Is property co-ownership viable for you?
The significant cost of buying into property may lead many younger investors and aspiring home-owners to pool their resources to buy real estate jointly – and taking this path can be a good first step towards final individual home ownership.
But deciding to buy a home with a friend, a family member or business partner must by necessity be done with some important safeguards in mind, and awareness of certain pitfalls to avoid, to ensure the arrangement works.
Co-ownership involves two or more people pooling funds and sharing the ownership of a property as “tenants-in-common”, as the parties to the arrangement are known. Tenants-in-common can own equal or unequal interests.
This is unlike buying property as “joint tenants”, as many couples often do, which is the holding of property by two or more in equal shares. If one owner dies, for example, his or her share automatically goes to the other. But as tenants-in-common, when one party dies their share of the property can be left to anyone they may have nominated in their will.
Co-ownership does not necessarily mean that owning real estate has to be vastly different to more traditional property ownership, except that the share of ownership has to be defined as each party may own a specified percentage and this needs to be stipulated on the title.
Co-ownership also allows parties, for example, to sell or transfer their share without having to sell the property as a whole. Another advantage is that the combined borrowing capacity (as each co-owner will borrow individually) can be larger than a buying couple would have of their own accord. (Although it should be pointed out that many if not most loan providers will require each borrower to be “jointly and severally” liable for the whole debt, which is why it is paramount to get good legal and financial advice.)
Property experts have recently reported that they are seeing more and more people buy property as tenants-in-common, even couples. It has also become more common for friends or family members such as siblings to buy real estate together. Of course buying a property alone or together with others to live in or as an investment depends on personal circumstances.
As with most financial arrangements, there can be a downside to co-ownership. Disagreements can crop up, but also the ongoing financial viability of each co-owner may not necessarily be assured. If one can’t afford to make their loan repayments, for example, the remaining members may end up being held responsible for making up these loan repayments for the property. So it is important to enter into any such co-ownership arrangements with people you trust and that are reliable.
Get it in writing
A co-ownership agreement, setting out people’s rights and obligations in relation to the property, must be put in writing and signed before you buy as tenants-in-common, and can include terms covering:
- the division of any profits or losses when the property is sold (important for capital gains)
- obligations on each co-owner to repay their loan on time
- the splitting of operating expenses
- a mechanism to protect a co-owner against default by another co-owner
- a plan on being able to sell out
- a dispute-resolution clause.
With borrowing, generally all the usual lender criteria will need to be met by each borrower, but some lenders may also allow the loan to be structured so that, while all borrowers may still be “jointly and severally” responsible for the whole debt, the loan can be split so that each party can make separate repayments to cover their share.