Buying a house with friends or family

This article was originally published in the LawCentral Bulletin 390 on 7th November 2011 and is republished with permission of the author, Brett Davies.

Hi Brett. I’m a recent university graduate. I’ve been lucky enough to land a graduate job earning a decent wage. The problem is, with rents so high and house prices even worse I can’t seem to get a foothold in the market. I have a bunch of friends that are in a similar boat. Can we all chip in to buy a house without getting into legal fights later on?

You are not alone. My graduate lawyers constantly ask for a pay rise so they can buy a house. However, it seems with the cost of renting and house prices – some people feel trapped.

Option 1: Buy a house with friends agreement

The ‘buy a house with friends agreement’ is a great way to get a foothold in the property market. You and your Gen-Y mates can pool your resources to buy a house together.

Sounds simple. But, why do you need it when you can just do that without an agreement?

The Buy A House With Friends Agreement clearly sets out the nature of the relationship between all your friends. We call the relationship a syndicate. It just sounds better than calling it a collective of mates.

But, everyone gets along fine. Why do we need legal documents?

Those are famous last words of many people who do business with friends. Just because everyone gets along well now, doesn’t mean that you always will. The buy a house with friends agreement defines:

  1. Each party’s investment contribution;
  2. What the property is that the syndicate owns;
  3. How the property is owned;
  4. Each party’s share of the capital and income of the venture;
  5. Whether the parties can borrow against the property;
  6. How the parties can end the agreement;
  7. How the parties can transfer their share of the syndicate;
  8. Whether the parties can force the sale of the property; and
  9. How the parties can exit the syndicate.

By establishing all of the above details at the beginning – everyone knows where they stand.

We even include a mutual promise that each party is to promptly meet their individual finance obligations. What does that mean? Put simply, everyone agrees to pay their mortgage repayments on time.

Although my litigators hate me for this it saves you more on legal fees to have the agreement in place now. We see disputes over property going to court and in the end both parties spend their share of the property in legal fees. It is such a waste of your time and effort.

Option 2: Investing through a Unit Trust

A unit trust is another great way for a group of people to pool their resources to invest somewhere. In this case, invest in property. The key players in a unit trust are:

  • Trustee; and
  • Unit Holders.

The unit trust is a ‘relationship’ between the trustee and the unit holders whereby the trustee owns property for the sole benefit of the unit holders. The trustee can either be each unit holder (acting in their personal capacity) jointly or you can set up a corporate trustee.

The unit trust offers greater flexibility for the unit holders. The unit holders are able to freely transfer their unit holdings amongst each other and subject to the terms of the trust, can transfer their units to third parties too. The units are much the same as shares in a company in that respect.

Are you thinking ‘if this all goes well we might buy another place later’?

If your answer to the above question is yes, then a unit trust may be the way to go for you. The unit trust offers the flexibility of acquiring new trust assets without requiring a new agreement. That is because the unit trust lives for at least 80 years.

Once you have set up the structure, it is practically with you for life.

Who do you appoint as the trustee?

It really depends on the number of people you intend to involve in the whole process. Remember, every person that is named as a trustee of the unit trust is required to be named as the registered owner of the property. That can be very cumbersome if you pool together 10 friends. You even need to change the title registration every time a unit holder sells out or a new one comes in. After all, there is no need for a former unit holder to be a trustee.

Another option is to create a corporate trustee. It is a relatively simple process. Just build a company on Law Central and you are on your way. Now the company is shown as the registered owner of the property. Better yet, whenever unit holders change – you don’t need to change the trustee.

Who controls the corporate trustee?

In the normal course, you appoint at least one person to be the director. You also issue shares to each of the unit holders in the same proportions as their unit holding. That way each unit holder has an appropriate degree of influence over the corporate trustee.

Then, when unit holders change or their unit holding changes, they simply transfer the appropriate number of shares in the trustee company to ensure everything remains kosher.

I hope you and your friends manage to make a solid start in the property market. If you are unsure about what is right for you, speak to your accountant and adviser first to get the financial advice you need. Then call me and one of my team can set you in the right structure.

