Buying a property as a group – is it a good idea?

More investors are teaming up to buy property.

With property prices on the up and stricter lending criteria, mortgage brokers say it’s becoming common to see applications with more than one last name on them (i.e. two or more people not in a romantic relationship).

Sure, it can be a cheaper way to get you on the property ladder, but is buying a house with your mates really a good idea?

In this article, you’ll learn the pros and cons of buying a property as a group and what property investors and first home buyers need to know.

If you have any questions or thoughts, please leave them in the comments section below.

What is a joint venture?

A joint venture – known informally as a JV in property circles – is the term used to describe when 2 or more people purchase a property together, when they are not in a romantic relationship. In simple terms, joint venture means buying as a group.

This includes 50/50 partnerships or when the parties hold shares in unequal amounts. For example, if someone fronts 70% of the deposit and the other party 30%.

Historically, many investors bought a property as a group, based on a handshake. But this means there isn’t much formality, and if it involves hundreds of thousands of dollars it’s best to have a clear agreement.

That’s why investors looking to purchase as a group should create an agreement, stating the terms and outcomes of the investment. More on this below.

JV, going halfsies, buying as a group – is it the right fit for me?

Going halves or thirds in a property can be a good fit for people who don’t have all the deposit to purchase a property by themselves.

This is typically the case for a younger investor just starting out, either buying their first home or first investment property, although it can work for older investors too.

For instance, let’s say you’re purchasing a $900,000 New Build property in Auckland. The 20% deposit required for this house is $180K.

But if you buy in a group of 3, you only have to pay a third of the deposit – which is $60K.

So, if you don’t have the usable equity, this can help you start climbing the property ladder earlier.

Buying as a group – is it the wrong fit for me?

But there are some downsides to going three-ways into a mortgage, and whether it’s a good option for you will come down to your situation.

For starters, the mortgage on the property is not divided 3 ways – at least not in the bank’s eyes.

Why? Because when buying as an unrelated group your incomes are assessed individually. All 3 of you have to have the income to cover the whole mortgage – as if you were buying it all by yourself.

So while teaming up can be a good fit for people who have low deposits, but good incomes, it’s not as handy for people who have a good deposits, but low incomes.

What are the pros of buying a property as a group?

Let’s start with the pros of co-ownership first.

Pro #1 – You can get started with a smaller deposit

A smaller deposit could mean you’re more likely to get on the property ladder faster (or at all) than you would otherwise.

Perhaps you aren’t in a relationship and on a single income. That could make it harder to save for a deposit. In this case, teaming up could be a good fit.

Pro #2 – You’re sharing the risk with others

For instance, if you’ve got a negatively-geared property already … and then interest rates go up further, you could be facing an even higher top-up.

But if there are 3 of you that cost is shared among more people.

Pro #3 – more likely to invest in property

From our experience working with thousands of investors if you share the risk – and the deposit – with another person you’re more likely to have the courage to invest. Teaming up works as a kind of positive peer pressure.

What are the cons of buying a property as a group?

Before you go signing up to buy that property with your best mate, you need to know there are drawbacks too.

Con #1 – you only get part of the house benefits

Without sounding too obvious, if you buy as a group you will only own a half or a third of any increase in value of the house.

But the bank is going to assess your future mortgage application as if you were responsible for the whole mortgage.

For instance, let’s say Tina borrows a 10% deposit, and her friend Tom does the same. They then collectively borrow 80% against the value of a New Build investment property they’re buying together.

The bank isn’t going to add their two incomes together like they would a couple.

Instead, the bank will assess the application as if each of them was going to individually service that mortgage.

This means Tina is going to be tested by the bank as if she can afford a mortgage that is 90% of the value of the new house (the 10% against her own house, and the 80% of the property). However, she is only going to get 50% of the capital gains.

So she has 90% of the responsibility, but only 50% of potential returns.

Sure, co-owning an extra investment property may be better than not owning another one (e.g. if you couldn’t afford to buy another property on your own). But co-ownership can have repercussions for investors, which brings us to our next point.

Con #2 – harder for future borrowing

So, let’s say you’ve got your co-owned property and you’ve owned it long enough with your friends for it to increase in value. Now, you think: “Ah great, I’m going to go and buy my own house now”.

But it’s not that simple because there is a lot of tied up income from a debt-servicing standpoint with the co-owned house.

For instance, when you go to apply for a mortgage the bank is going to be looking at your co-owned house as if you were paying for the whole mortgage yourself.

The bank doesn’t care that you are sharing the cost with your mates.

And this can stop you from growing a portfolio as quickly in the future.

That’s why many partnerships and JVs don’t hold properties for as long as a person (or a couple) owning a property on their own.

Con #3 – bright-line test

Let’s say you buy a property as a group, but then you come up against the issue we mentioned above. You don’t have enough servicing power to buy your next property. You might think “No trouble, I’ll just sell the jointly owned property.”

If you do that, you could trigger the bright-line test, which is 10 years for an existing property (5 years for a New Build).

The bright-line is New Zealand’s Capital Gains Tax-lite.

In a nutshell, if you sell a residential property you have owned in NZ for less than 10 years you may have to pay income tax on the gain.

This means if you sell earlier than this deadline up to 39% (top tax rate) of your profit is going to go to the IRD.

Because co-owned properties are more temporary (by nature), there is more risk of triggering the bright-line compared to owning a property alone.

Now, a simple fix could be to bear down and wait out the bright-line.

This doesn’t always work in practice because your business partner’s goals could change over time.

Con #4 – having a disagreement

Unfortunately, some business partners disagree. So, it’s important to formalise and have some exit strategies set in stone before you embark on any purchase. More on this below.

How do I structure the agreement when buying a property with others

Here are some tips for keeping your contract clean.

#1 – Think about your exit strategy

Before you’ve bought the property as a group, you need to discuss the exit plan.

This will usually be the time-frame you think you will sell the property within.

You need to ask: “What would make you [i.e. the other party] want to sell the property?” And “What are the circumstances when you’d want to sell?”

Typical triggers for wanting to sell are if:

• One partner enters into a new relationship or has kids and wants to upgrade their current house
• If one partner wants to start or grow a business
• If one partner has another property investment opportunity
• If one partner goes through a rough financial time

In each of these situations one partner may want their equity out of the JV property and may want to sell.

One option for an exit plan is if the other person (or people) buy the other partner out of the house. This means you won’t have to worry about the bright-line test.

#2 – Get your partnership written down (in detail)

It can be so easy to think that you are going to be BFFs forever – if you buy a property with a friend. But things change, and friends can change.

On top of that, two people will often remember a conversation differently many years later.

And that is why one of the biggest issues we see in business partnerships (through experience) is misunderstanding.

Even if something is written down, and you think it’s written down clearly, the meaning may have multiple interpretations.

So, you want to get all the ins and outs of your agreement written down, and agreed on in advance.

In particular, when it comes to determining how money is to be split, it is useful to give examples of how the calculations would work in different situations. This makes it clear how the maths should work in future.

Should I co-own a house with a friend?

For some people, sharing the costs and risks associated with a property can be a great way to get a foot on the property ladder.

But it’s important to be aware of what the tripping hazards are likely to be, particularly if you want to expand your portfolio in time.

No matter who you invest with – friends, family, or a stranger, it’s a good idea to get any business agreement written down on paper before taking the plunge.

Start by writing down what you agree between the two of you … then take it to a lawyer to get written up properly.

These are people you trust enough to share your money with. The last thing you want to do is lose a relationship over a business agreement.