Purchasing a property is a huge financial commitment which is beyond reach for many people. As property prices keep rising many young people are becoming increasingly frustrated. To get on the property ladder, many are considering buying a house with a friend to get on the housing ladder.
Buying an investment property with a fiend can be a smart financial move. As the property appreciates and you pay down the debt, you will build equity. This equity can be later used to purchase your own home later when you are in a better financial position.
But buying a property with a friend can also create challenges. You need to remember:
- Both of your credit reports are attached to the mortgage
- There is no easy or cheap way to way unwind the investment, so you should have a property sharing agreement drawn up. We have recently written an agreement on property sharing agreements here.
- If you have issues repaying the mortgage, you may both have problems borrowing money in the future.
- You need to know if you try to borrow money in the future, lenders will consider this loan when assessing your ability to repay
- It is likely to be some disagreements along the way, you need to agree what happens in those scenarios
Buying a house with a friend as an investment: 5 Common Issues
Both of your credit reports are attached to the mortgage
Since you and your friend will both be on the mortgage, the bank will use both of your credit reports. If either of you have a bad credit rating already this may impact your mortgage rate. A higher interest rate will have a significant impact on how much your repayments are.
No easy or cheap way to way unwind the investment
If you rent a house with a friend if things go wrong, it is easy to walk away if something goes wrong. This is not the same if you buy the house together.
As you are both owners, both of your names will be on the mortgage, you are both responsible to make repayments. If one of you wants out of the deal you only have two options:
- Sell the property and split the proceeds
- One party buys the other out
Both options will be challenging, selling the property might mean that you are forced to sell the property at a time whereby you may not maximise your return or even are forced to lose money. In addition, selling might take many months which may cause significant strain on your relationship.
The alternative is one party buys the other out. But, it is likely the reason you purchased the property together in the first place is because by themselves neither party could afford the property. So this may well be un achievable. Therefore it is important that you have property sharing agreement in place to cover these issues. We have recently written an agreement on property sharing agreements [link to post]
Credit rating risk
Since both you and your friend are listed on the mortgage, you are both responsible for making payments on time. If you fail to make payments on time and fall into arrears on the mortgage it will create issues for you both. If you are reported to credit agencies it will impact your credit ratings. It may also impact your ability to get a mortgage in the future.
Challenges Getting Other Loans
Even if you and your friend split the mortgage payment 50/50 each month, each of you alone is responsible for the entire mortgage payment each month in the eyes of other lenders. This can make each partner’s ability to obtain other loans difficult.
Disagreements
Relationships can be quickly tested if things go wrong. It is likely that things will go wrong while you own the property, so you will need to work out what will happen in those situations. You should have a written agreement which covers 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,
The Bottom Line
Buying a house with a friend has a lot of benefits. It may be easier to qualify for a mortgage and you get to share all the monthly expenses, including utilities, maintenance or repair costs, and the mortgage payment. And unlike renting, you get to build equity as you pay down the loan.
But some challenges come with something as big as this, and it’s important not to rush the decision. Do your homework ahead of time and make sure you and your friend both have the income to meet the monthly expenses of the investment.
Are you thinking about investing in a property with a friend?
Private landlords now need to be far savvier about how and where they invest. It is important to have a clear idea of why they are investing and their objectives. We have built Du Val Global to help investors think through the issues which matter when it comes to investing; including:
- Where do we want to buy?
- What kind of home do we want to buy?
- Are we going to live here or rent it out?
- How long are we going to own it for?
- What happens if our situation changes and one of us can’t service the costs?
- What will we do if we go to sell and the prices have fallen?
Du Val Global
We built Du Val Global to help small landlords make better investment decisions. Our platform helps investors with critical decision-making, including:
- Research – real-time market research, allowing landlords to have a complete picture of tenant economics, prevailing rents, and capital values.
- Financial Analysis – investors can create financial models to determine net return after tax and return on investment. Investors can understand specific tax implications and compare investments on an after-tax basis to determine the best investment for them. Investors can even compare properties in different countries.
- Du Val Dynamic Pricing™ – Du Val Global offers a range of properties for sale from leading developers in Australia, New Zealand, and the United Kingdom via its proprietary Du Val Dynamic Pricing™ algorithm. This sophisticated pricing model levels the playing field for small investors through aggregation, providing discounts of between 7.5% and 15% from retail prices, which, until now, have only been available to large institutional investors.
- Portfolio Management – investors can use the Portfolio Management tool to better monitor and track the performance of their investments.
Interested in giving our platform a go? Start your free trial today at www.duvalglobal.com/invest
