While most homebuyers are married couples, a marriage license is certainly not a requirement for buying a home. Teaming up with a friend and pooling your resources can make buying a home affordable. However, there are potential downsides to weigh before buying property with your pal.
Here’s what you should consider if you’re thinking about buying a home with a friend.
Pros and Cons of Buying a House With a Friend
Buying a home with a friend can come with big benefits, including making homeownership more affordable. However, it’s important to be aware of the potential downsides before making the commitment.
Pros and Cons of Buying a House With a Friend
|You can split homeownership costs and responsibilities.||Things can turn sour and hurt your friendship.|
|Together, you have more purchasing power.||Your friend’s financial situation can affect your chances of home loan approval.|
|You can begin building equity.||It can be difficult to move out.|
|You can get to live with a good friend.||Your friend’s mistakes can affect your credit.|
|You can avoid paying for private mortgage insurance.|
Are You and Your Friend Compatible?
Just because you’re friends doesn’t mean you’ll be compatible living together. It’s one thing to get along and then return to your own private residences, but it can be a much different experience living under the same roof each day. Differences in living style can erode the friendship and affect your investment.
“Before committing to purchasing a property with a friend, I would suggest that each party take a long, realistic look as to whom they are partnering up with and the potential for the relationship to last,” says Richard Payne, chief legal officer at Ligris + Associates, a law firm in Boston specializing in real estate.
Owning a home also means you’ll need to make financial decisions together.
“Knowing how you work together as a joint unit is critical, as homeownership will require many decisions — large and small — that will require cooperation and compromise, such as repairs, maintenance, upgrades, how much to spend, and who is responsible for what,” Payne says.
Are You Both in Good Financial Shape?
If your friend has a history of financial ups and downs, you might want to think twice before you go into business with them. However, if you and your friend both have good credit scores, predictable income, and similar spending habits, then it might be a good match.
“Each party should know each other’s finances including spending habits, debts, income, and whether both or one party will obtain the financing,” Payne says. “A joint discussion with a loan officer or mortgage professional to determine borrowing options would also be advisable at this point.”
What Are the Benefits of Co-Owning a Home?
Co-owning a home can help you get a bigger mortgage and start building home equity sooner.
“The pros of buying a home with a friend are that two buyers or borrowers can join their incomes and credit histories and buy larger homes or condos with more living space,” Payne says. “Especially in these times of COVID, younger homebuyers are looking for more living space with room for home offices, which in turn leads to higher price points.”
Know the Financial Obligations and Implications
Buying a home with a friend may seem like a fun idea, but you also need to be realistic about how this type of commitment can affect both of your finances.
“The biggest risk for friends buying a home together is similar to that of married couples. If the relationship deteriorates, the investment is in jeopardy,” Payne says. “Other issues can also arise even without the ‘break-up’ — for example, if one person loses their job or is not carrying or contributing their share of the costs of homeownership.”
One downside to buying a home with someone you aren’t married to is that your priorities and goals can go in divergent directions at any time. You haven’t quite committed to a life together, just an investment — and you don’t know how long that’s going to last.
What’s the Best Way To Split Ownership?
The two main ways to split ownership of a home with your friend are joint tenancy and tenancy in common.
With joint tenancy, each buyer has an equal share of equity in a 50-50 split of the property. If one owner dies, their share is passed on to the other owner.
Tenancy in common
With tenancy in common, you can split the ownership into unequal shares. For example, you might own 70% of the property and your friend owns 30%. You’re both also able to leave your share of the property to a beneficiary in the event that one of you should die.
“When friends are purchasing property together, they should always sign a legally binding contract known as a cohabitation agreement or cohabitation property agreement created by attorneys,” Payne says. “Cohabitation agreements are very similar to prenuptial agreements and are sometimes referred to as ‘no-nups.’ These contractual agreements address all aspects of the ownership, management, and potential division or sale of the property should the relationship end.”
How Will You Handle Paying Common Bills?
You may decide to divide and conquer your bills — or you could pay them out of a joint bank account that you both contribute to. Either way, you and your friend will need to figure out a system to pay homeownership bills. Keep in mind that you’ll both be faced with the following expenses:
- Property taxes.
- Homeowners insurance.
What Kind of Home Do You Plan To Buy?
If you’re buying a home together, you’ll need to agree about what kind of house you’re looking to buy. Depending on your mutual priorities, this could be a sprawling house in a rural area, a townhouse in a city center, or something in between. Make sure that you want to live in the same type of home and that you’re looking for the same features.
How Will You Make Decisions Together?
Beyond the monthly expenses and mortgage payments, you and your friend will be managing a property together. This means that you won’t be able to anticipate every question or decision you’ll be faced with — all the more reason you need to work as a team when it comes to making decisions. Working as a team also means making some compromises that you wouldn’t need to make if you owned property by yourself.
How Will You Resolve Disagreements?
Resolving disagreements as friends can be easier when there isn’t a major investment on the line. However, if you co-own a property, then that can raise the stakes. Disagreements are bound to happen over time, but if you have plans in place on how you’ll resolve certain issues, that can help you avoid major conflict.
What Happens If One of You Wants Out?
So, what if one of you wants to get married or needs to move for a new job? Payne compares this scenario to a divorce in that you need to split up the assets and liabilities of homeownership — but with fewer statutes and guidelines over who gets what and who is responsible for what.
“If both parties signed any notes on the property, then they are both 100% responsible for the repayment and there is no quick and easy way to relieve one partner from that responsibility,” Payne says.
One way to avoid a messy ending is by putting down an exit plan in writing before you close on the home. This should explicitly cover how you’ll handle a situation where one of you wants to terminate the partnership.
Here are answers to some frequently asked questions about buying a home with a friend.