Buying a House With Friends? Here's What to Look Out For

Friends, Finances, and the Fine Print

Homeownership in New Zealand might seem increasingly out of reach for many.

The combination of high property prices, rising interest rates, and the general cost of living has created the perfect storm for many aspiring homeowners.

While some individuals can rely on financial support from their parents, not everyone has this option. For those without parental support, alternative paths to homeownership can be worth exploring.

One emerging trend is buying a house with friends. While this can be an attractive option to share the financial burden, it's crucial to weigh up the potential challenges. After all, we’re not talking about going out for dinner with friends and splitting the bill.

Understanding the Basics of Co-Ownership

Before diving into the nitty-gritty, let's clarify the different ways you can co-own a property with friends:

• ‍Joint tenancy: This is similar to how married couples typically own property. All owners have equal shares, and if one owner passes away, their share automatically transfers to the surviving owners.‍
• Tenants-in-common: Each owner has a specific share of the property, which can be any percentage. If one owner dies, their share is passed on to their heirs according to their will.

Both options have implications for tax, inheritance, and selling the property. It's crucial to understand the differences and choose the option that best suits your circumstances and relationship with your co-owners.

Benefits of Buying a House with Friends

Buying a house with friends offers several advantages. Let’s explore some of them.

• Sharing the financial burden: One of the most obvious advantages of buying a house with friends is the ability to pool your resources. By combining your income and savings, you can afford a larger property or a home in a more desirable location than you might be able to on your own.
• Shared responsibilities: Owning a home comes with various responsibilities, from maintaining the property to handling finances. Sharing these tasks with friends can lighten the load for everyone involved.
• Building equity together: Over time, the property's value may increase, allowing all co-owners to build equity and potentially enjoy the benefits of a more valuable asset.
• Shared experiences: Living with friends can be a fun and rewarding experience, fostering strong bonds and creating lasting memories.

Brandon Vaalu brought his first home with a friend. He contributed $50,000 to the deposit and bought a three-bedroom house in Lower Hutt.

“If you’re on your own, everything is more expensive, whether it’s rent or a mortgage,” he told Re.

“The system isn’t set up to support single people, so having friends who can support you might be the only option for some young people to get into the market.”

Brandon said the process was “pretty straightforward” and was “similar to a couple buying a home together”.

“You just need to make sure that your friend is someone you can trust and that you have the same ideas about what you want to do with the house.”

“You also need to be okay with sharing all your financial information with them,” he added.

The Financial Implications

While pooling resources can make buying a house more attainable, it's essential to have a clear understanding of the financial risks involved. Here are a few of them.

• Default: Your credit is linked to your co-owners, so their financial decisions can affect you. All parties are jointly & severally liable so if one co-owner defaults on their mortgage payments, it affects everyone. In other words, if your co-owner stops making mortgage repayments, usually that means you’re still legally liable for the debt. This includes if your co-owner is laid off and struggles to find work or may have serious health trouble which prevents them from working and making mortgage payments.
• Approval: Banks may be hesitant to lend to groups of friends buying their first home. Not all banks have the same rules for friends pooling resources to buy a house. Some banks will consider your combined income, while others might require each person to meet individual affordability criteria. It's essential to research different lenders to find the best option for your group.
• Mortgage implications: Lenders might treat co-owners as a single financial entity. This means that everyone's credit history is considered. Your co-owners finances might not be as up to scratch as yours.
• Affordability: It's essential to assess each individual's financial situation to determine affordability. While combining incomes might seem beneficial, individual debts and expenses can also impact your borrowing capacity.
• Exit strategy: It’s important to carefully consider what would happen if one co-owner wants to sell the property in the future. The situation you’re in now is surely not going to last, any number of things could change: your potential co-owner might want to settle down by raising a family, move overseas, or move to a different city or town. In any case, you need to know how a sale process might work, including for a forced sale, and have it fully agreed upon between all parties, in writing.
• Limitations: Buying a house with friends can limit your ability to buy another property. Even though you only own a part of the house, with some banks’ policies, you're responsible for the entire mortgage. This means banks might see you as having a larger debt than your share of the property, making it harder to qualify for another loan.

