Buying a home in Sydney or Melbourne seems to be an increasingly distant prospect for many first home buyers, who either find their savings don’t seem to climb fast enough, or there’s never enough income to service the ever-increasing debt.
“We get lots of enquiries about this at Golden Eggs, either with two siblings who want to use both incomes to get started, or with parents trying to help their kids. It sounds ideal, two incomes, or a bigger deposit sounds like it solves all the problems, but in reality it just leads to a whole new set of issues,” Max Phelps said.
Max Phelps is a money coach, founder of Golden Eggs, best-selling author and creator of the FIVE 2 Money Diet. He has a list of important reasons why teaming up with family to buy property could be the worst decision you ever make.
“First and foremost, at the end of the day, who’s house is it? Buying a property is a very personal choice, so in my experience, normally the older one or whiniest one get’s their way and the other has to go along with it. Over the long term, this can cause a festering problem, or lead to steadily worse passive-aggressive conversations,” Phelps explained.
“Another factor that can lead to you stumbling out of the property gates is the trials of the application process. Applications are not as easy as they first seemed. If one of the applicants is buying to live in, the other has to be able to cover their own mortgage, or rent. Even just lodging an application means the application isn’t complete until both have provided all their information, and you know that one of you is probably no good with paperwork.
“As your circumstances change you aren’t going to want to live in your sister’s, mother’s, brother-in-law’s, or second cousin’s house, so why on earth would you start on a 30-odd year investment journey together today? Take for instance this example: Coco and Talulah bought a property together with their sister Maddie. When Maddie got married and wanted to move in with her new husband, she had to continue paying her share of the mortgage, yet struggled to rent out her old room. Coco and Talulah didn’t want just any random person moving in with them, but didn’t want to rent their sister’s room off Maddie either, because that didn’t seem fair. As the family’s circumstances changed, a joint mortgage can draw a wedge between each of the investors.”
According to Phelps, there are a number of other reasons that buying property with family is not a wise decision, or long term investment, including:
- Costs of buying out. Following the previous example, to solve Maddie’s problem, Coco and Talulah had to pay stamp duty all over again to buy out Maddie’s share of the property. They also had to afford the whole mortgage with one less income. Often the property just gets sold, which is not ideal and defeats the initial reason that they co-bought the property together in the first place.
- Half the rent, all the debt. Coco and Talulah later moved out of the property and rented it out. Coco wanted to apply for another mortgage, however the problem was that lenders would only allow Coco to count half the rent on the property, but counted all the debt, since both were jointly and severally liable for it. A good broker can solve this problem, but a bank might just say no.
- Partners double any problems. Two siblings might get along really well and not mind helping each other out if one is short for their share of the mortgage, but once they both have their own partners, there’s no guarantee they will all get along the same. If the property is bought jointly and one of the siblings died, the other would become the sole owner, leaving the surviving partner with no inheritance, regardless of their partners will.
- First home buyer benefits disappear. If both siblings are first home buyers, then they each get one shot at getting the benefits of a grant, or stamp duty savings. If one family member has already bought before, then the other family member may lose all, or most of their first home benefits.
According to Phelps, pooling your savings with family members is not the only strategy you can employ in order to afford a property. He has suggested alternative strategies, such as:
- Consider setting up a family trust to own the property. Both can contribute and have their incomes taken into account, but it provides more flexibility long term as circumstances change.
- Consider unequal partnerships. An 80 to 20 ratio makes it undoubtedly clear that one person is helping the other to achieve their goals. It minimises the future strain on the minor party’s share, it’s much cheaper to buy 20 percent of the other sibling than 50 percent if circumstances change.
- Buy something cheaper on your own and rent it out long term. Even if you have to live in a dump for a short term period to qualify for the first home buyer benefits, it will be worth it in the long term.
- Improve your savings skills. If savings are the problem, contact a money coach to help. It may put the dream of home ownership back by a year or two, but think how much better it will feel to be the one to beat your siblings to buying a solo property.
- Ask your parents to be security guarantees only. You can get an 80 percent loan on the property in your own name and then get a 20 to 25 percent loan secured by your property and your parent’s property too.
- Look for more income. Not just a second job or promotion, but a life partner who earns as much, or more than your siblings – just make sure that assets are still protected in case that relationship goes south. We often forget that the basis for marriage historically was economic, not romantic.
- Consider rent-vesting. Rent where you love to live and buy investment property where you can afford. Most people that say they can’t get into the housing market don’t realise how many areas of Australia have median prices for only $300,000.