Buying a property with friends

If you’re looking for a creative way to overcome being locked out of the property market by rising prices, buying a house with a group of friends may be a solution to consider. It can also be a minefield though, so here’s how to avoid a blast.

While the excitement of banding together in such a life-changing moment can put everyone on a bit of a high, you need to plan for situations in which things might go wrong.

It’s essential you have all been completely upfront from the start about what you want to achieve by purchasing property together, as well as your personal expectations about timelines for purchasing the property, paying it off and selling it. And all of this must be documented in a co-ownership agreement.

Your mortgage broker can refer you to a solicitor or conveyancer with experience in working on co-ownership agreements, who can advise and create yours and make sure it’s suitable for your circumstances, whilst providing the necessary legal protection for everyone involved.

The big question will be what structure your ownership takes. There are two options: joint tenants and tenants in common. Joint tenancy is the most common ownership structure in Australia, as it is how most family homes would be owned.

However, because friends are less likely to share assets and long-term debts than a couple, and less likely to will their assets to each other, the ‘tenants in common’ model would usually be more suitable for this situation.

Under this model, each person owns a specified share of the property’s value. These shares may be equal, but don’t need to be. So, if you are willing to contribute $500,000 to the price of a property, but your two friends are not quite at that stage and only comfortable contributing $250,000 each, you could own a 50% stake while they each own a 25% stake. Keep in mind that each stake is in the property’s value, not control of the property. Legally, under this model, each owner has the right to full access to the entire property.

The co-ownership agreement created in collaboration with your conveyancer should set out how the costs of maintenance and insurances are divided, as well as how sale proceeds will be divided.

It should also cover plans for depreciation and capital gains tax, selling a share of the property to another co-owner, choosing tenants or determining rent, selling a share of the property to a third party (otherwise there are no restrictions on this under the tenants in common model), and selling the property altogether.

If all purchasers are planning to occupy the property, the agreement should make plans for if one wants to move out but continue their ownership. Under the tenants in common co-ownership structure, the other owners occupying the property would not be obligated to pay rent to the one who has moved out, as long as they are not restricting that co-owner’s access to the property.

As is the case with any property purchase with any structure, each co-owner should have an up-to-date will that specifies who inherits their stake in the property.

There are many more considerations when buying property jointly, so speak to an expert early on to make sure you’re doing it the right way.

What to consider before renovating

The decision to renovate is a common sticking point for homeowners, who can spend hours weighing up the cost benefits. Whether your motivation is to add value to your property or to add a touch of your personality to the home, renovations are expensive and debt often follows. It is important to find the right solution that benefits your long-term goal, rather than hindering any future plans.

A survey by Finder.com.au found only 27% of homeowners think refinancing their home loan to renovate is a feasible option to raise funds for the next big step. In this survey, 93% of homeowners who refinanced to renovate, said they had concerns over whether they would be able to afford the repayments, and whether the proposed renovation would actually add value to the property.

It’s important to reassess your current financial position, run through your plans and future payments, and decide if you can afford to take on more debt.

Laying the foundations

The next step is to investigate and calculate how much you need to borrow to renovate. Work out the specifics of your renovation, what the average cost to renovate is in your area and how much you are eligible to borrow. Aim to spend no more than five per cent of your property’s value on a renovation.

If renovations are likely to take over your living quarters for an extended period of time, you may need to also consider the additional cost of accommodation for the renovation period – another cost to factor in to your budget.

Getting bang for your buck

Once you decide to renovate, if you are trying to add value to a house to resell, it is important to look at the rooms and areas of the house that will add the most value. These are average renovation prices for key rooms, however prices will fluctuate based on the city and suburb.

  • Kitchen: If you are a fan of any renovation show, you will know that kitchens sell houses. According to realestate.com.au, the average renovation cost you should be spending on a kitchen is between $12,000 and $16,000.
  • Bathroom: The average bathroom space in Australia is six square metres. So look to spend around $9,000 to $12,000 as the bathroom is a highly trafficked space and needs to appeal to a wide variety of investors.
  • Other areas: An extra bedroom or a deck outside adds appeal, more living space and improves the standard of living for the homeowners.

