2 person venture: 1 treats as PPOR, 1 as IP. How does it work?

Hi guys,

Myself & friend are considering purchasing a property together. Let's assume we have 50/50 ownership & have drawn up a legal contract that stipulates the terms of the venture, exit strategies, share of liabilities, etc..

What I'm not sure of is how it will work if my friend lives in the property as her PPOR & I treat the property as an IP.

1) If we obtain a loan, obviously all interest and bank fees are split. Is it possible to get 2 offset accounts that align with this loan giving us each our own account to use for daily transactions while the savings in these accounts reduces offsets against the principal of the loan?

2) My friend is eligible for the FHOG - I assume that as it this is not my 1st property & it is a joint venture she would forfeit her eligibility of the FHOG for this property & any subsequent properties she would by on her own?

3) I wish to collect rent while she lives in it, can she simply pay 1/2 the market rent to me on top of her interest payments (e.g. market rent for this type of residence is $200p/w, she pays me $100p/w)? Similarly, any expenses incurred in maintaining the property would be split & I could claim half these expenses but she could not claim her half?

4) If we were to refinance the property in the future to incorporate a LOC of which I drew on 50% of the increased equity, can this be considered solely my own draw down & all interest expenses attributed to me (i.e. my friend would not be considered to incur the interest of the interest charged for the amount drew down as her 50% of equity remains in the LOC)?

As you can see I'm not really sure of the wider ramifications of this & just trying to think out future scenarios. Any info would be appreciated.

Thanks heaps,
DJ

 

There is far too much to answer here - you are going to keep a Solicitor and Accountant very happy !!

Can you avoid the joint loan ? You are automatically starting with a mixed purpose loan. Better to separately finance your own separate interest in the property.

Even if you have to go guarantor or cross-collateralise it might be better, for instance the investor will want interest-only & may want to capitalise interest sometimes. Whilst it is in the best interests of the private owner to have P&I and pay down private debt as fast as possible.

Cheers,

Rob

 

Hi Dj
Answers in red

 

Thanks heaps guys. Sure does seem complicated.

I'm thinking I'll try & convince her to treat it as an investment & rent it out so we are both on the same page with the same agendas.

Doesn't seem to be worth the hassle!

 

Hi Dexter

Besides the obvious shortcomings of setting up something like this, the largest obstacle to overcome and deal with is the joint and several liability issue of the loan. Both of you being responsible for the entire amount not only limits your future borrowing capacity but it also means that should something happen to one of you, the other takes on 100% not just the 50% initially invested.

I've attempted to go down this path with some relatives and, after much investigation and discussion with professionals, decided against it. There's also been several posts on this topic before so try doing a search on joint several liability and happy reading.

 

I have clients who I am organising a loan & refinance for in this same situation.

A daughter living in her mothers IP, where she pays rent, wants to buy half the property.

This is a common situation because house prices in Perth are unreachable for a lot of people. The daughter can't afford anything otherwise - except a shared equity home ownership situation.

The problem is, being the daughter's first house she loses the FHOG because of the mother already owning. She pays stamp duty at normal rates. She has to have a joint loan for her new finance and with her mother's refinance, or they garantee each other. This means double the liability risk.

And the mother has a CGT problem.

 

I have been waiting for a thread to start on joint loans vs guarantees.

This is a nasty trick used by the bank that you should be aware of.

A guarantor has much more rights, being that they are not exposed to further withdrawals or redraws not for the original purpose or beyond the original agreed amount.

e.g. Mum guarantees a child's mortgage loan for $300k.

Then if child revalues equity to $500k and withdraws and spends the $200k on wild parties and then defaults, the guarantor is usually only exposed to the original $300k.

Maybe not exposed at all if the bank was negligent.

With the banks pushing people to borrow as hard and often as possible, guarantors become an obstacle for them.

Cheers,

Rob

 

That's right Rob guarantors have a limit to their liability & that's it.

I find that banks & mortgage brokers would rather do joint loans than guatantee situations because it's easier and doesn't become as messy with having to get accountant & solicitors involved expalining the rights & liabilities to the guarantor (for a fee).

But with guarantees the liability can be set at an exact amount & that's good, eg the 20% deposit can be guaranteed by Mum & Dad and once the repayments reach this point the guarantor can be released from the guarantee.