Starting a share house with friends
Every man, woman and monkey who hasn’t been living under a rock knows how hard it is to get into the real estate market today. The entire generation of baby boomers are collectively breathing a sigh of relief that they aren’t starting out in the game. Sydney’s ratio of dwelling prices to household income in middle of 2016 was 8.5 and Melbourne at 7.1, with the lowest, Canberra, still at an incredible 5.2. The median ratio in Australia back in 1995 was at just under 2.4. Therefore, it is no surprise people are looking at alternative ways to get into the property market. One of the most common ways of getting in and getting in quickly, is combining funds with friends and starting a share house.
A quick pro and con of starting a share house
|Increases your capacity to buy in high growth areas.||In case of a disagreement about the sale of the property going to court, it is up to the opponent of selling to dissuade the court against ordering a sale.|
|You diminish your day to day/maintenance costs||If someone has to leave, you may be under pressure to either buy them out or share ownership with someone you don’t know.|
|You can access the market sooner than by yourself.||If you want to apply for a second home loan, the lender will assess your existing shared home loan in its entirety and as such assess your ability to pay for both with your existing income.|
|You can leverage the power of multiple partners to increase your financial capabilities.||There is the risk of losing friendships over money.|
|You rely on another’s ability to pay their bills.|
|There may be too many chefs in the kitchen in terms of personalities and making decisions.|
- When starting a share house, keep the number of people within the agreement to an absolute minimum. The more people, the more chance for disagreements and fallouts. Be sure to choose people with whom you already have healthy lines of communication. You want to know that you can talk about finances and as such you want to avoid friends who you have always taken a little long to pay you back for certain things and that you felt uncomfortable asking for this money.
- Get independent legal advice and ensure everyone else does so too.
- Draw up a will with your solicitor. If you do unfortunately pass away, does your share in the property automatically go to your financial partners? If so, do they have Power of Attorney in the case of an emergency?
- Establish a Co-ownership Agreement. This is fundamental to sharing a property, even just with a loved one. First establish if the nature of your shared ownership is a Tenants in Common agreement or a Joint Tenancy. A Tenants in Common agreement allows you to act as an individual in respect to your investment, as long as it aligns with the terms of your Co-ownership Agreement. A Joint Tenancy means that all partners in the investment act as a single agent. This means you cannot sell your share of the investment, as it needs to be done as a whole. Spouses often enter a Joint Tenancy so that in case of death their share of the property instantly goes to their partner. Joint Tenancies tend to outnumber Tenants in Common agreements, yet this is changing as more and more people enter investments with their friends or other financial partners.
Things to consider in Co-ownership Agreement
Consider addressing your response to the following situations when starting a share house. Talk to your solicitor for a better understanding of other unforeseen circumstances that may pop up.
- How long will you collectively hold the property? This can be a difficult timeframe to specify as it depends on the market, buy you can at least set a minimum number of years or minimum amount of capital growth.
- Will you have a fund for repairs and when the property is vacant?
- Outline and establish your taxation processes and tax offset expectations.
- In case of transferring ownership, how will you establish the sale price?
- Who determines who will live in the property and the rent you ask? Or, who among the partners will live in the property? It may be impossible to restrict a partner’s right to live within the property. They own the physical right to inhabit it.
- If someone wants to sell, do the others have first right of refusal to buy?