4 Reasons Why Investing With Others is a Risky Strategy
Co-investing with other people could help you fast-track your property portfolio and may even help you spread your risk. But there are hidden traps you need to be aware of. Nila Sweeney, managing editor, Property Market Insider explains.
With property prices continuing to rise across Australia, it’s becoming increasingly difficult to break into the property market on your own.
Whether you’re trying to buy your first home or investment property, the sky-high prices now require you to have a bigger capital outlay.
As such, buying with other people who are not your spouse, is becoming attractive.
Buying with others allows you to crack the property market with a smaller deposit and share the costs of buying such as stamp duty, legal and bank fees.
While this can be a viable strategy and can make financial sense, there are potential hazards involved when buying with someone else.
Peter Koulizos, property author and professor explains these traps to be aware of.
1. Different investment ideas
People may have very different ideas about what to do with the property once it has been purchased. Some may see it as more profitable to knock down the existing dwelling and redevelop the land. Someone else may want to rent the property as it is or renovate and sell.
The problem that arises here is that because the options are so different; it is hard to reach a compromise.
Therefore, before even buying the property, make sure that everyone agrees to the investment strategy for this particular purchase.
Work out what you plan to do and put in writing before you buy the property.
2. Decision making
If one person contributes more capital in the beginning, do they have the upper hand for making decisions on what to do with the asset?
Perhaps the person that has put in less expects less profit at the end but presumes the decision making will be equally shared.
Similarly, if one person has more of a say in how the investment is managed, do they also take on more responsibility should their decisions not go to plan?
Profit share agreements, project management and other arrangements all need to be documented and agreed upon before buying.
3. Exit strategy
Even the best-laid plans can come undone. The financial strain may lead to the decision to sell an investment and when it is owned by a number of different people, it can be tricky.
Other owners may not want to sell just yet. They may not have the financial capacity to buy out someone who wants to sell and leave.
As you cannot sell just a part of a house, it comes down to selling the whole property, regardless of whether the market is in your favour.
Before you enter into a joint deal, you should work out the exit strategy and put this in writing.
4. No records
Sometimes people get very lax about having things in writing when they invest with family or friends. Perhaps because it doesn’t seem necessary or because it may be awkward to ask a friend to make arrangements in writing as opposed to a handshake.
The problem is that people forget, circumstances change, relationships change and financial stability can waver. By keeping plans casual and undocumented, you run a real risk of relationships being tested.
While there are certainly advantages to going in with family and friends to buy an investment property, consider the risks and at the very least ensure everything is written down in a legally binding agreement.
It may seem awkward at first but it will be well worth it should unforeseeable circumstances arise.
5. Upgrade any outdated features
Simple cosmetic renos such as a fresh coat of paint, a new shower curtain or new blinds would go a long way in making your property more attractive to tenants.
Top insider tips!
Vet the other party rigorously.
You need to make sure you know the other buyers very well and understand their financial situation and motivation. Listen and trust your guts.
Always document everything.
Don’t invest with others without a legal agreement. This is crucial in protecting your interest and ensuring everyone agrees on how to deal with any situation that may arise.
Ask a lot of questions
If in doubt, ask. No matter how stupid you think, it’s better that you clarify any doubt that you may have before entering into a partnership.
Remember, you maybe sharing the risk, but you’re also equally responsible if the others falter. It’s better that you’re clear with any issues that you may have before you commit.
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This article was first published at www.propertymarketinsider.com.au
Managing Editor of Property Market Insider and a former editor of Your Investment Property Magazine.
Published: February 13, 2017.