Property Investment
7 min read
Mortgage brokers say it’s more common to see people teaming up to buy property.
Why? Property prices (and the cost of living) are high. So pooling your deposit with other people can seem like a cheaper way to get on the property ladder.
But is buying a house with your mates (or your family) really a good idea?
In this article, you’ll learn the pros and cons of buying a property as a group as well as what property investors and first home buyers need to know before jumping in.
A joint venture, or JV, is when two or more people (not in a romantic relationship) buy a property together.
In simple terms, a joint venture means buying as a group.
This might involve a 50/50 split, or something less even, like one person contributing 70% of the deposit and the other 30%.
Historically, a lot of investors entered these arrangements with a handshake. But with hundreds of thousands of dollars on the line, it pays to formalise things with a proper agreement (more on that later).
Secure a comfortable retirement with 3 easy steps
Book your free sessionLet’s start with the pros of co-ownership first.
If you buy a house with another person (and go 50/50) then you only need half the deposit.
A smaller deposit may mean you can get on the property ladder faster (or at all).
Perhaps you aren’t in a relationship and on a single income. That could make it harder to save for a deposit on your own. In this case, teaming up could be a good fit.
For example, say you’re buying a $900k New Build in Auckland. The 20% deposit is $180k. If you buy as a trio, each person only needs to front $60K.
Let’s say you invest in a property with a mate. It’s a negatively-geared property … and then interest rates go up even further. That means your top-up goes up. But since there are 2 of you that burden is shared.
From our experience, if you share the risk you’re more likely to have the courage to invest. Teaming up works as a kind of positive peer pressure.
Before you go signing up to buy that property with your best mate, you need to know there are drawbacks too.
If you only own a fraction of an investment … you only get a fraction of the returns.
Let’s say you buy a house for $500k and you buy it with a friend. If that house doubles in value and you make $500k … you only get half those gains. In this case, $250k.
Even though you only own part of the property and get half the returns … you are still liable for the full loan.
So if your friend stops paying their part of the mortgage, you’re on the hook for it all.
Because of that, there’s also an interesting quirk when you apply for the loan.
Let’s say two people each have a 10% deposit. They combine those deposit together and now have 20%, so they borrow the other 80% for a new property.
The bank won’t add their incomes together and say: “Can you afford the loan with both your incomes?”
Instead, each person must prove they can afford the whole mortgage on their own.
Because then if your friend skips town, they want to know you can still afford it.
So each person is responsible for 100% of the loan, but only gets 50% of the returns from the investment.
As just mentioned, the bank wants to know you can afford the whole loan when you buy a property as a group.
That has an effect when you first buy the property. But it also has an effect when you apply for your next property.
So, let’s say you’ve co-owned a property and it’s increased in value.
Now, you think: “Ah great, I’m going to go and buy my own house now”.
But it’s not that simple. When you apply for a loan for your new house … you need to show you have enough income to afford:
The bank won’t care that your mates are splitting the repayments.
This can make it much harder to expand your investment portfolio.
If you need to sell early (within 2 years) you could trigger the bright-line test and face a hefty tax bill on your capital gains.
Group-owned properties are often held for shorter periods, so the risk here is higher.
It’s easy to get excited when buying with friends, but life changes – relationships, finances, goals.
You might find yourself in a disagreement with your friend, so,make sure you have a plan in place if (or when) things go south.
As a financial adviser, I help Kiwis invest. I’m seeing more and more families coming to me wanting to invest together.
But it’s not just about buying a property at any cost. It’s about making sure that purchase doesn’t stop you from buying your next property down the track.
Here are a few scenarios I am seeing on the ground:
One of the most common set-ups I see is where the parent brings the equity (because they’ve owned for a long time), and the child brings the income.
Together, they’re able to buy something bigger, better, or sooner than either could on their own.
I recently worked with a family in this situation. Two older parents were about to buy an investment property with their 20-year-old daughter.
But they hadn’t considered that even though the daughter only owned half the property, she was responsible for the whole loan in the bank’s eyes.
That matters. Especially if she wants to buy another house again in the future, because she wouldn’t be able to borrow as much.
You should also remember that your parents are likely at least 20 years older than you.
So, you need to consider the life stage you’re both in. A child in their 20s or 30s can wait for decades for the property to grow in value.
A parent nearing retirement needs the money much sooner. So often parents want strong cashflow or a clearer exit plan. As the child (in this situation) you’d want to think about if you need to buy your parents out of the property in the future.
So when buying together, make sure the exit strategy and long-term goals align.
I’ve also worked with siblings who’ve bought together. And again, it’s easy to focus on the now, without thinking about what might come next.
And sure, you might be of similar age and think you have the same goals.
But if one sibling later finds a life partner, they might want to buy an owner-occupier with their new beau. So what happens in that situation? Do you sell, or do you plan to buy your sibling out of their share?
There are 2 key things you need to do when you buy a property as a group:
Before buying, agree on a clear exit plan. Ask yourself things like:
Then you need to think about what happens if one party buys out the other(s). That way you’re not forced to sell and trigger the bright-line rule unnecessarily.
It can be so easy to think you are going to be BFFs forever – if you buy a property with a friend, but things change, and friends can change.
Get every part of your agreement documented – especially around how profits (and losses) are split.
It’s even better if you include worked examples so the maths is crystal clear.
Then take your notes to a lawyer to have them formalised properly.
For some people sharing the cost and risk of a property is a great way to get started.
But make sure you go in with your eyes open. Understand how it could impact your future borrowing power, portfolio growth and relationships.
Whether you’re investing with a mate, sibling or parent, a proper agreement is essential. Start by clarifying expectations, then formalise it in writing with a legal professional.
You’re trusting these people with your money. Don’t let a property deal ruin a personal relationship.
Kathy Faulkner, Financial Adviser and property investor
Kathy Faulkner is a Financial Adviser providing 5-star review service to 100s of Kiwi investors. She is a property investor herself and has a diverse property portfolio throughout New Zealand. Her financial advice career started decades ago in South Africa and she knows what it is like to start from the beginning and build wealth through careful investments and hard work.
