Jointly buying property is traditionally left to engaged or married couples. However, it’s becoming more common for long-term friends to invest in property together.
We discuss the perks of setting up a “property club” with your friends, and we find out what you should consider before taking this plunge.
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The advantages of buying property with friends
Andrea Tucker, director at MortgageMe, says that a property club allows a group of friends to invest and build wealth by harnessing their collective buying power.
“By pooling their financial resources, the group can purchase larger properties and benefit from compound interest,” says Tucker.
In the event of a financial setback, such as retrenchment, this pool of resources can also potentially enable the group to avoid losing the roof over their heads.
“You can buy a property to maintain, manage, and rent out, with the property club members each taking a share of the rental income, or using it to decrease the financial burden for the first few years of the loan,” says Tucker.
“During times of low lending interest rates, it makes sense to look at investing in assets, such as property, to ensure that your investment is beating inflation and you’re not eroding the true worth of your money,” she explains.
Be prepared for difficulties
Tucker points out that if one person defaults on their monthly instalment and the other members can’t settle the shortfall, the account will go into arrears.
“This can negatively impact the credit rating of all participants, as everyone is jointly liable for the loan. The group’s approach to this situation must be discussed and drawn up in a contract beforehand, and a slush fund should be created to cater for occasional payment shortfalls,” says Tucker.
She adds that disputes between members may lead to the breakdown of the group, which will be complicated further by the co-ownership of a large, long-term asset.
“Members may want to pull out of the club due to personal reasons, and they may not be able to get their money back. By formalising the group’s constitution, this situation can be negotiated upfront,” says Tucker.
How common is this arrangement?
Tucker says that large corporates are recognising the growth in popularity of collective property purchasing. For example, FNB recently launched a collective buying home loan scheme, which allows up to 12 people to buy property together.
“While it’s a good way to enter the property market, I would urge people to be cautious when entering into this type of agreement, as your home loan application is only as good as your worst investor,” says Tucker.
She suggests that credit information, which can be kept to a minimum, be divulged by all participants before the group invests.
“A credit score is important because it shows whether a person is a good candidate for your property club. It reveals how a person has handled debt in the past and whether or not they stuck to the terms and conditions of the deal,” says Tucker.
Ask your potential fellow investors to join JustMoney. It’s a free service that gives them immediate access to their credit score.