When home prices continue to rise (and rise!) all over the country, some would-be homeowners are thinking about alternative paths to homeownership -- like teaming up with friends to buy a house together. This isn't a new solution, but it can feel very unusual for people who have never done it before or who don't know anybody else who's joined forces with friends to buy a residence. And like most big life decisions that aren't all that common, it's smart to research your options before you commit to one path over another.
If you have a friend you'd consider tapping as a real estate partner, then make sure you're covering all your bases before you sign any documents. Buying a house together isn't as permanent as marriage or divorce, but extracting yourself from an unpleasant situation can still be expensive, time-consuming, and generally not much fun, so it's smart to do your due diligence on the front end. Here are a few of the things you'll want to consider while you make your game plan and get ready to execute it.
Renting together first is a (really!) good idea
Even if your hope is to buy a multifamily unit, such a duplex, and each live in your own space, it's still a good idea to rent with your potential housemate before you seriously dig into the buying process. Because even if you're not going to be sharing living space or negotiating cleaning schedules, there's still a lot you can learn about your friends once you move in together.
For example, if your friend has a habit of stashing food in the bedroom, that could lead to pests with the ability to infiltrate your living area, too. Or if you know your friend struggles to pay bills on time every month (or even every once in a while), that's a tendency you'll want to know about well in advance of sharing a mortgage with your buddy.
Try to rent together for at least six months before you start down the road of buying a house with your friend. People might be able to keep their more unsavory habits locked down for a shorter period of time, but six months is usually a decent stretch of experience that will help you decide whether this is really a good idea or just wishful thinking.
Your combined income and credit scores will make getting a loan easier
When a mortgage lender considers lending you money to buy a home, the lender looks at a number of financial indicators, including your annual income, your credit score, your savings, any money you've accrued for a down payment, and more.
So when you're trying to buy a house with a friend, you can really help each other out at this stage; the lender will consider both incomes, both credit scores, and so on, in order to decide how much money to loan you. Generally speaking, a bigger income means an easier time securing a loan, so in most cases, buying with a friend will give you more options when it comes to mortgage loans.
That said, income aside, your friend might have an abysmal credit score or a paucity of savings that could be problematic, especially if you're looking at a bigger house with more bedrooms than you'd prefer on your own. Sometimes the temptation presented by a bigger (shared) kitchen can make you blind to red flags, and you'll want to make sure that you're both making a smart decision about how much you can spend. Don't forget: You'll also be paying for taxes and homeowners' insurance together, so make sure you understand how adjustments in either of those factors could increase or decrease your monthly mortgage payment.
It pays to be transparent -- about finances and everything else
Friends who buy a house with the intent of living in it together, and who are able to cohabitate successfully for years, were transparent from the very beginning with one another. We know: It is inherently awkward to ask your friend to see a copy of their credit report, and it probably feels like a huge violation of privacy to ask if you can look at their bank statements. But the people who survive and thrive in the buying-with-friends partnerships were able to do so because no unpleasant surprises were lurking for anybody around any corners.
When you buy a house with a friend, you are going to be entangling yourself financially with that friend for (ideally) years, so vetting finances is always a good idea -- but transparency goes well beyond finances. Do you really want to discover that your bestie was planning on moving her fiance into the master bedroom by running into him in the kitchen some random morning? Has your old college roommate always wanted a dog, and are they intending to go shopping for one as soon as the closing paperwork is all signed, even if you're allergic?
Talk about your expectations, your pet peeves, your romantic and pet plans, and yes, your finances, well before you start shopping for a house. Sometimes surprises are nice, but realizing that your roommate/co-owner is starting a goat farm in the backyard is never a nice surprise.
Discussing both 'wants' and 'needs' can save lots of time
Houses aren't quite as individualized as human beings, but there are nonetheless homes that can accommodate any number of human relationship styles and configurations. Maybe a house with shared kitchen and living space, but two master bedroom suites, is perfect for your plans, but maybe you'd prefer to share a multifamily property and each occupy your own unit.
When you're discussing your plans with your housemate-to-be, it's smart to have a "wants/needs" conversation where you both disclose your preferences and your plans for a living space. For example, if it makes your skin crawl to consider sharing a bathroom, you'll want to know that at least two bathrooms is a must-have in any property you buy. And if you work from home and would like to use a bedroom, attic, or basement for an office, you'd better tell your roommate that before they decide to turn it into a home gym, guest room, or photography lab.
