Are you a real estate investor? 

Do you co-own properties with your friends and family members? 

Do you intend to buy your next investment property with your co-investors? 

If the answers to any of the above is Yes, read on. 

As I write, co-ownership of properties is a fast growing trend for it offers people a more affordable avenue to invest in real estate. It allows investors to leverage on each other’s strengths in regards to age, capital, credit profile, and any other relevant expertises to quickly build their real estate portfolios. 

With that being said, many don’t realise the risks that are associated with being a co-owner of a piece of real estate. Regrettably, some realised them a little too late and thus, resulting in financial distress and nightmares when administering the affairs of the property. 

In this quick guide, I’ll share 3 major issues on property co-ownership and more importantly, how they will impact the co-owners. I’ll end by offering a couple of solutions that all co-owners could take in advance to avoid the complications as stated below: 

A Hypothetical Situation 

Understandably, there are many structures for property co-ownership. 

As such, I’ll keep it simple here. Let’s say, we have two buddies: Alfred and Matt and they both decided to invest in a condominium costing RM 800,000. Both of them earn RM 6,000 a month from their salary, are below 35 years old and had obtained a joint mortgage amounting to RM 720,000 at an interest rate of 3.5% per annum. 

Their mortgage installment is around RM 3,000 a month and they agree to split the commitment and all property-related transactions (rent, maintenance costs and sinking fund … etc) equally as they are equal owners of the property. 

They plan to hold onto the property for ten years and dispose of it for a profit. 

Unfortunately, Matt passes on after four years of investing into the property. As such, what will happen to their condominium? 

Complication 1: The Property Will Be Frozen 

The condominium will be frozen as half of the property falls under the estate of Matt and shall be distributed in accordance to his testacy status (have a written will or not). 

If Matt does not have a Will, his stake in the property would be distributed most likely to his parents, wife, and children based on the Distribution Act 1958. If he has a Will, his stake in the property will be distributed in accordance to his Will. 

The process of transferring Matt’s stake in the property unit to his beneficiaries shall take around 1-2 years if he has a written Will and 2-5 years if he has no Will written. Why? This is because it takes more paperwork and legwork to expedite the transfer of property ownership in the absence of a Will. 

In Alfred’s case, he is forced to hold onto the condominium unit as he could not sell off the unit as long as it remains stuck in the estate distribution process and thus, leading us to: 

Complication 2: Alfred May Become Financially Stressed

Let’s think about it. 

Alfred earns RM 6,000 a month and he is required to step in for Matt, paying as much as RM 3,000 a month in mortgage installments.

The amount will come up to be about RM 3,500 a month if its maintenance fee, sinking fund, quit rent, assessment, … etc of the property is to be included. This leads to a handful of questions: 

What if the condominium remains vacant for a long period of time? 

What if both Alfred and Matt did not buy MRTAs for their joint mortgages? 

Does Alfred have the financial means to make all these payments while the unit is stuck in the estate distribution process? 

If Alfred could not afford to make these payments, he will end up defaulting the mortgage installment and other property-related expenses. Thus, he risks being blacklisted by his bank and other service-providers, which would greatly impact his eligibility to qualify for any financing facilities such as home loans, car loans, credit card applications, … etc in the future. 

Complication 3: There Will Be More Co-Owners of the Property

Let’s say, Alfred has managed to hold onto the property and finally, Matt’s stake in the condominium is transferred to his beneficiaries. The concerns are: 

1. All Beneficiaries are Adults 

First, if Matt’s beneficiaries are his parents and his wife (all are adults), it means that Alfred will be sharing the ownership of the property with three co-owners.
This complicates the adminstration of the property. For instance, if Alfred plans to sell the unit, he needs to get the consent from Matt’s parents and his wife to dispose of the condominium. If one of them decided against it, Alfred could not sell the property. 

2. One of Matt’s Parents Passed On

Second, let’s say, Matt’s father passed on. Guess what will happen? 

The property unit will, once again, be stuck in the estate distribution process. In this case, Matt’s father’s stake in the condominium unit would be distributed to his beneficiaries based on his testacy status. Thus, it is possible for the property to be co-owned by Matt’s siblings, if any, and it will further complicates things. 

The more co-owners, the more complicated it becomes when managing a piece of property. 

3. Matt has a Child 

Let’s say, Matt has a son. His son shall be entitled to his portion of the property. However, his son is a minor and thus, is not eligible to make any decision when it comes to disposing the property. Hence, all co-owners shall be forced to hold onto the property until Matt’s son attains adulthood (18 years old). 

Conclusion: How to Avoid The Above Complications? 

The goal is to prevent the condominium from falling into the estate distribution process and thus, avoiding all of the complications discussed above. 

To do so, Alfred and Matt may form a Property Trust to hold onto their property and thus, preventing the property ownership to be frozen in the event of any of the triggered events (premature death, total permanent disability, comatose, … etc) happened to any one of the co-owners. The trustee appointed may dispose of the property as instructed if any one of the events happen. 

In addition, both of them could buy a term life insurance policy and assign their policies to a designated insurance trust. In the event of Matt’s passing, the sum assured from Matt’s policy shall be paid to their insurance trust and the trustee is tasked to use the monies to pay all property-related expenses. Thus, Alfred is less financially burdened for he waits for the property to be sold off in the open market. 

Perhaps, your situation is different from other real estate investors. If that’s you and you wish to explore for more ideas, please do feel free to book a 30-minute private session with our estate planning consultant by filling the details below:

Jocelline Chee
Jocelline Chee

As a Full-time Senior Professional Estate Planner, Jocelline seeks to understand every client’s unique asset holdings and legacy wishes, before recommending a suitable Will and/or Trust structure to meet their needs. She is well-equipped to point out various blindspots in Legacy Planning, that her clients may have. With Jocelline, you can be assured that your legacy planning journey will feel more like having an open-hearted coffee session with a trusted friend, as compared to a formal and awkward session with an equipped advisor.

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