Finishing touches

The final hurdle to look at when deciding to renovate is the council fee. The council can charge you up to $2,000 for an application fee, although prices can vary depending on your suburb. After speaking to a broker and finalising the renovation, make sure you account for an extra 10 per cent in your funds, to cover any unexpected costs.

Deciding on the type of loan   

If after the initial assessment and investigation you do decide to renovate, there are three types of loans to consider in helping refinance and renovate your house: a line of credit loan, a construction loan or increasing your existing home loan.

These options suit different people for different reasons. It is important you seek the right advice to determine what is going to work for your particular circumstances.

Top tips for open inspections

Never judge a book by its cover. This is certainly true for books, and also for houses too. After all, who would buy one having never seen more than the front door? We’re in the midst of the season for selling houses, and open inspections are the perfect opportunity to get a good look at all the pages – so here’s how to take full advantage of the time you have.

Use your senses

Smell, see, listen and feel as much as possible. Your senses may be able to pick up tiny details of the house that other people would miss on an initial look. See that crack in the wall? It could mean structural issues. Or that damp smell coming from the kitchen? There could be mould in the house. Feel and hear that clattering underneath you when the water is running? Maybe there are serious plumbing issues.

Don’t be distracted by the bling

Everyone is an expert at styling houses since watching The Block or scrolling through Instagram, so don’t fall for the cushions and lamps. When you’re buying property, you’re buying the sausage. Not the sizzle. So make sure you take a good look at the size and shape of the actual rooms, and the placement of them across the floor plan. Imagine how you will really use it.

Look up

Lift your noses up from the brochure of the house, and check out the roof on the way in. Make note of the ceilings in the rooms too. Spot any damp patches or leaks? These could be costly and hard to fix issues.

Kitchen and bathrooms

If these two rooms aren’t how you would like them to be, then are you prepared to either live with it, or spend the money needed to transform them? Kitchen renovations in Australia have an average cost of $10,000 to $32,000, and that is only when the room doesn’t need any structural renovations… Bathrooms can be upwards of $10,000, too. To know what you might be in for, check out the Archicentre Cost Guide.

Look beyond the boundaries of the property

Who, or what, are your neighbours? Have a look at the location at different times across the day and week, as sounds and smells may differ greatly. What’s the noise like from the road? Are you right underneath a window-rattling flight path? Is there a bar across the road that only operates at night? If you have kids, or they’re on your cards in the future, what are the local schools like? Make sure you check out both primary and secondary schools. What is the local crime rate? What is the community like in the street? Do your research beyond the boundaries of the property so you’re truly informed.

Ask lots of questions to avoid unwanted surprises in the future

What is the price for utilises each month? Because that beautiful window in the living room may let in lots of light and open up the space, but it can also let in drafts in Melbourne’s cool winters – really bumping up the cost of bills each month. Check in on the history of the property too – has it had any previous repairs or renovations? It’s always good to have a history – just in case.

Have a pre-purchase building inspection

It may surprise you, but many houses are bought and sold without a building inspection. Home inspectors are trained to find the flaws in a home – ones that you may either never see, or never see as a problem.

Before you start looking at homes, get in touch with 40 Forty to help guide you in the direction of buying a house, with a loan that suits you.

 

10 tips when buying an investment property

1. Have a clear goal

Understanding your objectives is key to finding the right investment property. The actual property itself is never the end goal when it comes to investment – it’s the financial element that you’re really concerned about.

2. Check your emotions at the door

This is not a home for you so there doesn’t need to be an emotional connection to it. It should always be about which property will give you the best return, not which one is most suited to your furniture. Be prepared to invest your money wherever the numbers make most sense… this could even be interstate.

