My wife and I bought our first home back in the early 1980s - a three-bedroom weatherboard in a Melbourne bayside suburb. Before then we rented a cheap flat (no telephone - couldn't afford it) and after five years of sacrifice had managed to save a 33% deposit. We were very pleased and very excited at becoming home owners, especially since we weren't earning big bucks - I was an accountant and my wife a nurse. But, we did it and even managed to pay off our mortgage within five years, meaning we were rent and debt free in our 30s.
Fast-forward to today and I can tell you there's no way we could achieve now what we did then. As we all know, long-term house price growth has far exceed wages growth, and the disparity will continue to increase. Back then our house cost us $60,000; we put down a $20,000 deposit and borrowed $40,000. In today's terms, and even accounting for real economic growth, these are small numbers. To put things into perspective, to get into the same neighbourhood in 2011 you'd be looking at an entry price of between $700,000 and $800,000, way beyond what a young accountant and nurse could reasonably afford to pay.
For some time now I've been writing and advocating for the government to introduce policies and incentives to make home ownership more affordable for everyone.
Unfortunately, there's no quick fix to a problem that's been building up over the past fifty years. So what options are there for the average Australian to become a home owner or property investor when affordability constraints are now an inherent part of the property market? One option is to co-own.'''
What is co-ownership?
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Most of us are used to the idea of buying property with our spouse or partner, especially since two incomes are usually needed to meet affordability and loan serviceability criteria. When property is bought this way it is normally done so under a joint tenancy where each party owns equal shares (e.g. a 50/50 split between husband and wife). In such circumstances, if one partner dies the surviving partner automatically gets the other's share regardless of any will provisions.
Co-ownership or tenants in common is where two or more people buy a property and own separate and defined shares, which can be equal or unequal depending on the agreement reached. In addition, if one party dies, their share of the property can be passed on or left to whomever they like. Co-ownership is therefore a way to get into the property market by pooling resources with other likeminded property purchasers, who could be family and friends or anyone else.
Do the maths
Let's look at an example. Say you found an investment property for $500,000 and you expected it to grow in value by at least 5% a year. You've done some research and discovered a lender who'll lend 90% of the property's value ($450,000) at a variable interest rate of 7.5%. You've done your sums and worked out you'd have to contribute $80,000 of your own money (deposit plus costs) as well as meet monthly loan repayments of $3,325, as shown in the table below:
Table 1: Buying on your own
However, you've also worked out you can only afford $50,000 in upfront costs and around $2,000 a month in loan repayments after taking into account rental income and other outgoings. What could you do if you really wanted the property? A possible answer would be to pool your money and co-own it with others:
Table 2: Co-owning
As you can see from the table above, by spreading the costs among (in this case) three investors each investor benefits from owning a defined portion of the property while remaining within the limits of what they can afford.
But as with any investment approach there are advantages and disadvantages to consider. Let's take a look at the main ones.
Advantages of co-ownership
One of the biggest advantages is that you can combine and pool your financial resources to significantly increase your purchasing and borrowing power. This will help you buy in more established and/or expensive areas where price growth potential and longer term profitability is likely to be greater.
You're also able to enter the market earlier. For instance, using the above example, you don't have to wait to save the full deposit or cover all the purchase costs, which enables you to become a property investor or owner-occupier sooner.
The costs of buying and the day-to-day costs of owning a property are shared, meaning you don't have to carry the financial burden on your own.
Your home loan application could be enhanced through strength in numbers, giving you access to finance you might not otherwise have qualified for. Plus, you may be able to reduce borrowing costs by, for instance, collectively contributing a 20% deposit and thereby saving on lenders mortgage insurance.Disadvantages of co-ownership
Of course there are some downsides to consider as well.
Lenders will undoubtedly lend on the basis of joint and several liability. This means each co-owner will be individually and collectively responsible for meeting all loan repayments and other obligations. The fact that you may own a greater or lesser share of the property than your partners is irrelevant. If one or all of them skips town, you'll be left holding the bag.
If you buy with family and/or friends and things go wrong it could put a strain on your relationships. Remember that financial problems are a big contributor to marital breakdowns and the same principles apply to co-ownership.
Exiting a co-ownership arrangement is complicated and often impossible unless you can be bought out. In a worst case scenario the property may have to be sold, even if it's not in the best interests of everyone involved. Remember you're financially committed to the venture and to your co-owners as well.
If you're buying to invest in property there's no guarantee that you'll make the money you expect, so be sure you do all your homework, seek the advice of experts and ensure your fellow owners understand the risks and rewards involved.Before you commit…
If co-ownership is something you're seriously considering, here are some things to consider.
Take the emotion out of the equation, especially when you're dealing with family and close friends. Make sure everyone gets independent legal advice and draw up an agreement that sets out everyone's rights and obligations. And make sure you use a lawyer with co-ownership experience.
Keep the numbers to a minimum (no more than three or four) to help reduce complications and complexities.
Choose your partners carefully. Look for those you can trust and who share your views and passions about property. And make sure they are people you could live with if the plan is to become an owner-occupier. Always look to protect friendships and relationships.
As with any property purchase, choose wisely and borrow wisely. The same rules apply whether you're buying on your own or with others.
''Follow Peter on [http://twitter.com/pete_boehm/ |Twitter]
Peter Boehm's first book The Great Australian Dream: A guide to buying your first home is now available. It discusses the numerous challenges Australians face in entering the property market and provides straightforward advice, hints and tips on getting past them.''
