How to buy property with friends (and should you?)

Published on 4th September, 2024 at 03:04 pm

Always dreamed of being a homeowner, but simply don’t have the finances to make it happen? Group-buying could be the answer. And with enough members involved, it can be an affordable way to tap into the property market. But there are also risks to consider.

Reading time: 5 minutes

In this article, you’ll learn:

• The basics of group-buying a property
• The pros and cons
• The financial implications

Whether you’re a group of friends, family members or a neighbourhood stokvel, it’s possible to group-buy a property, with many major financial institutions endorsing this method. In these cases, the total cost is divided equally between the members (unless otherwise agreed), with normal regulations applying to each member.

The pros

• Assuming all credit scores are good, pooling together a deposit may result in a better chance of bond approval.
• General expenses over the long run are lower when shared, like maintenance, levies, rates and taxes.
• The bond can be paid off faster if all agree to pay slightly more than needed every month.

The cons

• Each member’s credit score affects affordability and interest rates.
• If one person defaults on their payment, it affects the entire group, which shares full legal obligations.
• Any member defaulting on their personal debt could incur debtors to claim against the investment.
• Circumstances may change very quickly, as individual members’ lives evolve with marriage, children, job changes and so on – this could significantly alter the dynamic of the group.
• Without a prior agreement in place, complications can arise if one or more members decide they’d like to sell their share of the property or exit the arrangement.

What to consider

When multiple people enter into a legal agreement of this nature, it’s important that everyone understands the arrangement and what is required in order for each person to feel financially confident and secure. To achieve this, consider:

• The hidden costs of buying a property, including admin costs, structural issues, security costs and insurance.
• An agreement for what the property will be used for: will it be rented out or flipped? Will some members be living there, or is personal use off-limits? Clearly define the dynamics to avoid any misunderstandings.
• A financial arrangement for unforeseen costs (like burst geysers). This may take the form of a joint banking account to which each member contributes.
• A binding and valid legal agreement that protects everyone in the case of disputes, defaults and other unforeseen circumstances.
• A will and testament for each person that outlines what happens to their share of the investment in the event that they pass away.

Even with sharing, can you really afford it?

In today’s economy, shared buying could be the answer to becoming a homeowner. With that being said, a sound financial rule is not to spend more than 30% of your personal income on your investment.

Certified Financial Planner Lood Conradie of ConradiePrisma BlueStar explains that “the 30% threshold must include the cost of building insurance, rates and levies. By purchasing below the maximum, you can make provision for the unexpected.” If the group is large this might not be a problem, but with only two or three members, the costs can still be considerable and might require some adjustments to your budget and savings to afford a home loan. “Have a look at your monthly expenses and see where you need to spend less,” advises Conradie.