3. What type of property should you purchase?

An investment needs to be a property that will be in hot demand from renters and possible owner-occupiers down the track. It’s best to do your research to see what types of properties are renting quickly and what properties are staying on the market for longer periods of time.

4. Old or new?

It’s the age-old debate: should you buy a renovator’s delight, or something you can rent straight away? It’s great if it can be rented out as is, but potential to renovate should also be considered. The ability to add value to the property is a good tick, as it will increase rental returns. Don’t immediately write off a property just because it needs a paint job or the kitchen cabinets need to be replaced. Alternatively, there are significant depreciation tax benefits to new properties.

5. Location, location, location

Consider

  • How far it is to the CBD or business area?
  • What is the proximity to schools?
  • Are local shops within walking distance, or will tenants have to get in their car to pick up the essentials?
  • Where are the public transport options?
  • What other amenities are close by?

6. What can you actually afford?

Get pre-approval and make sure you have all extra costs available, including conveyancing, inspections and any taxes – and always ensure you have a financial buffer. You may not get tenants within the first month.

7. How to set up the purchase

When it comes to investing, it’s important to understand how to set up the purchase so it benefits you most. The entity should protect any existing assets and be tax effective. You can purchase in your name, through your super or through a trust, but always understand how the purchase will affect you and your family.  Expert advice will assist in maximising the short and long term performance of your investment.

8. Features

You want to appeal to the highest number of tenants, so look for properties that offer that little something extra, like a second bathroom or a lock-up garage.

Also look at properties that appeal to many segments. For example, a lift may appeal to both retirees and a young family, as both will be looking to avoid stairs.  Just make sure the benefits outweigh any extra costs like higher body corporate fees.

9. Timing is key

You need to understand the market and the dynamics. While there are investment opportunities around most of the time, some market conditions are more favourable. If you don’t fully understand it all, ask for help.

10. Ask for expert advice

Your broker can put you in touch with the experts you need to talk to when it comes to real estate and investment. This means accountants, real estate agents, lawyers and valuers. These people are in the industry and they’ll be able to guide you in your decision making.

Utilising your equity

The equity in your home could be the missing ingredient in purchasing your first investment property.

The idea of property investment is one that appeals to many Australians but is sadly often overlooked because of the misconception that it is only within the reach of the wealthy.

The reality is that with the right finance, planning and strategy, an investment property may be easier to achieve than you think.

Ease the deposit burden

One of the key challenges to breaking into property investment is raising a deposit, but there are solutions. Property buyers are typically required to contribute 20% of the property’s value, and for some this can be a stumbling block. But existing home owners may be able to unlock equity – or the increased value – that’s built up in their own home to cover some or even all of the down payment on an investment property.

The following scenario illustrates how.

Example

Dan and Jessica bought their four bedroom family home in Doncaster in 2003 for $247,000 putting down a $49,400 deposit and taking out a loan for $197,600. The couple recently decided that they’d look at breaking into the investment market so they contacted us for help.

We suggested they get a valuation of their home, and they discovered that it was now estimated at $580,000.

Over the years Dan and Jessica had paid $48,000 off their original loan leaving $149,600 owing on the property. Today’s valuation of the property, less the outstanding loan, left them with $430,400 worth of equity.

Dan and Jessica didn’t want to sell down their managed funds to raise the deposit for the investment property, so we suggested they consider refinancing their own home to free up some equity. Once successful at auction, Dan and Jessica put down a 20 per cent deposit on a $350,000 two bedroom apartment and take out an 80 per cent loan.

The deposit came to $70,000 leaving a further $20,400 to cover stamp duty and other expenses while a $280,000 loan covered the rest of the purchase price. Now that Dan and Jessica had a bigger loan on their home their repayments had gone up, but they were pleased to discover that the repayments on their investment property were almost covered by the $385 weekly rental the investment property was generating.

And because the couple managed their investment themselves they reduced the overheads against the gross rent. By taking out an interest-only loan they also minimised their monthly outgoings and improved their cash flow.