Should you buy property with your friends?
As a result of high property prices, first time buyers are purchasing homes with friends instead of picking family as fellow investors. Isabelle Coetzee has a look at the advantages and disadvantages of this.
These days, lenders don’t care who you buy a property with. What they tend to care about most is if you have a good credit score. As a result, friends have teamed up to get onto the property ladder.
Buyers have realised there are more opportunities in paying off a bond, than indefinitely paying rent of a similar amount. As a result, friends have teamed up to get their share in the property market for this favourable return on investment.
According to Craig Hutchison, CEO of Engel & Völkers Southern Africa, “There are many advantages to buying property with friends, if the transaction is handled correctly, and you choose the right friends to do the transaction with.”
“The main advantage being that jointly owning a property reduces the individual’s financial commitment that home ownership involves, as investors will be sharing the deposit, transaction costs, bond repayments, maintenance, and utilities bills, making it a much more affordable venture,” he said.
According to Engel & Völkers, you should consider the following before purchasing property with friends:
- Do your homework and have very open and frank discussions about what you all want to get out of the venture.
- How do you plan on funding the investment?
- How long do you plan to live together?
- What happens if one of you wants to sell their share in the future?
- How will expenses be split?
- Thoroughly check each other’s credit report, income, and assets to get a better sense of how likely a potential investor is to make timely payments as well as his or her ability to make payments if income is temporarily unavailable.
- Consider setting up a joint bank account from which the mortgage payments will be drawn. You might also want to use this account to pay for any agreed, shared expenses. This will enable you to keep track of payments and expenses more easily.
- It is imperative to hire an attorney to compile a comprehensive agreement that details what will happen if the co-investor wants to sell, the relationship turns sour, or death of any of the parties.
- It is also a good idea to take out a term life insurance policy on each other – enough to cover the mortgage in the event that one owner passes away to protect you and your investment.
Buying property with friends is possible
Caroline Smith, head of PR at Flow Communications, considered some of these, and other points, and decided to go ahead and buy property with two of her friends.
They took out a joint bond from the bank, which was divided into three separate portions and today they are each re-paying their own portion.
“We’re all single and we each depend on one income. Buying a house together suddenly tripled our buying power, and let us all improve our standards of living. We haven’t just bought together, we also live together and we share all costs,” explained Smith.
Each of them could afford approximately R750 000, and together they bought a house in the charming area of Bordeaux, Gauteng for R2 000 000 – which offers a lot more space than anything going for R750 000.
“The advantage is that we are all responsible, so things like maintenance can be spread out among us, and we all have someone who will notice if we slip in the shower and hit our heads. Besides that, we can now afford a four bedroom, four bathroom house! As well as DStv, a domestic worker, internet, and all the frills – divided by three,” Smith remarked.
Buying property with friends can, nonetheless, be tricky when it comes to coordinating with one another and agreeing to favourable terms that suit everyone.
“We have to work hard on communication, not take one another for granted, and do a lot of checking in,” she said.
Before making the purchase, the group drew up a legal agreement including the following:
- If one of them dies, the other two get to live in the house as long as they want to – none of their heirs can force a sale.
- They have all taken out insurance policies so that if they die, their portion of the bond gets paid off, so they don’t leave anyone responsible for their share.
- They have an agreement regarding buying one another out – they all have to agree on it, as well as who would buy the third portion if someone wants to sell.
What else should you consider?
According to Kayley Leverton, associate at the commercial and litigation department of Gillan & Veldhuizen Inc, the benefit of buying property with friends is that you can choose people who have the same vision and ideas as you for the property.
On the other hand, she cautioned, “younger friends may be less settled and if the friend relocates or emigrates, you may be left with the entire property and bond repayments or, if this is not a possibility, the property may need to be sold.”
Regarding applications for finance, Leverton advised interested parties to approach other banks if their initial application is rejected.
“All financial institutions have their own financial risk assessment model and if an application for finance is rejected by one financial institution, this does not mean that the others are necessarily going to decline the same application,” she said.
So those who plan to pursue this route have many options available to them and, if thoroughly considered, it can lead to a wise investment.
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