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Buying an IP with another couple

Discussion in 'General Property Chat' started by PurpleTurtle, 27th Jul, 2016.

  1. PurpleTurtle

    PurpleTurtle Member

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    Hi folks,

    My wife and I are in our mid 40s and more or less starting from scratch. We are renting and only have 15k currently aside toward a deposit. After many years of single income we now have 2 FT incomes and it looks like we can put aside around $2500/month. We are currently happy to keep renting cheaply and try to get an IP hopefully followed by more.

    We have been thinking about looking for a house in Frankston, but to get in there in the low 400s means we are going to need to save in the vicinity of 80k (assuming borrow 88%) which will take us at least 18-24 months to save.

    My best friend has suggested we consider buying a place with them as a way for both of us to get a foot in the door. His proposal is that they borrow against their PPOR whereas we would borrow close to the full amount of our half. His suggestion is then we can go higher than the 400k price area because their equity covers the deposit.

    Does this even work? Or do my wife and I still need cash to cover the 10 or 12% deposit on our half of the loan?

    Apart from the risk of personality clashes and disagreements, are there other things I need to be wary about with an arrangement like this? I don't even know the details of how this could be set up.

    Any feedback would be great. Thanks.

    PS. If we don't do this, alternatives are simply waiting until we have a big enough deposit, or buying something cheaper (unit instead of house, or looking at regional areas) so we can get moving sooner. I guess another option is to see if my parents could loan us enough for the deposit, but I'm not sure if this is viable or advisable.
     
  2. Corey Batt

    Corey Batt Finance Strategist Business Plus Member

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    Outside the considerable issues from buying an asset with a party which from any break down in agreement (or change of circumstances) can result in expensive costs - ie selling, tax, stamp duty to buy out the other party, getting finance after doing a joint purchase like this is a pain.

    Buying with another party will cause the long term destruction in your serviceability - plain and simple. Joint and several liability will come back to bite you (lenders will consider that you owe 100% of debt, but only 50% of the rent). This leaves you with an asset that lenders will effectively see as a massive cash drain, and you cannot easily access funds without having the other party be a co-borrower OR guarantor (which they may not agree to).

    A whole lot of negatives with negligible potential positive results.
     
  3. JacM

    JacM VIC Buyer's Agent Business Member

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    Don't do it. As @Corey Batt has pointed out, it'll chop you off at the knees.
     
  4. PurpleTurtle

    PurpleTurtle Member

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    Thank you. This is exactly the sort of thing I needed to know and the reason this forum is so great.
     
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  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    I think it can be a good way to enter the market. You just need to understand the legal consequences and risks (and how to minimise these)

    It could help you build up the deposit for the next property.

    You might buy something, do a reno, wait a year or so and sell splitting the profits.
     
  6. John Bone

    John Bone Well-Known Member

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    Terry, I do not agree with some of the previous comments.
    The way to do this is to buy the property in a unit trust with a corporate trustee. The directors should only be the people who have the income that provides the serviceability. You should not need this because the property should be positively geared.
    The units in the unit trust should be owned by each parties own discretionary trust, each with a corporate trustee.
    A joint venture agreement is essential and it must give power to one party in default of the other.
    The directors of the unit trust will need to provide personal guarantees for the bank loans but the joint and several liability will only extend to the amount of the bank loan which should be secured by the asset.
    Contributions to the unit trust should be in the form of a loan and should be 50/50 otherwise one party will have control and that would be unfair.
    It can be done safely, you just need to talk to the right people and Pacific Law on the Sunshine Coast have done many of these.
     
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  7. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    That is one way to do it John, but it would be costly in some states because of the land tax. Also it is not the only way. Another way is 2 trustees of discretionary trusts as tenants in common. or 1 of each family as TIC.

    The advantage of a unit trust is that the units could be transferred without stamp duty in some states in some situations so if one party wanted out the other party would just buy the units instead of transferring title to the property (still triggers CGT and a new loan would be required).
     
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  8. wylie

    wylie Moderator Staff Member

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    I'd try to borrow from your parents or even the friends as long as you can repay that loan separate to the bank loan. Keep it in your names only.
     
  9. Colin Rice

    Colin Rice Mortgage Broker Australia Wide Business Member

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    A wise acquaintance said to me in passing "dont go into business with someone unless you have to"!

    Im not adverse to JVs but you need to know what each party's short, medium and long term goals are as well as a clearly defined exit strategy. Corey alluded to above in regards joint and several which would be one of several important factors to consider before proceeding.

    If you can go it alone then that would be my advice.
     
  10. John Bone

    John Bone Well-Known Member

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    Terry is correct, there are more possibilities that the first structure I mentioned. The one he has mentioned is what I would call a partnership of trusts and is also perfectly legitimate. I prefer that as an option for short term projects that have an identifiable end point. I prefer the unit trust for long term holds but this is something I leave to the lawyers.
    The unit trust model can also be used where two or more SMSF's come together to do a project, not just a buy and hold but also one that involves subdivisions and construction and it can borrow without the restrictions normally placed on SMSF's.
     
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  11. PurpleTurtle

    PurpleTurtle Member

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    My wife asked basically this question. If the big problem of a joint venture is serviceability being hit for the next property, what if we joined with them to buy, subdivide, build and sell? Of course, there are a whole lot of other problems there, not to mention that the whole point of joining was to get us in earlier with less outlay.
     
  12. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    If you sell and pay back the loan it won't hurt serviceability from that point.

    But get legal advice before joining such a venture as there are a lot of issues. And the issues are not just legal, but management type as well - one party ends up doing more than the other (each party will think this is them!).

    Consider the 4 Ds
    1. death
    2, disability (incapacity)
    3. divorce
    4. d'bankruptcy

    What if one died? What if this was mid project?
    What if one of you lost capacity - you could then be dealing with their attorney.
    If they divorced a caveat could be slapped on title and the property unable to be sold for years.
    you could end up owning the property with the trustee in bankruptcy of one of the other parties.
     
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  13. Azazel

    Azazel Well-Known Member

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    I would agree.
    I can't think of a scenario where I had to.
     
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