Rapidly rising and falling property prices are a fact of life in Sydney and many other places across Australia. Those entering the property market can be forgiven for feeling daunted by the cost of a first home or the initial outlay required to get started in property investment. There may be a workaround, though. 

Property co-ownership can offer financial advantages. Be it a couple, or a group of friends who would otherwise consider renting together, or a budding investment consortium who might want to consider co-ownership as a serious option.

There are pros and cons to co-owning property. Co-buyers can pool their assets to make a down payment and combine their credit to get a mortgage. They might share maintenance or repair costs. They may still take advantage of various federal and state government schemes including First Home Owners Grants, First Home Saver Accounts and exceptions to stamp duty.

On the other hand, co-ownership is definitely not the answer for the uninformed or underprepared. To understand the benefits and financial risks, here are some co-ownership options.

1. Tenants in common

Most friends looking to purchase a share in property are not thinking about inheritance or a potential friendship breakdown. In fact, they may be thinking about the benefit of building a credit history by:

• Making mortgage payments rather than paying rent. 
• Collecting some income.
• Watching the market value of the property rise and then selling and reinvesting the proceeds elsewhere. 

For friends, owning as tenants in common may be appropriate. Each tenant in common owns an individual share in the property, and those shares do not need to be equal. Each shareholder can sell his or her share, borrow against it or bequeath it independently. Yet be aware, owning property as a tenant in common also has serious tax implications.

With a tenancy in common, therefore, it is very important to negotiate and agree upon: 

• The details of the ownership percentage.
• Buy-out rights.
• Approval of additional or new tenants in common.
• What to do in the event of foreclosure or personal bankruptcy. 

For the legal and financial protection of all involved, these details should be formalised in a co-ownership agreement. Failure to work these things out is naïve and may end in a lawsuit.

2. Joint tenants

In the early part of the twentieth century, most married couples were presumed to own property as joint tenants. This matters most when a partner dies. 

Imagine: Mum and Dad owned a house for many years; Dad died; Mum inherited the property automatically. In legal theory, both always owned an undivided share in the whole property and neither could have sold or bequeathed their interest individually. This means there is no danger that Mum could have found herself living with a stranger who inherited Dad’s share. 

When parties own property as joint tenants, this means all joint tenants have equal ownership interests in the property and a right of survivorship exists (this means that if one of the joint tenants should die, the property is automatically transferred to the survivor).

Typically, joint tenants are husband and wife, or couples in long-term relationships. However, unless you specify otherwise when you are purchasing the property, the law assumes that your purchase is a joint tenancy. This can create issues when individuals in a couple purchase property together, and then decide to split. This can be further complicated if they are both living in the property at the time. 

The only legal avenues to end a joint tenancy are:

• When the property is sold to a third party.
• When one tenant transfers their interests to the other tenant, meaning that tenant owns the property in full.

This can be a challenging and oftentimes fraught legal position for individuals to find themselves in, especially attempting to navigate property negotiations in the middle of a relationship breakdown. However, these risks can be negated by drafting a co-ownership agreement. 

What a co-ownership agreement should cover

A co-ownership agreement sets out the rights and obligations of each person with a share in the property.  Consider that, even among the best of friends, disagreements may arise about:

• Whether or when to sell the property.
• Whether to refinance.
• Whether and how a party can be bought out.
• How to split income and costs associated with the property. 
• Mortgage repayments.

Everyone involved should have a clear understanding of the financial risk. As co-borrowers, parties are jointly liable for each other’s debts if they are using the co-owned property as security for their mortgage.

Before buying a property with a partner or friend, it is important to clearly understand the legal ups and downs of co-owning a property. You may also wish to consider the implications if you choose to live in the property or rent it out as an investment. Be sure to carefully research each option and understand how any scenario may affect you. 

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