To invest as a family or not to invest? The pros and cons of combining financial forces for property investment

They say you can choose your friends, but you can’t choose your family. However, in the world of property investment, an astute relative with capital and commitment could make the ideal business partner.

It’s been no secret this year, with the intense scrutiny on the traditional banking sector, that more young property investors are having their dreams financed by their parents, becoming customers at what’s fondly referred to as the “Bank of Mum and Dad”. In fact, back in May, the Australian Financial Review trumpeted the news that loans from the Bank of Mum and Dad were up 25% and were now the 10^th biggest lender in the country, dolling out more loans than global giants Citigroup and HSBC Australia.

Family investing is not new, but the with tighter lending restrictions and larger deposits required to break into the property market, it’s becoming more prevalent. And, it’s not simply parents looking after the next generation, husband and wife teams and syndicates of siblings are also combining resources to get a proverbial foot on the property ladder.

While partnering with a family member deepens the money pool, equally as importantly is that it can provide the broader perspective often required to make a prudent property investment decision.

Our Managing Director, Philip Ryan recently lauded the input and influence of his wife on some of his most important investment decisions.

“Investing with the emotional and financial support of your partner can provide the clarity of thought and consideration you require to make an investment decision that’s right for your family,” he said.

“You have a shared vision for your financial future and often your collective financial resources provide more potent buying power at the bargaining table when it comes to securing finance and making an offer on a property.”

However, like all investment decisions, there are two sides to each story and a number of details to consider. Below we explore the pros and cons of combining financial forces for property investment.

The pros of family property investment

All those in favour, say “buy”.

• Trust: Typically, family members are comfortable investing with one another because there is trust between all parties. That personal relationship breeds a mentality of being in the investment “together”. All investors are connected and committed to achieving the best outcome.
• Access to the market: It takes time to save a deposit and with more restrictive lending policies being adopted by banks and financial institutions, higher deposits are required to qualify for a loan. Two regular contributions to saving a deposit could allow access to the market sooner rather than later.
• Buying power: By pooling money with a family member, the deposit can be increased, bringing more buying power to the table. This extra capital could facilitate a purchase in a better location, with greater long-term prospects for growth.
• Shared risk and expenses: Owning a property singularly means taking on all the fees and costs of purchasing and owning a home; such as stamp duty, pest inspections, mortgage repayments, council rates, repairs and renovations, by yourself. Having someone to split the costs is a great way of freeing up some income to save, finance other investments or simply fund a more comfortable lifestyle.

The cons of family property investment

Some of the disadvantages of family investing include:

• The impact of loss: Not every investment is a bona fide winner. When members of the same family invest in a property or business together, if it takes a hit, so does the financial health of the family unit. If partners share an investment it takes away some of the diversity in your respective portfolios. A poor investment has potential to fracture personal relationships.
• An unequal partnership: One party may have put in more money, time or effort into securing the investment opportunity. This could lead to an assumption that they are a majority holder and will be making the decisions on the future of that investment. An imbalance or disagreement over the power to make choices that impact investment outcomes could lead to conflict, resentment in either parties, or feelings such as lack of control.
• The decline of professionalism: When partnering with a financial institution, the relationship is kept formal, with many processes and systems in place to resolve any disputes as they may arise. The level of familiarity between parties when it is a family investment means that often, responses are dictated by emotion rather than facts and figures. In an environment that needs to be calm and measured, the decline in professionalism – not dotting the Is and crossing the Ts – can have a profound effect on investment outcomes.
• Increased risks: Depending on how your loan is structured, if one party strikes financial trouble elsewhere in life, the other party’s property interest could be vulnerable to creditor action.

Other things to consider

Whether you are a borrower, a lender or in an equal partnership with a spouse or family member in a joint investment, it’s important to set some boundaries prior to making a commitment to avoid any misunderstandings in future. Make it clear that despite the family connection, it’s best to treat the investment or loan like a business arrangement.

As with all investment decisions, be sure to seek professional financial advice to ensure you’re making the right decision for your financial goals and situation.

Looking for more on making a property investment? Weigh up the benefits of residential, commercial or industrial property for your portfolio. Or, if you’re considering another style of property investment, learn how a mortgage trust could be an alternative step into the property market.