Darren Palmer on Buying His First Home With Friends
Pooling our Finances and Setting up Moral Contract
There is a lot of discussion about housing affordability and the figures shown recently on “The Project” comparing average wage to mortgage repayments as a percentage that has been steadily growing over the decades since my parents bought their first home is alarming. It is hard to get a foot hold in real estate and, whilst this is not financial advice, I’d like to share how I got my start in the real estate market.
In the middle of 2003 three friends and I were talking about our shared desire to purchase property. We discussed what resources we had and worked out what we needed to do to join forces and purchase property together as a group. This is a risky strategy and it’s by no means something I personally advise, but it worked very well for us as we were able to borrow and service more easily together than we were as two separate couples. LJ Hooker's recent study into the savvy way gen Y's are entering the property market showed that teaming up with friends and family is becoming a popular trend for first home buyers. Read more here
Because there were several relationships to respect in the arrangement we needed to protect ourselves and each other in the event that things didn’t work out or a personal relationship or relationships broke down whilst we were partners in property. That meant we had to draw up a legal contract of obligations and responsibilities that outlined what our individual commitments were, what our entry and exit strategies would be and any other details that could cause us a headache in the future if they were to come up without being first agreed upon. We decided that if anyone wanted to get out for any reason that they would be responsible for the legal fees to change the ownership and that the remaining partners would have first right of refusal to purchase any shares in the property group. This worked for us but each person and group’s circumstances will change their requirements and it’s best to get advice from a solicitor.
We also had friendships and relationships to consider so we drew up a moral contract between ourselves about how we would communicate, what we would and wouldn’t do and anything else we thought it would be important to outline so that we could keep these important relationships intact. Failing to do this up front may have put unnecessary strain on our business and personal relationships which would make the whole exercise pointless. There’s no point getting ahead if it means leaving behind the important things and people in your life so whether you’re thinking of buying together with friends, family or your partner you need to be very clear on what hurdles you may face along the way and be sure you’ve planned ways to navigate them together, ahead of time.
Combined Financial Planning
Once we had our legal and moral obligations sorted we then started to look at exactly how we were going to afford a purchase together. We were all in the same boat, young and with average incomes and not huge stockpiles of savings tucked away, though we were all saving for deposits as best we could with what we had left. We all come from similar socio economic backgrounds which meant, whilst growing up in comfortable families, there were no inheritances or cash gifts coming our way so we were pretty much going to have to figure it all out on our own.
We each had a small amount of savings but not enough to get a deposit on our own but by joining forces we were able to get close to the deposit and legals costs. We each then asked our folks for a small loan to be paid back within a year and were able to borrow around five thousand dollars each which made up the rest of the deposit and legal costs.
The property, being in a newly released fringe area and a new build, was relatively inexpensive so our up front costs were low. Trying to loan more than we could service would have been detrimental, not to mention impossible so we looked for what we could afford with what we were able to borrow.
What we Bought?
We also purchased the land first and built on it which meant our purchase was initially low, just $208,000 to buy the land, and the build was paid for in stages which meant we were able to slowly draw down on our mortgage which meant keeping our repayments low to begin with. Once we completed the build we went about paying the mortgage whilst a tenant was paying rent. There was a short fall so we were able to claim the loss on our tax returns which was a small blessing, but the property itself was a cashflow drain. It was also in an area where there was new land being steadily released and properties just like ours being built and released regularly which meant the value of our home didn’t increase much. We were in the market but we were playing the long game, waiting for the area to increase once all of the land was developed and the infrastructure out there was built and demand started to climb.
Our 2nd Joint Purchase
In the mean time I decided I wanted to realise my dream of buying a property to renovate. I didn’t know much about property as we were completely guided through the first purchase by the developer who was a friend of one of the partners. We really needed to start from scratch and work out again how to purchase a small and inexpensive apartment – this time though in the inner city, a fixer upper in the fringe of Potts Point and Kings Cross in early 2005 when things were still decidedly gritty in the area.
Fortunately my ex’s folks had paid their home off decades earlier so we spoke to them about taking a small mortgage out on part of the deposit amount so that we as a group could pay them back on a monthly basis. This discussion was agreed to in writing so we had a contract to pay between us guaranteeing that his parents would receive the money back over a 5 year period, with interest. By being creative and taking a risk – not to mention our folks and families taking a risk on our behalf – we were able to gather the funds needed for the deposit and associated costs of the small loan. We were able to borrow a small amount of money from the equity in our first property by getting it revalued by the bank which allowed us to have enough for the deposit and a small amount for a very moderate and frugal renovation on the new apartment in Potts Point. The renovation took a year of weekend work but by the end of it we’d created an apartment that was included in Belle magazine’s renovation issue.
A purchase price of $440,000 with a renovation of $60,000 which included refinishing every surface, reconfiguring the layout, putting in a new kitchen whilst only freshening up the bathroom and doing every bit of labour that we possibly could allowed us to create a property that finally started to show some profit. We had the property valued on completion in early 2007 at around $600,000 which meant we had $100,000 of equity that we could borrow 80% of to purchase the next property.
With the $80,000 we purchased a small 1 bedroom apartment in Potts Point in 2007 for $360,000 and we saved for a few years to gather $40,000 to do another small but comprehensive reno.
All of the design work and, wherever possible, the labour was done by me to save every cent so that we could spend on the things that made a difference, namely fixing the floor plan and improving the size and finish of the bathroom and kitchen.
By completing this renovation over a 6 month period we were able to create an apartment that rented solidly almost covering the mortgage and was worth $540,000 by the time we sold it in 2013.
By the time we had sold all 3 of these properties in 2013 we had made enough money from the capital growth to walk away with around $80,000 each that helped us in our individual forays into the property market. Without helping each other out at the very beginning we would have had to wait while the market grew and grew and possibly missed the boat so, for us, there was strength in joining our resources to help us get a foot hold in the Sydney property market.