Risky SMSF borrowing advice from real estate agents

The Institute of Chartered Accountants of Australia (ICAA) superannuation specialist, Liz Westover recently wrote of her alarm at some marketing material she received from a real estate agent promoting borrowing within a self managed superannuation fund (SMSF) to buy property.

Westover wrote: “I was surprised and somewhat alarmed that some of the information provided was technically wrong and misleading, particularly in relation to the tax measures.”

Remember that Real Estate agents are NOT licensed financial advice providers.

Real Estate agents are licensed facilitators of a real estate transaction.

And in the current property climate it seems that some will do whatever they can to get more transactions occurring.  Don’t allow yourself to be misled – get financial advice only from licensed financial advisers.



Residential property vs shares since 1926

The residential property versus shares debate is popular and can be as fiery as political and religious debates. So I’m often asked about comparisons of the long term returns.

Following is some commentary I came across from Dr Shane Oliver, Chief Economist and Head of Investment Strategy at AMP Capital Investments. (Emphasis added by me.)

After allowing for costs, residential investment property and shares generate similar long-term returns. This can be seen in the next chart, which shows an estimate of the long-term return from housing, shares, bonds and cash.

Over the long term, the returns from housing and shares tend to cycle around each other at similar levels. In fact, both have returned an average of 11.5% p.a. over the last 80 years or so. While housing is less volatile than shares and seems safer for many, it offers a lower level of liquidity and diversifcation. The bottom line is, once the similar returns of housing and shares are allowed for, and these characteristics are traded off, there is a case for both in investors’ portfolios over the long term.


Source: Oliver’s Insights, Edition 37 – 25 November 2010, ‘Australian housing – is it a bubble? What’s the risk?’

Property prices do go down

Do you or someone you know hold beliefs like “property is safe”, “property doesn’t go down”, “you can’t lose money on property” and “property is the best investment”. If so, you may be a victim of our natural tendency to confirmation bias. Read this article to boost your robust decision making.

A couple of weeks ago someone was telling me about their recent investment property purchase. They had borrowed the full property price plus purchase costs. Their strategy was to hold it for about 3 to 4 years and then sell it for a substantial profit.

Alarm bells were already ringing for me – then they came out with “the worst that could happen is we sell it for what we bought it for.”

I do not have a bias for or against any particular type of investment asset, although some may interpret that I do. I favour robust decision making where the outcome is selecting the right strategies and assets for you right now. What is appropriate for you will be fluid and change over time as your situation evolves.

When it comes to residential property too often I encounter beliefs and decision making that is far from robust.

I hear phrases like “property is safe”, “property doesn’t go down”, “you can’t lose money on property” and “property is the best investment”.

Smart people believe weird things because they are skilled at defending beliefs they arrived at for non-smart reasons.”
— Michael Shermer

Naturally deceptive

Confirmation bias is one of our natural tendencies where we selectively focus on and easily recall information that reinforces our existing beliefs. At the same time we selectively ignore and forget information that would challenge that belief.

When people talk to me about residential property they seem to always have a toolkit of anecdotes they can roll-out to prove their point. Often they can’t recall knowing anyone who has lost money, or reading any news about property loses.

I know a lot of people have made good money investing in residential property in the past decade. But I also know people who have lost money, sometimes lots. And I also see the more scientific statistics of movement in real estate indices (and the indices of other asset types.)

“…thinking anecdotally comes naturally, whereas thinking scientifically does not.”
— Michael Shermer

Evidence to help you

In the interests of supporting you in making more robust decisions I am starting to collate and publish evidence to challenge the common misconception that property does not go down. Here is the first:

House prices tipped to slip in year ahead

The Weekend Australian, January 1-2, 2011 reported “…a national fall in house prices with further declines likely over the year ahead.” Read the article here

I live in the “boom town” of Perth where optimism about property investment is astounding. Yet even in Perth property does go down as reported by The Weekend Australian:

“The Rismark-RP Data house price index shows the market is weakest in Perth, where average prices have fallen by 4.9 per cent, or almost $25,000, since May.

