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Hi David,

I purchased your Simply Budgets software some years ago and am an avid reader of your regular email newsletters. My partner and I would love to buy our first home but find the current housing market a struggle to even get our foot in the door.

Recently a long term friend of ours, who is also keen to buy his first home made a suggestion that perhaps the three of us could buy a home together to reduce the mortgage repayment burden. This idea is certainly appealing and will help us all get a start on the property ladder.

With the three of us contributing we will have a larger deposit and aim to make extra repayments. Household bills would also be more manageable and providing we are not too ambitious in our choice of a first home by seeking what we can actually afford and are comfortable with rather than luxury, we expect to continue to save money.

I was wondering if you could offer any advice on where we could find information of people already purchasing a property this way? The options of how we should look at structuring a legal contract between the three of us to cover situations such as one person defaulting on repayments, maintenance and renovation agreements, relationship breakdowns, the possible addition of a forth person not on the mortgage (if our friend was to start a relationship that ends up being serious and long term), agreement on when to sell etc are of particular interest. All of these situations are certainly things we hope never become an issue but we would be silly to not consider them and plan to mitigate due to the financial impact on us all.

Obviously our goal is being able to eventually sell the property for my partner and I to comfortably afford buy our own home together and our friend to do the same with the profits.

Any suggestions on the pros and cons of this type of arrangement would definitely be beneficial in helping us decide what is in our best interest. I look forward to hearing from you and thank you in advance for your time and effort.

Kind regards,

Renaldo

I am sure you have heard it said, "Never do business with family or friends". This is pretty good advice unless you do things properly from the start. Too many good friends have ended up never speaking again over misunderstandings or different expectations from a loose agreement to go into something of a financial nature together.

I am currently a co-investor with 7 other people in a property investment so have first hand knowledge of how you could set up your joint venture together but you need to talk to an accountant or solicitor who will be able to advise you more specifically on your needs.

Who will get what at the other end of the partnership?
What will the other end actually look like?
When will you sell?
What if someone falls in love with the property and wants to stay while others want to cash out?
What if someone wants/needs to get out before the others want to?
What if you have differing opinions as to what should be done to the property in the way of renovating etc?

On the positive side of things there is definitely a good idea in there as you have power together that you do not have on your own. You just have to structure it correctly and be really clear from the start as to what the deal will be.

Here are a few options to consider and enquire about but please don't think that I have considered or explained in detail every option you have available to you.

1. You could simply apply for a loan with all of the names of the borrowers on the loan application and purchase a property with all of your names on the contract. That would be nice and simple but there are risks and a lack of flexibility. What if you or your friend needs to get out of the deal? The person who did not want to sell would have to find the money to buy out the departing person or find someone else to buy in or be forced to sell up!

If you bought your friend out, or found someone else to buy him out, because the ownership of the property would actually change there would be stamp duty to be paid on the change of title. That could run into tens of thousands of dollars and could put a good friendship at risk!

You could form an official partnership with your friend with similar outcomes but with added risk. If your partner happens to go broke owing money to people, those people are able to take legal action against you for the payment of your partners bad debts; NOT A GOOD SITUATION TO BE IN!

2. You could set up a company. You would spend between $1,000 and $2,000 dollars setting that up but then you would have a much safer entity to trade as. You would have that company as a vehicle to use from then on so don't get frightened off by the cost of setting it up. You would have to get a company tax return done every year and pay an annual fee to ASIC so you will have costs associated with this. You will also have other record keeping requirements but the advantage is that you would have shares in the company and if one of you want to cash out of the deal you would simply offer the shares to someone else. The company actually remains as the property owner and no title change has to be made.

Companies also have limited liability so it is not you and your friend personally who are purchasing a property. If something ever went wrong and someone wanted to sue you or your friend for everything, or they wanted to collect outstanding debts from your friend, it is the company that owns the property and you have no legal responsibility for your friend's liabilities. What the company owns is not your property.

3. You could use a trust. The best way to describe a trust is like this; If I wanted to go on an overseas holiday for an extended period of time and did not want to manage or worry about my assets I could leave someone else to look after them in TRUST. They would not own them, but they would have legal rights to manage them. You can set up a trust so it owns things and you are the trustee. There are a number of different types of trusts and a good accountant or solicitor will be able to advise you on the features of each type and set you up with one that best suits your needs. An accountant would be an essential person to consult with because there are tax considerations as well as ownership considerations to look at.

a. Unit Trust allows 'units' to be issued to different parties who can be jointly responsible for the decisions and the profits from an investment effectively creating joint ownership.

b. Discretionary Trust allows profits to be distributed at your discretion when it comes to tax time but may not be so suitable for the joint holding of a property.

A trust is also a really effective way of protecting you from nasty people who might want to sue you for everything you own. e.g. if someone comes onto your property and trips over your rake and breaks a leg and wants to sue you for damages. If your house is held in a trust then that is not considered as something you own. You are just looking after it! You could be so broke on paper that it would not be worth anyone's time, effort or money to try to sue you at all!

An accountant will probably charge you about $800 to $1000 to set up a trust for you but you can also set them up yourself for about $200 if you are prepared to shop around on the internet (e.g. cleardocs website) and do some stuff yourself. A trust has to submit an annual tax return as well.

The property investment I am involved in that I mentioned earlier is set up as a Unit Trust and I am one of the Unit Holders. When there is income from the project, each unit holder will receive income according to how many units they hold.

I hope this gives you some food for thought and helps you get clear about what to do.

You definitely should get advice from a suitable professional before launching into a venture like this as there are legal and financial considerations. If you do your homework properly then you should be able to achieve your goal and not have any hassles later on.