You may discover that things you both need are fundamentally incompatible, and that's sad, but it's better than figuring it out after you're paying a mortgage together. Talk about existing and potential future opportunities and relationships, too, so that your housemate knows you still plan on hosting your significant other at least three nights every week, or that you'd like to set up a nice guest room (or at least a guest area) for when your brother comes to visit.
You can split monthly expenses
Going over your monthly expenses is especially useful after you hash out your wants and needs because it will help you divide things more equitably. The housemate who works from home might be more invested in paying for the upgraded high-speed internet package, and the housemate with a bathtub in the master suite might agree to take more responsibility for the water bill.
Maybe splitting everything 50-50 seems like the most equitable arrangement, and perhaps it is, but there's probably some wiggle room where you can negotiate the additional expenses and decide together whether someone wants to shoulder more of the bill in one area, in exchange for relinquishing some of the burden in another area. And if one housemate has voiced that they really would prefer the kitchen and bathrooms to be clean at all times, then this would be a good time to discuss whether you want to hire a cleaner or a landscaper, too.
You'll build equity together
Once you're all moved in, settled down, and paying the mortgage, you'll both (or all) be building equity in your home. Even though this is just the beginning of the road and not the end, it's wise to determine how that equity will be divided when the time comes to sell the house and collect on your investment.
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Again, this is an area where maybe a 50-50 or otherwise equally divided split seems like your best option, but if one housemate has forked over more for the down payment or is paying a larger share of the mortgage every month, then it probably makes sense to talk about increasing their allocation of current and future equity in the home. Maybe one housemate even wants to put additional money toward the principal every month. Whatever the case, make sure everyone is on the same page well before the first mortgage payment comes due.
Decide in advance how to handle mortgage interest deductions
One perk of homeownership that you may have heard discussed before is the mortgage interest deduction (MID), your ability to deduct the amount of money you've paid into your mortgage interest every year on your taxes. Hurray for bigger tax return checks!
But before you go claiming your MID, have a discussion with your housemate about how to split the deduction. (You didn't really think the government would let both of you claim all of it, did you?) This is another scenario where circumstances might invite you to reconsider an equal split of the MID, especially if one of you is paying a larger share of the mortgage than the other. Whatever you do, make sure that when you file your taxes, you aren't exceeding what you actually paid in mortgage interest. The IRS will notice!
Outline household and financial responsibilities before you start shopping
You may have already determined the financial landscape, but all of you should sit down at least one more time (preferably with a lawyer -- more on that below) to document, in writing, what the house rules, household responsibilities, and financial responsibilities will be while you all live together. That way, you can all live together in more-or-less harmony.
Talk about cleaning the house, overnight guests, pets, kids, food allergies, storage preferences (including in the fridge or pantry for your food), and anything else that might have emerged as a point of contention during your previous discussions or during your time living together. Whose furniture is going into the common areas? How will you handle big purchases, like a new television for the living room? What's the plan for paying for any necessary repairs to the house? Hammer out the terms and conditions, then make it official.
Involving a lawyer can be a really good idea
Some people may believe that talking to a lawyer before you've even bought a house together will spell doom for your joint homeownership venture. If you're expecting things to go that badly, then aren't you at some level predicting your own future?
That's one philosophy, but perhaps a healthier view is "life happens no matter what you do, and it's better to prepare for it." It's possible that there's no need for a legal contract outlining both your household and financial agreements -- but heaven forbid your housemate or you gets hit by a bus or is involved in a plane crash and dies. Or maybe something much less fatal but still unfortunate, like a divorce between married friends who co-own a house with you, or a job loss, or any number of circumstances beyond your control.
Talk to a lawyer, preferably one who's helped more than one set of unrelated people buy a house together. Ask them what scenarios could unfold and how to protect yourself against them. Come up with a plan that sounds reasonable to everybody, document them, then sign and seal them so that everyone knows what they should do if the worst happens. Unfortunately, "the worst" does also include "everything I thought I knew about my housemate is a lie, and I want out right now," so understand what your options are should that unfortunate scenario manifest, too.
