Pooling resources and buying a home with friends sounds like a great idea: you don’t have the down payment on your own, but hey, Jimmy’s a nice guy, there’s plenty of bedrooms––why not?
Like all deals, this one could fall apart quickly if you both aren’t careful.
1. Vet Your Friend(s)
This isn’t the time to tiptoe around big questions. If you’re in bed together, hypothetically, openness is key when buying a home with friends.
- Review finances: Lay out everyone’s credit scores, monthly income, down-payment portions, extra savings accounts, retirement funds—everything. When the roof needs replacing a year after you buy, that is not the time to learn Jane doesn’t have extra cash for big fixes.
- Talk responsibility: Are your friends generally dependable people? Do they follow through on what they have promised? Will everyone be open and honest?
- Consider business acumen: Buying a home together is a business deal. It’s not just a residence but an investment. Make certain your co-owners have a business-focused orientation.
2. Get a Loan
Experts disagree about whether all the owners should apply for the mortgage loan. Some say every owner should be listed on the loan paperwork, in order to avoid future disagreements about repayment. If one partner’s income isn’t enough to cover the mortgage payment alone, you may have to supply all names.
Others say in order to qualify for the best loan, only the person with the best credit and highest income should apply. If one of you has a significantly higher credit score, having the other person sign, too, could mean higher rates.
3. Polish the Paperwork
Hire a lawyer. Write up a contract. If this makes you squirm—your friendship is so great; nothing could go wrong, right?!—think about all the problems that could arise, from major storm damage to someone wanting out to start a family, to one of the partners losing a job. Or worse—who inherits your share should something happen? You could be best friends since birth, but it’s still vital to sign on some dotted lines when buying a home with friends.
You might consider a Tenants-in-Common deal, where you all own shares of the property. Either way, make sure the contract includes these details:
- Payments and ownership: Spell out who contributed money to the down payment and who pays for what portion the mortgage, real estate taxes and home repairs.
- Receipt of tax deduction: Only one owner can claim a tax deduction on the home. Specify who will claim the deduction and what the co-owner(s) will receive as compensation.
- Decision-making process: At the outset, make a plan for resolving disputes about home maintenance costs. Otherwise, every needed repair can create disagreements.
- Daily life: Much like sharing a rental, sharing home ownership requires rules. Set out guidelines about noise, parties, guests, cleanliness and pets.
4. Plan for the End
Expect your co-ownership of a home to last only a few years. When one of you wants to wed, or move to another city for a job opportunity, you should be able to exit with your money intact. Will you sell the house? Buy each other out?
If you’re worried the hard questions might risk your friendship or your deal, then maybe buying a home with friends isn’t the right choice. But if you can come to agreements on all of the above, owning without carrying the sole burden of all the costs can prove a huge boon.