In my view, owning a house – or, even better, several houses – is still the best form of investment. But if you’re a first-home buyer, how do you get your foot in the door, given the minimum 20 per cent deposit and the chronic shortage of housing stock to purchase?
First, you need to be very frugal and, if you’re in your twenties, no doubt this may mean continuing to live with your parents and to save, save, save.
But what else can you do?
Pool your savings with others and jointly purchase
You don’t need to be in a stable relationship with two Kiwi Saver Home Start grants and/or two Welcome Home grants to explore your options in the property market. If you’re single, consider pooling your savings and investing with friends or family members as co-owners. But if you do, remember to put the appropriate legal arrangements in place to establish the procedures and protocols if a partner wants to be bought out or if there are irresolvable differences down the track. This could include a property-sharing agreement containing a binding pre-defined mediation or arbitration process should one partner default or if you fall out.
If you’re friends or business partners rather than a couple, a tenants-in common agreement is more appropriate (with equal or unequal shares), so that each owner has separately transferable interests. This is in contrast with couples who often have a joint tenants’ agreement, which means that if one dies, the property automatically passes onto the surviving spouse or partner according to the terms of their will.
And don’t forget that this status needs to be specified on the property title. It’s a good idea to update your will at the same time.
There are many advantages to co-owning with friends or colleagues. You can share the cost of the mortgage and outgoings such as insurance, rates, repairs and maintenance and split the capital gain. Over the last 5 years the gain would have been approximately $50,000 per year.
Have a chat to a reliable mortgage broker first to find out which lending institutions are more likely to lend to co-owners.
As a co-owner, you’ll be obliged jointly and individually to pay the mortgage. If one of you defaults, the other is liable for the full amount borrowed – or the bank can insist on a mortgagee sale to recover its money.
Check your credit status – and your potential co-owner’s
A first-home purchase is a big deal. So do your homework. Be realistic about your own current level of debt and try to reduce it. Do you or the person you’re planning to co-purchase with have extensive credit card debts or other outstanding debts? If any alarm bells ring for you about your fellow investor and their credit status, pull out the rug before you become legal!
Clarify your expectations in advance
Make sure that you choose a fellow investor who you feel confident will reliably pay their share of the mortgage. Don’t wait for issues to arise, talk through any potential best and worst-case scenarios first to be sure of what you’re entering into. And if you’re planning to share the house with your co-owner, rather than renting to tenants, then you need to know in advance that you’ll get on. Discuss in advance how any work on the property will be allocated between you or contracted to suppliers and, if so, how it will be paid for.
And one more thing – be prepared to invest in the outer suburbs if at first you can’t find the right property, let alone one you can afford. Remember, your first home investment is a stepping stone – it needn’t be your final destination.
In other words get on the property escalator.