With house prices at an all-time high, an increasing number of young people are thinking about pooling their resources and buying a property together. But is it really a good idea? In the first part of a series on investment alternatives for ‘Generation Rent’, Jenee Tibshraeny looks at the financial implications of buying with friends.
This story first appeared on interest.co.nz.
Acquire a skill, start working, get married, buy a house, have children, pay off your mortgage, retire, trade in your family home for a smaller place and use the difference to supplement your savings and superannuation.
This formula has historically served New Zealanders well.
Today, I believe there is no formula.
Steps one, two and (broadly speaking) three are fine – even if they’re only completed by age 35, rather than 25.
Step four –‘buy a house’ – is where things get awkward and throw the remaining steps off course.
I could cut the article here and leave you all to debate whether young people would be able to buy houses if they spent less on “lattes and Feng Shui consultants”, weren’t locked out of the property market due to the greed of baby boomers, or our entire system didn’t encourage us to get rich by buying houses from each other in a money-go-round.
But I’ll refrain on this occasion.
Instead I will focus on what people stuck at the ‘buy a house’ part of the formula – by force or by choice – CAN do to build towards their financial futures. Welcome to the Generation Rent Investment Guide.
Before veering too far off the beaten property track, I’ll begin by looking at how one might go about buying a house by teaming up with others. Then in coming weeks I’ll tackle investing in shares, digital currencies, peer-to-peer schemes and more.
I accept these don’t necessarily put a roof over your head, but the point is renters shouldn’t be an underclass.
Your thoughts and feedback are of course most welcome.
Teaming up to get ahead
A couple of years ago I wrote about a woman in her late 20s who bought her first home in 2014 by forming a company with three friends.
She didn’t have enough money to make a deposit on the sort of property she was after on her own, so teamed up with others in the same boat.
They forked out about $3000 to create a company constitution and a shareholders’ agreement, before buying a $407,000 newly built, three-bedroom town house in central Christchurch.
After accumulating income from rent, and receiving a government valuation of $430,000 for the property six months later, they bought a two-bedroom house in New Brighton, Christchurch for $210,000.
Her rationale behind the group effort was to spread the risk and financial burden, so she could still be in a position to diversify her investment portfolio.
Here is what you need to think about if you would like to consider going down this path:
LVR and KiwiSaver rules
Unless everyone in your group would like to live in the property you are buying, you will be considered an investor, so will have to make a 40% deposit on the property under loan-to-value ratio (LVR) restrictions introduced in October last year.
An ANZ spokesperson confirms that even if one person in the group lives in the house, the fact the other three don’t, means it will still be considered an investment property.
“If [they all] hold the property, borrow and income is received from the property to pay back the debt, then yes it is an investment property,” she says.
Asked how rigid these rules are, and how ANZ might respond if everyone in the group loosely said they intended to live in the house at some point in the near future, the spokesperson says: “The bank will consider you an investor unless you can confirm by way of statutory declaration that the property you are purchasing is intended to be your principal place of residence.”
ANZ says the same principle applies to KiwiSaver.
The only way you can make a KiwiSaver withdrawal to buy a property, is if everyone in your group lives in the house.
Go2Guys mortgage adviser, Campbell Hastie, admits that while people may have been able to manipulate the system in the past, it has become much harder now that KiwiSaver is more established.
There are a number of structures your group could use to organise itself.
Yet at the end of the day, Hastie says the bank will look through whatever structure you choose and weigh up the risk of all the individuals in the group when looking at your mortgage application.
No matter the structure, all individuals will be jointly liable in the eyes of the banks. In other words, if your mate doesn’t meet their mortgage repayment obligations, the bank will come knocking on your door.
It also means that if you use a company structure to buy the property, and the company decides to take on a new shareholder, you’ll need bank approval first.
Martelli McKegg solicitor Matt O’Neale has helped interest.co.nz put this table together, explaining the nuts and bolts of the three most appropriate types of structures a small group of people looking to buy a property could use.
Here are some things to think about when deciding whether you’d like to buy a property with friends:
– Are these the right people to be doing business with?
– Do we want to achieve the same goals (ie rental yields vs capital gains) in the same timeframes?
– How might all of our financial circumstances change in the future?
– Does the structure we’ve selected give us the flexibility and security we would like in the event of circumstances changing?
Coming up on the Generation Rent Investment Guide: beyond bricks and mortar – what young people need to know about investing in the share market.
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