Average apartment prices in Perth are down $44,000. Home buyers in Perth have seen no capital appreciation since August 2007.”

(emphasis added by me.)

Wow, two whole years where investors potentially had no capital appreciation to compensate them for negative cash flow (from rent not covering interest).

Selling your property for what you bought it for is certainly not the worst that could happen!

Ensure you are scientific in your research and make robust decisions about what is right for you right now.

Guide for landlords

If you have an investment property then you may be interested in the Landlords Pack from the W.A. Department of Commerce.

The pack contains many useful guides and links to other relevant information to property investors, including:

  • Renting Out Your Property – An Owners Guide
  • Information on new smoke alarm requirements
  • Information on requirements for Residual Current Devices (RCDs)
  • Links for useful forms for things like rent increases, inspections, lease agreements and termination of agreements

Even if you don’t yet have an investment property but are considering one you should visit the site to better inform yourself prior to making your investment decision.

Is residential property over, under or fair value?

Graphs, graphs and damn statistics!

There is no shortage of articles quoting one “expert” or another about whether or not Australian residential property is currently in a bubble, ripe to boom again or just fair value. Every article seems to be accompanied by a barrage of graphs and statistical quotations to justify the author’s point of view.

If your eyes glaze over at the detailed graphs don’t worry, you’re not alone, often mine do too. I sometimes wonder (suspect) if the detailed graphs are purposeful anaesthesia to make the reader compliant to the author’s conclusions. (Hmm, I think that sentence may have done the same…)

Overvalued or fair value or…?

Who cares?

Really in the scheme of things if property is over or under-valued matters most if you are taking a short term trader’s view – trying to make money within a short time frame from a volatile asset.

What matters more is that new residential property investors are increasingly reliant on a continuing price boom in order to make a reasonable total return on investment (ROI).

With property prices and rents at current levels residential property investors make significant annual net income losses (even after tax returns). That creates a situation where a high capital growth is required to repay the debt, offset income losses and retain a reasonable return on equity.

Yes, my generation and those with an investing memory of about 15 years may say that residential property does generate really high capital growth. But the fact is that all you can say is that over that period it has done.

Can residential property continue to deliver high annualised capital growth over coming decades?

My helicopter view

Value is in the eye of the beholder. People seem to be willing to pay whatever they can to get something they really want. And Australians really want their own home – and a comfortable one at that.

In the last decade the amount of people bidding for property and their ability to pay has rapidly increased for reasons such as:

  • Ability and willingness to borrow higher percentages of income.
  • Ability to borrow higher percentages of the property value, meaning you needed to have saved less before you could compete in the market.
  • Grants to property purchasers.
  • Commencement of lending to a lot of the population previously shunned (e.g. employed yet unmarried females of baby-making age; and those with limited or mixed financial history.).

Consequently in many of our memories we have seen stellar above-average capital growth.

Can that ability and willingness to pay increase as rapidly over the next 40 years and thereby support continuing stellar capital growth?

It would require 40 years of:

  • Above average wages growth
  • Increased percentage disposable income through reduced lifestyle expenses (less kids and more frugal living – yeah right!)
  • Low interest rates
  • Increased willingness to lend by the banks
  • More crazy Government subsidies

I’m not an economist so I don’t even pretend to have a crystal ball. But my rational mind says that in the long term gravity will kick in and force a return to normal long-term growth rates.

Therefore I expect that at some time there may be a sustained period of sideways or even negative growth (i.e. price declines.)

Predicting when that will occur matters most if you are taking a short term trader’s view.

I welcome your thoughts, reaction and responses to my view which you can in the comments section below.

How To Save Up To Buy Your First Home

Owning your own home is one major goal for many young Australians. But with property prices so high a first mortgage may appear out of reach. In this interview on Wake Up WA, Certified Financial Planner professional Matt Hern shares three strategies that first home buyers (especially young people) can use to save up to buy their first home.

(Recorded 3rd July 2008.)

