with a friend or loved one saving your relationship might become a 6th reason.
From vetting the right tenant to dealing with unpaid rent or responding to a broken hot water cylinder emergency at 1.00 am the reality of owning an investment property is less glamorous than it may seem. If you or your investment partner does not have the time, patience or experience to deal with the challenges of problem tenants or law changes then hiring a property manager is the perfect solution for you. At McDonald Real Estate, every prospective tenant receives a 60 point check which includes court records, news searches and company record analysis to ensure they're going to be a good tenant. And if they're not then your McDonald Real Estate property manager will go in to bat for you.
Some questions to consider before making a decision are:
- What happens if one person wants to sell before the others?
- How long do you want to own the house for?
- What will you do if you want to sell and prices have fallen?
- Who will be responsible for maintenance costs and tenant management?
- Who will cover premiums on insurance?
Going into any kind of financial venture with friends or family where costs and responsibilities are shared can be a risky exercise, however, it can also be a rewarding one with many long-term benefits, especially with today's increasing housing market. As prices and competition continues to rise, splitting the cost of investment with people you trust is a smart way to get onto the property ladder. While making sure you cover yourself legally as much as you can and take great care is the number one rule.
If you’re ready to move forward with the purchase of an investment property with either friends or family then we recommend downloading our guide “Owning an investment property in Taranaki” and speaking with a property manager.
A property manager is an impartial third party, which can be ideal if the groups cannot agree on an outcome. The property manager will handle all issues and will be responsible for finding tenants when needed. The peace of mind and reduced responsibility means that you and your loved ones can enjoy a relationship where the day-to-day issues of managing a rental property are far from your relationship.
You might not agree on the weekly rental price, with one wanting more and another member of the group wanting less. Your McDonald Real Estate property manager can tell you what the market expects to pay for a property like yours. They can even handle finding tenants with a weekly budget that suits the market demand.
You can download our investment guide by clicking here or via the graphic below or you can book a free property appraisal with one of our property managers by clicking here.
