Question:
Hi, I’m Jerry, a 27-year old executive based in Kuala Lumpur. Lately, I had bought a condominium unit for RM 600,000 with Ricky, my co-owner who is a colleague of mine. We both earn a fixed salary of RM 4,000 a month and both of us would hold onto the unit 50-50 and share all expenses equally. Our plan is to hold onto it for a period of 5 years and flip it for capital gains in the sixth year.
As such, my question is: ‘What will happen to our property unit if anyone of us passes on before we sell it off?’
Answer:
Here, let’s say, Ricky is the one who passes on prematurely. So, Jerry shall be its surviving investor. Upon Ricky’s passing, the condominium unit would be frozen and Ricky’s portion of the property shall form part of his estate, hence, raising a tricky situation as to how best to administer the property. Let’s start with Ricky:
Who Inherits Ricky’s Portion of the Property?
First, it depends on Ricky’s testacy status. If he passes on with a Will, his portion of the property shall be bequeathed to his beneficiaries as stipulated in his Will. The process of transferring the ownership from Ricky to his beneficiaries would take around two years, the fastest. In other words, the condominium unit could not be sold off in that two-year period.
If Ricky passes on without a Will, his portion of the property shall be distributed based on the Distribution Act 1958. His beneficiaries shall include any of Ricky’s surviving parents, his wife and children based on the following ratio:
The entire process would often take about 2-5 years, double the time needed if Ricky has a written Will before passing on. So, in the meantime …
Can Jerry Afford to Keep the Property?
Let’s focus on the RM 600,000 condominium unit.
Assuming that this property is funded with a 90% loan-to-value mortgage for as long as 35 years in loan tenure, its total installment is about RM 2,400 a month. Inclusive of its maintenance fee, sinking fund, and other related expenses, both Ricky and Jerry would incur RM 2,800 (or RM 1,400 each) a month to keep their investment property.
But, if Ricky passes on, Jerry is required to step up for Ricky and pay RM 2,800 a month to maintain the property. If Ricky continues to earn RM 4,000 per month from his employment, how long can Jerry keep the property if he fails to secure a tenant? What if he has other debt commitments such as car loan and PTPTN?
Couldn’t Jerry sell the property?
Nope. Remember the property is frozen once Ricky passes on irrespective of his testacy status (with or without a written Will).
What about MRTAs?
If Ricky and Jerry had bought MRTA to cover their mortgages for 35 years, then Jerry would have an easier time in keeping the property. But typically, most real estate investors would choose to buy MRTA with the shortest term (5-10 years) to save on cost. In this case, Jerry would need to step in for Ricky as the cover is insufficient to pare down the outstanding mortgage.
What if Jerry couldn’t afford to keep the property?
The condominium unit will be taken back by the bank and it will be marketed in the auction market. Jerry will not only lose his investment property but he shall also be blacklisted by the bank, filed in for bankruptcy, and no longer be eligible to obtain any loan facilities such as credit cards, car loans, mortgages … etc.
So, What Can Jerry and Ricky Do About It?
There are two methods to protect their interest in the condominium unit:
1. Insurance Trust
Jerry and Ricky should buy themselves a term life insurance policy each and the sum assured works out to be their share of mortgage payments for 60 months. For instance, Ricky’s share of the mortgage is RM 1,200 a month. Thus, the sum assured for his life policy is RM 72,000.
Subsequently, they should assign their policies to an Insurance Trust. So, if Ricky passes on prematurely, his insurer will pay out the sum assured to their Trustee and out of which, the Trustee is tasked to make the mortgage payments. Hence, this gives Jerry a breather as he administers the affairs of the property unit.
2. Property Trust
After buying the condominium unit, Jerry and Ricky can set up a Property Trust. They shall transfer the legal rights of the property to the trustee via a power of attorney (POA). They can set a clause which allows the property to be disposed of by the trustee after he has obtained consent from Jerry, the surviving owner of the property for the disposal if Ricky passes on prematurely.
Hence, with a Property Trust, it shall prevent the condominium unit from being frozen in the estate distribution process if any of the two co-owners passes on prematurely.
In Conclusion:
Co-investing into real estate has become increasingly popular among locals as it is more affordable. With that being said, I believe it is important for investors to also consider the downside of property co-ownership and have necessary plans in place to tackle the issues mentioned above.
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