Generally speaking, when a person buys a property with someone else, they do so with a spouse or partner. However, with the price of real estate these days in most major cities, just as people rent houses on a share basis, so are more and more people opting to buy with a friend or business partner, either to live in together or to rent out as an investment.
Buying an investment property with friends can be exciting, especially at first, but you must plan ahead in case circumstances change. For example, one partner might want out and things can become messy.
Importance of Legal Advice
It is imperative you obtain legal advice from your solicitor before purchasing with another buyer. When setting up the legal side of things, you must approach the process with worst-case scenarios in mind. It might sound morbid, but you have to decide what will happen to the property if you have a falling out with your friend or if one of you needs to sell out for any reason.
While everyone’s circumstances are different, you should use the following as a basis when setting up your investment:
- Establish a sinking fund to cover repairs and for periods when the property is vacant
- The agreed time to hold the property before you consider selling
- A plan to pay for unforeseen costs
- If one partner wants to sell out their portion to another owner, how will the sale price be determined?
- How will you determine the rent and tenant?
- Who and how much will each of you contribute to the deposit?
- How would you resolve disputes should they arise?
The two types of contract available are Joint Tenancy and Tenancy in Common. Both types of contract allow for the owners to sell their share of the property to someone else, but they are different in other crucial ways.
As a joint tenant you are entitled to possession of entire property, but if you die, your Joint Tenant automatically owns the property no matter what your will says. Therefore this type of contract is normally only used by people in a close relationship
If the contract specifies that you and your co-owner are Tenants in Common, that means that you can leave your share to a friend, child or other person in your will. This form of ownership is suitable for people making a business venture, or for friends who are using shared ownership as a means of getting into the market at a lower figure than if they were to buy a whole property by themselves.
You must consider the legal implications of the method of co-ownership you choose and it’s important to iron out any issues from the beginning so there is no confusion later on. Think about buying with like-minded people with similar goals and make sure you feel confident the other owners are financially secure enough to make their repayments.
Detailed advice from your legal representative is vital and a formal, written agreement can be put together to avoid disappointments. Always obtain your own individual legal advice as it relates to your specific circumstances.