Two for the Money

Co-investing in real estate with family or friends can be a win-win proposition in today’s market. Our experts sound off on what you need to know.

The Toronto Regional Real Estate Board predicts that by year end, the average price of a home in Toronto will hit $1.025 million — almost $100,000 up from the average in 2020. For first-time buyers, this can make getting into the game trickier — Canadian law requires a minimum down payment of 20 percent to buy a home over $1 million.

Enter the co-investor. For those fortunate enough to have the financial means, helping an adult child, a sibling or a close friend with a down payment can pay dividends down the road — not only from the satisfaction of helping a loved one buy their first home, but as an investment that you can recoup at a significant return when it comes time to sell.

“Co-investing can be very advantageous for both parties, and young buyers can get into markets and neighbourhoods that they never would have dreamed of,” says real estate agent Mark Richards, founder of The Richards Group. For example, if parents contribute half the 20 percent down payment, or 10 percent of the home’s purchase price, then as co-investors they own 10 percent of the equity.

“When the property is sold, they get that initial investment back plus the raise in the value of the property,” Richards says. With Toronto prices climbing 15 percent year-over-year, that could work out well for everyone involved.

Contact Jenny Simon to explore your co-investing opportunities: C 416.728.2495 E jenny@therichardsgroup.ca W therichardsgroup.ca

Make it legal The key to making it all work is an airtight co-investors’ agreement, ideally drawn up by a real estate lawyer. This should nail down who is responsible for issues like major repairs, or what happens if the principal owner dies or is unable to make mortgage payments.

“It’s essential to talk with a lawyer and plan out the worst-case scenario,” says Richards Group agent Jenny Simon. “Drawing the lines very clearly at the beginning is the best way to avoid stress.”

Open conversations about death, divorce, and defaulting on mortgages — all awkward topics to bring up at Thanksgiving dinner — are necessary for the arrangement to succeed. “Take a close look at the relationship and ask yourself whether it can withstand the stresses of loaning large sums of money,” says Simon.

Typically with family co-investments, says Simon, one individual (or couple) is listed on the property title, while the other party holds a promissory note — a legally binding agreement between the parties containing a written promise to repay a definite sum of money. Should things turn sour — either by death, foreclosure, or the rupture of the relationship — the co-investor has the ability to register against title, ensuring they are paid back before any third parties (after the bank, of course) when the property sells.

In other scenarios — siblings or friends sharing a principal residence, for example — co-investing in real estate also requires you to update your will. If multiple parties co-own a property — meaning everyone’s name is on the title — they can either be joint tenants or tenants-in-common. If one of the joint tenants dies, the property automatically passes to the other(s), as it does with married couples. Tenants-in-common each have a percentage interest in the property, and if one dies, their share does not necessarily pass to the other owners. It’s worth consulting an estate lawyer if you think conflicts might come up with any of these situations.

It’s also important to envision how the coinvestment relationship will eventually end. Will it be short-term or long-term? Will the principal owner have the option of buying out the investor’s share at a later date? “It’s important to talk things through and come up with a solid exit strategy,” Simon says.

Winning streak As with any investment, there is risk involved — home prices may sink, the developer on a pre-construction condo may go belly up, someone may lose their job. “Everything has the option to go positive or negative,” says Richards. “If the market does shift, at least you can say that you invested in your sister, your best friend, or your child.”

In the end, with the right partnership and team of professionals on your side, co-investing can be a winning strategy in a real estate market where thinking outside the box can reap big rewards. “The value proposition for both sides of the co-investment is key,” says Richards. “You’re creating an excellent investment for yourselves, not just giving money to a loved one. And the value of your investment is something they’ll appreciate for a very long time.”

Contact Angie Alvarez to learn where you stand with your mortgage: C 416.315.6261 E angie@capitalhomelending.ca W mortgageweb.ca/angiealvarez