With the increasing prices of property and other setbacks (such as the tight lending policies by banks) that have discouraged many Sabahans from buying, many people have resorted to buying property in a group or as joint owners. Group investing is not exactly a new thing in Malaysia, but it is starting to gain popularity here in Sabah. People realise the tremendous benefits of buying in numbers; some groups can own from one to as many as ten properties at a time.
What's so appealing about investing with other people, especially for those who want to take their first step into the world of property investing, is that it lessens one's financial burden that homeownership can bring by sharing the costs with others in the group.
There are plenty of advantages of buying property with friends and family, but it's also important to understand the problems that could arise and their consequences.
Group investing is when two or more people decide to buy a property together, and is much more common between married couples. However, these days, there are more and more people sharing their mortgages with siblings, friends, or even with strangers. If you've always wanted to buy your very first property but do not have enough capital, or you think that this could work for you, you must first understand all the perks and pitfalls that come along with investing in others. Just like everything else, when more than one person is involved, especially when it comes to something as big as buying a home, there are bound to be some issues.
Find the right person/s to invest with What better way to start your investment journey than with people closest to you and whom you trust. Approach close family and friends that are also interested in buying property and make sure that you have a solid plan and proposal for them. Don't just approach them blindly, expecting them to be immediately convinced with the prospects of lower initial capital required to invest together. Money is involved after all, and ventures pertaining to this could either make or break relationships.
Have an honest and open discussion When buying property with other people, it is imperative that you have a very open and clear discussion about what you all want to gain out of the venture, whose name/s will be on the deed, how you're going to divide the shares and responsibilities and what happens in the event if one of you wants to sell off their shares. Don't forget to cover all basis, no matter how big or small. Something that seems small or unimportant that you might overlook right now could eventually snowball into a big problem in the future. Make sure you are very thorough.
One of the things to consider is in the case that your group decides to put in different deposits for your mortgage. You need to record who will contribute what amount. If they're not equal amounts, you will need to work out the proportion of the value of the property each deposit equates to and agree, should the property be sold and how the proceeds should be split.
Engage in a lawyer Once everyone agrees with the set terms within the group, engage a lawyer to go through it. An experienced lawyer in this matter can help suggest ways of keeping all parties satisfied and will be able to point out some flaws in your agreement or other crucial things that you might have missed out.
After a solid decision has been made by all parties, the lawyer will then draw up a contract, a Declaration of Trust, which is highly recommended. The Declaration will establish in black and white the contributions made by each party as mentioned previously. This Declaration is necessary in order to proceed with the venture safely.
Something to consider is how you will split the ownership and how many names will be on the deed.
- Sole Name on Deed - If you decide that the property will only be under one person's name, then technically the property â€˜belongs' to that person. However, some backend difficulties might arise if other people that have been contributing to the property are not named on the deed.
- Joint Names on Deed - If you decide to put more than two people's names on the deed, then you have to decide if you will be joint tenants, meaning that the co-owners own the property in equal shares or tenants-in-common, meaning each person can decide what proportion each person will own. For example, if two people buy the property and one contributed more than the other, then you may decide on a split ownership of 60:40. If your group decides to sell off the property, then each person will only receive the percentage which is entitled to his or her share out of the sale proceeds.
Remember that should there be any disputes, the outcome should be beneficial to all and that it will be easy to come to a compromise. It could mean just one person moving out but retaining ownership, or that all parties decide to sell. Whatever the circumstances, make sure all rights and obligations in the partnership are watertight.
PROS The main advantage of buying a property with others is that it reduces your financial burden. Also, starting this way is a great way to gain experience and knowledge into real estate. Not only do you benefit the returns together, but you also learn and grow together. When you invest with others, you will basically be sharing the costs of: - Your deposit - Transaction costs - Mortgage payments - Maintenance and repairs
CONS If one person defaults on payments, everyone is liable because all parties involved in the transaction is responsible for the mortgage payments. It's important that everyone is open and honest about any of the cash flow problems that might impact your meeting the collective mortgage repayments every month. Investing in property is an investment that always increases in value, and as you have read, buying property with others can be very beneficial and can be a very good way of starting your investment journey. However, the pitfalls can be considerable if proper care is not taken to ensure that all parties are happy and agreements are solid. This requires open and honest communication and covers all basis.
Just to summarise the points mentioned:
- Trust and like the people you are planning to buy with and make sure they trust and like you too.
- You are open and honest with each other about areas of possible issues, conflict or disagreements.
- Make sure you get a very good lawyer who is knowledgeable in this matter.
- You are all comfortable and satisfied with the terms of the sharing agreement.
Just remember that in the end, you are creating an investment for your own future. When you're all ready to sell the property, you may make enough money to invest in your very own property.