How buying with friends can get you on the property ladder

Priced out of the real estate market but desperate to buy? More and more people are turning to friends to help them buy a home or an investment property.

When Julie O’Donohue and her husband wanted to secure a property in a good neighbourhood of Melbourne, they discussed the idea with friends who said they would be interested in buying it with them.

“This gave us a way of buying a two-bedroom property in a reasonable location,” says O’Donohue, who lives in a regional town of Victoria. Together, the two couples were able to purchase an older unit with large rooms in South Yarra.

O’Donohue enjoys the fact that they are building an asset and “can add value without disrupting the tenants, as the tenants are our family”.

“We have adult children and they were both paying rent which we were helping them with, so it made sense to secure a home to pay off for ourselves. They would then benefit in the long run.The friends are younger and they know their children will probably study in Melbourne, too. We see this as a 10-year plan,” says O’Donohue.

ME Bank head of home loans Patrick Nolan says it is a favourite first-home buyer strategy “to team up with friends and family to purchase a property jointly”.

“Co-buying offers valuable advantages. By pooling resources, buyers can afford a better-quality home or a more desirable location. Ongoing costs like rates, insurance and maintenance are also more manageable,” says Nolan.

Research by ME suggests 4 per cent of buyers have purchased with friends, but that trend looks set to increase.

“Co-buying is becoming prevalent because of affordability,” says John Cunningham, president of the Real Estate Institute of NSW. “It’s probably now becoming one of those options that people have to seriously consider. People are looking for opportunities where they can live together at far less cost than it would be for them to actually go and buy those properties separately. It’s a smart idea. It gets them into the market.”

But, warns Nolan, despite the pluses, buying a property with someone else calls for planning. “Rather than simply hoping it will all work out, it makes sense
to have a formal co-ownership agreement drafted by a solicitor. This will set out in writing how varying possibilities will be handled by everyone, from the arrival of a partner on the scene to what happens when one owner wants to sell up.”

Dr Adrian Raftery, senior lecturer in financial planning and superannuation at Deakin University, Melbourne, says there are two big risks in property ownership between friends. The first is the risk of loan default.

“Whilst you technically own only half of the property, you are liable for 100 per cent of the debt. So if your mate doesn’t stump up his or her half of the loan repayments then expect that you will have to, otherwise expect a nasty call from the bank.”

The second risk concerns what happens to the property should you die. “Do you want your half of your property to go to the beneficiaries named in your will or do you want it to pass automatically to your mate?” says Raftery.

“You also need to consider that joint ownership may impact on future goals you may have, particularly if you want to start a family down the track. Your borrowing capacity greatly reduces. For example, when you go to borrow for another property, the bank will only assess half your asset but 100 per cent of your combined loan.”

Julie O’Donohue and her husband were able to purchase an investment property with help from their friends. The couple’s son, Nick, now rents the unit off them. Photo: Josh Robenstone

And what happens if you can’t live with your friend? “You may love going out every weekend and having a few beers or wines, but what happens if they are a pain to live with? Who moves out? Things can get complicated rather quickly.”

Buying with friends is not without risk, agrees O’Donohue. It is important to be clear about who is responsible for what element, she says, but on the upside “we also have a place to crash which doesn’t cost us”.

In fact, co-buying has worked out so well for the couple that they have purchased another property with their friends that they are in the process of developing.