Find the right property mentor

One of the messages I teach is to “Do What You Love; Outsource The Rest“. When it comes to direct investment in residential property it can be tricky to implement this due to the presence of too many biased spruikers. Neil Jenman refers to them as “selling machines” in his insightful article, which I recommend you read in full here.

Following the recent drop in real estate prices I have noticed many spruikers coming out again in force promoting their services and properties. If you perceive property to be “cheap” and are tempted into buying now please read Jenman’s article.

One of the valuable insights in Jenman’s article is when he busts the myth that property prices double every seven to ten years:

“In 1890, the average Sydney home price was $1,446 (£723). If property really does double every seven years then, in 2009, the average Sydney home will be worth $189,530,112.”

Neil Jenman has been in the real estate industry for decades and is now also a consumer advocate. Here’s his view on investing through property investment clubs and the like:

“In my opinion, investing in property via a Selling Machine company, which is rapidly becoming the most common way to invest in property, is the worst way to invest in property.”

“…all [investors] have been ripped off because they have paid far too much at the start – and they often pay far too much in holding costs.”

When direct investment in real estate becomes the right strategy to achieve your life goals find the right mentor to help you and ensure they are biased and/or incentivised to achieving your best outcome rather than theirs.

I’ll huff and I’ll puff and I’ll…

…blow your house down.

For years I’ve been earbashed by people enamoured with investing in residential property. Apparently it’s THE best investment and “you can never lose money in property”.

Out of curiosity I enquire of these people what makes them hold that belief. Sadly most can only regurgitate the words of others and have never done thorough comparative research.

I am not against residential property investment. I am against blind faith in absolutes, especially in the area of investing.

If you would like to add some breadth to your views of property investing I recommend the following two resources:

  • Read Scott Pape’s article from the Herald Sun (20th June 2009) “Wealth starts at home” where he and Neil Jenman share some of the lies spread by property spruikers.
  • Watch the documentary “The Ascent of Money” by Niall Ferguson on ABC TV this Thursday night. This episode is about property. If you miss the show you can either buy the DVD or read the book of the same title.

Coupled with the recent publicised falls in property prices you should by now realise that ‘safe as houses’ is absolute rubble!

If you are going to invest in residential property be broad and deep in your research so that when the wolf comes along he can’t blow your house down.

First Home Buyers: Don’t Rush In

Many in the media are saying that the latest interest rate cut makes property more affordable for first home buyers. I disagree.

Let us remember this is the lowest interest rate in over 30 years. Rates are artificially low to stimulate the economy short term. This is not normal or even an average.

So it is fair to assume that over the 25 to 30 year loan term that interest rates will go up again. If you can’t afford the repayments when interest rates go back up (as they will) then buying a house now is a recipe for future financial stress.

The current interest rate only makes a home more affordable if you can fix your rate at current levels for 30 years.

If you still buy even though you can only just afford the repayments now then you are betting that your income will increase quicker than interest rates. Start praying that it does.

The only thing that makes the house more affordable is free cash in the form of the First Home Owners Grant.

House prices will perhaps stop decreasing so rapidly. Lower interest rates reduce the pressure on would be sellers so they will be less inclined to drop the price of their house. It is suddenly more affordable for them to hold on.

Of course you could be really creative and just buy a less expensive house that you could afford.

TIP: calculate your affordability based on the repayments if interest rates are 3% higher than they are at the time of purchase. Then make repayments at that level right from the start.

Property index changes name

Standard & Poor’s and the Australian Securities Exchange (ASX) recently changed the name of the S&P/ASX 200 Property Trusts Index to the S&P/ASX 200 A-REIT Index. The name change follows the ASX and Property Council of Australia’s renaming of Australian listed property trusts as Australian Real Estate Investment Trusts (A-REITs) to align with global practice.

REIT is the most commonly used and understood term used for listed property trusts in international markets. Australian REITs currently comprise around 12 per cent of the world’s listed real estate assets and are one of the largest sectors on the ASX.

Source: Vanguard Investments Australia, Smart Investing newsletter.

I recommend that all investors benchmark their portfolio returns once per year. The above name change is important to know because I recommend you use the market indices as one of your benchmarks.