Talk about where your career could take you
Maybe you aren't thinking ahead about your career yet, which is absolutely forgivable, but you should do some pondering before you commit to buying a house -- whether with friends or solo. If you want to avoid capital gains taxes when you sell your home, then you'll need to live there for at least two years. So even if you're perfectly happy in your current job, but you know that no other big companies in your industry would offer similar opportunities in your city, then understand that you might want to move before your 15-year or 30-year mortgage is paid. And the same goes for your housemates-to-be.
So spending some time thinking about where you'd like to be, career-wise, in the next five to ten years, then talk those plans over with your aspiring co-homeowners and ask them how they're thinking about the future.
Moving out can be complicated
Even if everyone is on good terms, when one co-homeowner is ready to move out before the other, things can get complicated -- fast -- especially if you neglected to talk in advance about what you'd do in this situation. Will you find a roommate to shoulder your portion of the mortgage? Or will you give your co-homeowner the opportunity to buy out your part of the mortgage and take on the home solo?
This can get particularly difficult to parse after you've been living together for some time, especially if there have been big repairs or improvements to the home that one or another person shouldered. You can't exactly take a furnace or a roof or a water heater -- or a deck -- with you when you leave. So make sure you've discussed the possibility that one of you might want to move out before the other (or others) and make sure you have an agreed-upon plan for how to handle it if the possibility becomes reality.
Your credit score could get dinged
It's normal for your credit score to dip a little bit right after you buy a house, but if you haven't done your due diligence in terms of real estate partner, then a small dip could become a persistent downward trend. You are linking yourself financially to your housemate or housemates, and their poor financial decisions can most definitely affect you even if you aren't on the hook for their credit card bills. Their ownership of the house can be considered a financial asset that creditors could potentially go after if their financial problems become acute enough to warrant it.
Make sure you know your potential co-owners well enough that their credit score isn't going to negatively follow you around. It pays to repeat: We understand that financial conversations between friends can feel like "prying," but when you're tying your life to someone else's to this extent, the need-to-know parameters expand considerably.
Your ability to secure another loan could be compromised
Even fragmented among joint homeowners, a mortgage loan is a hefty loan for, usually, hundreds of thousands of dollars. If you've decided to put the house in only one person's name, then that person will be considered responsible for the remaining balance on the loan, and those large dollar amounts can make it difficult for them secure another loan -- even if their finances are pristine.
Depending on what your mortgage loan looks like and how credit companies report assets, be aware that you may be unfairly penalized for having a loan on your balance sheet that might appear excessive for your income. So if buying a yacht in tandem with your house has always been a dream of yours, it could be smart to start saving harder or adjust your expectations accordingly.
You may want to consider securing life insurance for each other
Accidents happen, and sometimes those accidents lead to disability or death. Do you and your co-homeowners know what you'd do if one of you were to suddenly die?
Granted, this is a morbid conversation, and life insurance isn't the answer for every household. But in some circumstances, it might make sense for you to each take out life insurance policies on each other that will cover each individual's remaining portion of the mortgage loan, so that if the unimaginable does actually happen, housemates will know that at least their home won't be in jeopardy because of a tragedy.
Creating an exit strategy can save you a monster headache
Maybe your exit strategy is to sell the home together in 30 years, but you should always make a contingency plan regardless. That way you'll have a road map for what to do if someone decides they want to leave early, or falls in love and wants to buy another home with their new partner, and so on.
Before you go shopping and sign the closing papers together, make sure you know the answers to at least the following questions:
How much notice will you need before one of your housemates decides to move out or move on?
What buyout options can you legally offer the remaining owner or owners? What seems fair and equitable to everyone?
If a buyout is warranted, how will you determine the home's fair-market value so that the departing owner gets a fair share of equity? Will you hire an appraiser and possibly even an inspector to nail that number down?
Under what circumstances should you ask a co-owner to leave? What will you do if one of you can't pay the mortgage? If one of you consistently breaks commonly held house rules?
Potential co-owners with adult children might also want to discuss death and inheritance with their housemates. How will inheritance be handled if you should die while co-owning a house?
Owning a house with a friend requires a lot of work to make it work well, but if you're willing to ask some hard questions, share some personal information, and strive to get on the same page when it comes to rules and exit strategies, then you may have what it takes to succeed as co-homeowners.
Posted by John Crowe on