Beyond the mortgage, several ongoing costs will impact your wallet.

Property Taxes (“Rates”)

In New Zealand, property owners are subject to rates, which are property taxes levied by local councils. As co-owners, you'll share the burden of these costs. The amount you each pay will depend on your ownership share.

• Council valuations: Your property's value determines the rates you are required to pay. Regular revaluations can impact your share of the costs.
• Rate increases: Councils often increase rates annually. This means your share of the burden will likely grow over time.
• Differential rating: Some councils offer differential ratings for multiple owners, which may affect how rates are divided.

Insurance

Protecting your investment is vital. As co-owners, you'll need to decide on the type of insurance coverage and how to share the premiums. Here are the types of insurance you should consider:

• ‍Home insurance: Covers damage to the property itself.‍
• Contents insurance: Protects your personal belongings.‍
• Landlord insurance: If you plan to rent out part of the property, this type of insurance may be necessary.

You'll need to agree on how to split the insurance premiums based on ownership shares or other factors.

Maintenance Costs

Owning a property comes with ongoing maintenance expenses. From minor repairs to major renovations, these costs can add up quickly.

• Budgeting: Create a joint budget to cover expected maintenance costs.
• Emergency fund: Consider setting aside money for unexpected repairs.
• Decision-making: Establish a process for deciding on repairs and renovations. For example, what if your co-owner decides they want a new deck or pool and starts pushing you to contribute your fair share of it?

Tax Implications

Understanding the tax implications of co-ownership is essential for effective financial planning. If you rent out part of the property, you may need to pay income tax on the rental income. Consulting with an accountant or tax adviser can help you understand your specific tax obligations.

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Communication and Trust

The success of a co-ownership arrangement depends on open communication and trust.

• Clear expectations: Discuss your expectations about the property, including its use (e.g. investment, primary residence), how expenses will be shared, and how decisions will be made. What is the structure of home ownership? Make sure you get it all in writing.
• Legal agreements: Having a well-drafted co-ownership agreement is essential. This document outlines each owner's rights, responsibilities, and what happens in various scenarios, such as selling the property or one owner wanting to leave.
• Conflict resolution: Discuss how you will handle disagreements. Having a clear process in place can prevent conflicts from escalating or becoming personal, though this might be easier said than done!

The Lifestyle Factor

Sharing a home with friends can be an enriching experience, but it's essential to consider the potential challenges.

• Compatibility: Ensure you and your co-owners have compatible lifestyles and expectations. Differences in habits, cleanliness, social schedules, and even noise tolerance can strain relationships.
• Privacy: Living with friends means sacrificing some privacy. Consider how this will impact your personal life and relationships.
• Flexibility: Be prepared for life changes. People's circumstances can and will change rapidly, and you need to be flexible to accommodate these changes. For instance, what happens if your co-owner gets into a relationship which changes the dynamic?

When Buying a Home Together Might Not Be the Right Choice

While co-ownership can be a viable option for some, it may not be suitable for everyone. Consider carefully if you:

• Have significantly different financial situations.
• Have incompatible lifestyles or values.
• Are unsure about your long-term plans.
• Prefer complete control over your living situation.

Remember, this is just a general overview. It's essential to seek professional advice from a lawyer, mortgage broker, and financial advisor to tailor the information to your specific situation.

The Bottom Line: Is Co-Ownership Right For You?

Buying a house with your mates can be an awesome way to get a foot on the property ladder and share the adventure. However, it’s important to be aware that it may not always go smoothly. It could end in tears, especially if you haven’t taken the time to carefully plan and communicate exactly what you’re after, and what will happen if things change.

You’ll need to be honest with each other, understand the financial risks, and make sure you’re legally covered in all circumstances.  

It would be the pleasure of one of our trained professionals to help you work through any of the topics mentioned above, so get in touch today.