While it’s far from unusual for couples and family members to join forces in property investment, it’s less commonplace to see friends partnering up in investing, but that doesn’t mean it’s not a good idea.
Between you, you’ll be able to purchase a more expensive and potentially more lucrative property than you would by yourself, and have access to better borrowing rates. As with everything property related, it’s not something that should be rushed into and there are some crucial steps to take.
Particularly if it’s a first investment, the major financial and legal matters will add a new dimension to a friendship. A lifetime of common interests and share experiences takes on a different scale when it involves binding contracts and significant sums of money.
It could be something that brings happiness to owners, tenants and lenders alike over many years. Then again, a quirky and laissez-faire approach to life may have been a terrific bond in a social environment but if it spirals to the avoidance of the costs and responsibilities of successful property ownership, things could quickly turn sour and take a amount of time to resolve.
There are some key points for you and your potential investment partner to tick off on search for the perfect property.
Be honest about your finances
Things have to start on the right foot and with the sums involved in property investment, honesty is especially important in matters like debt, credit history, and current and likely changes to income.
Work out your budget. Make it clear how much each partner is contributing to the deposit and a maximum to commit to in terms of monthly mortgage payments and overheads such as landlord’s insurance and management fees. Bear in mind that your property may not be rented out 100% of the time, so you should make allowances for not receiving rental income in void periods. Remember your tax obligations on your income too.
Find a mortgage
Buy-to-let mortgages are generally interest-only, making them cheaper than repayment mortgages on a month-by-month basis, though you’ll need to pay off the whole balance when the loan term comes to an end. They also require larger deposits than owner-occupier mortgages, typically around 25%. Both borrowers will need to have a good credit rating and history, and the amount you can borrow is also usually based on the ratio between what you’ll be receiving in rent and what your mortgage repayment is, rather than your personal income. Many buy-to-let lenders will accept up to four joint borrowers on one of their mortgages.
Find legal assistance
While just one conveyancer can look after the purchase process, each partner should also seek independent legal advice on clearly laying down things such as who owns what percentage of the property, how renovations will be paid for, how much notice one partner needs to give the other if they want to sell, a right of first refusal for the joint owner to buy the share, how disputes will be settled and how the net proceeds from the sale will be divided up.
Make a will
If you’re purchasing as tenants in common, it’s also important that each of you has a will in place to say what happens to your share if you die, for instance whether it passes to the other owner, next of kin or other beneficiaries. Without a will, things might get very confusing, expensive and possibly acrimonious.
Agree on splitting the bills. Establish how you’ll jointly cover things such as ground rent, service charges, council tax and utility bills.
Open a joint bank account
This is the clearest way for investment partners to keep track of mortgage payments, regular bills and other necessary outgoings on the property. Agree on how each of your contributes to this, and how you have access to it.
Keep an inventory
A landlord’s inventory can include a host of items from furniture and kitchen appliances to the condition of walls, floors and ceilings. You may share responsibility for them all 50/50 or take on some of them individually but best to make it clear and agree as soon as you can which of you owns what and where the duty and cost of maintenance and replacements lies, and who gets the proceeds if something is sold.
Agree on landlord duties
Who will deal directly with tenants, attend the property when needed and address any issues that arise? You could increase your budget and hire a property management company, but it will still need one or both of you to look after some responsibilities yourselves.
