Investing with Friends and Family- The Good, The Bad, The Ugly

Investing in property with friends or family can be an appealing strategy, especially with rising properties prices in high-cost markets like Sydney. Reaching out to family and friends to buy property together means pooling all your resources together to make property ownership more accessible, but it comes with a warning- it can bring many complexities into your property investing journey that will require careful planning from the start.

The Good

If you’re looking to break into the property market, but going solo may seem impossible, then pooling resources with friends and family can bring many rewards and benefits. You can build wealth together and everyone could be reaping the benefits of property investing together.

Increased Purchasing Power
When you combine financial resources, then the combined purchasing power will increase, and you may have the opportunity to purchase a higher-value property, or you might gain access into a competitive market that you couldn’t afford solo. This is particularly beneficial for any buyrs facing affordability challenges and finding it difficult to get a ‘leg up” on the property ladder. Pooling purchase power may also mean a higher interest loan may be reconsidered to a lower interest rate due to their combined perceived risk of the loan to be lower.

Shared Financial Responsibilities
Co-owners can split costs such as mortgage repayments, maintenance, and utilities, reducing individual financial burdens. This reduces the overall financial risk when buying an investment property resulting in less stress and anxiety knowing the financial burden is shared.

Diversified Investment
Joint ownership allows for diversification across multiple properties, spreading risk and potentially enhancing returns.

Emotional Support and Shared Goals
Investing with trusted individuals can provide emotional support and align investment goals, fostering a collaborative environment. You will have other people “in it” with you so you can bounce ideas off each other and share the research and due diligence to ensure the investment is the right choice for the group.

The Bad

Legal and Financial Complications
You must consider that there are multiple people in the transaction and so there are multiple people needing to pay back financial obligations. If one person’s personal circumstances change, and needed to default on their financial obligations, it will impact all the co-owners.
If the party chooses to get out of the investment, selling their ownership “share” in the property can be a complex process with tax obligations.

Impact on Credit and Future Borrowing
Joint ownership of a property can affect the individual credit scores and borrowing capacity of each owner. If you decide to later on buy another property on your own, you might find your future borrowing capacity isn’t as high as you expected.

Challenges in Decision-Making
Something to consider when buying a property with friends and family, is who will be making the decisions on the property after the purchase. When a property has shared ownership, there will need to be a consensus on all decisions related to the property such as property management, all of this may lead to disagreements as well as being time-consuming and contentious. To avoid this, it should be clear from the start how decisions will be made, and each of the co-owner’s responsibility. Discussing and keeping word will not be as powerful as a legal document drawn up to clarify how to co-owners will operate.

The Ugly

Buyer Beware- Things can turn ugly. When it comes to money (and property is a substantial amount of money), families or friends could have severe arguments that lead to relationship breakdowns that cannot be repaired. To avoid this, set the clear boundaries from the start and have everything written down in a legal contract to avoid any disputes or arguments that could be damaging down the track.

Differences in financial priorities or lifestyle choices can lead to conflicts, potentially straining personal relationships.

How to Make it Work

Investing in property with friends or family can be a viable path to homeownership or portfolio expansion, provided that all parties approach the arrangement with clear communication, legal safeguards, and a shared vision. Thorough planning and professional advice are essential to navigate the complexities and protect both financial interests and personal relationships.

Once you have considered all the good, the bad, and the ugly and you want to proceed with buying a property with your friends or family, there are a few things you could put into place to mitigate the risks involved and avoid the ugly outcomes:

Legal Agreements
It’s important that you have a comprehensive co-ownership agreement that clearly outlines each party’s financial contributions, responsibilities, and what the procedures will be for resolving disputes. You will also need to determine the correct legal structure for your circumstances. Legal structures like “tenants in common” can offer flexibility in ownership shares.

Clear Communication
Regular meetings and transparent communication can help align expectations and address issues promptly.

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