A REALTOR® hands a newlywed couple the keys to their new home and life’s journey begins. It’s the image of homebuying that has been portrayed in the media for decades, but in reality, we all know that the “typical” homebuyer has changed a lot. While married couples still make up the majority of buyers, real estate data provider ATTOM reports that the number of co-buyers with different last names has increased by 31% just since 2019. Many such buyers are unmarried romantic partners, but a growing portion represent different household compositions – friends, roommates, etc.
The rise in unconventional co-buying situations is partially due to rising home prices and high interest rates that have created challenges to homeownership, especially for single buyers. Subsequently, co-buying among friends and roommates is becoming more common.
Of course, if you’re thinking about buying a home with someone other than a life partner, there are some special factors to consider, including each party’s financial situation, long-term plans and personal compatibility. Read on for a few things to think about before beginning your co-buying quest.
Open Up About Finances:
When you’re buying a home as a single person or married couple, your personal finances are generally no one’s business but your own and your mortgage lender’s. But when you’re buying with a friend, roommate or partner, all parties need to be comfortable with the uncomfortable conversations about money. Your pesky student loans? Your co-buyer’s less-than-optimal credit score? All of that will come into play as soon as you apply for a mortgage. So, it’s crucial to talk about finances early on, according to @properties Christie’s International Real Estate managing broker, Paul Blackburn. Knowing each other’s credit scores, income, debts, and other existing financial obligations is essential for determining your budget and the extent of your shared liability.
Determine the Ownership Structure
When married couples buy together, they generally hold title through joint tenancy or tenancy by the entirety, legal structures that allow for the automatic transfer of property ownership to a surviving owner. However, it’s more likely that friends or roommates who buy together will not want ownership to automatically transfer to the other party, according to real estate attorney Kelli Fogarty of Fogarty Fugate LLP. Instead, most unmarried, unromantically involved co-buyers will opt for tenancy in common. When title is held this way, friends can more easily divide up a percentage of ownership and determine how they want their share to be distributed if they die. This option may be better suited to friends who are co-buying or for situations where one person is contributing more to the mortgage, downpayment or maintenance of the home.
Discuss Your Contributions
Determining how you’ll split the costs of purchasing and maintaining a home is a topic that requires open and continuous communication. Agree on specific financial obligations regarding mortgage payments, property taxes, utilities, and the cost of repairs and upgrades. A joint bank account to handle shared expenses may be a good idea. Besides the financial aspects of maintaining a home, it’s also important to decide who will handle other responsibilities. After all, different people have different skills, talents and tolerances, which are often tested during the course of homeownership. Who deals with the insurance company when a basement floods? Who makes design decisions? Who attends condo association meetings? Figuring out these questions before purchasing a home together can spare you from future arguments.
Understand the Tax Implications
Unmarried individuals face different tax considerations than married couples filing jointly or separately. According to mortgage lender Proper Rate, unmarried people can split tax deductions for mortgage interest and property taxes in any way, provided all names are on the mortgage and the combined deductions claimed don’t exceed 100% of the amount paid that tax year. Additionally, when a property is sold, capital gains taxes can be split similarly. Be sure to consult an experienced accountant who understands all the potential tax implications of owning a home with a friend.
Write It Down
Even if you’re fully confident in your co-buyer, it’s important to have a trusted attorney draw up an equity agreement, according to Fogarty. These agreements can clarify matters like a buy-out, one-time and recurring financial responsibilities, division of personal property upon a sale or dissolution, and more. It’s also important to remember to budget for professional services, including an attorney or accountant, when you and your co-buyer are mapping out your housing expenses.
Consider a Multi-Unit Property
According to Blackburn, friends who are buying together should consider a multi-unit building. A 2- to 4-unit property (or larger) will allow co-buyers to maintain their own living spaces. Additionally, rent collected from non-owner-occupied units can offset the costs of owning and maintaining the property. And if one person decides to move, an apartment provides more flexibility, because that owner can lease their unit while maintaining ownership instead of selling their share or forcing a sale of the property.
The bottom line is that buying a home with a friend can be an excellent way to start building equity in real estate. However, it’s essential to approach this decision thoughtfully and responsibly. Have open conversations about finances, clarify ownership structures, put agreements in writing, and consider all possible options. With proper planning and communication, purchasing a home with a friend can be a successful venture that benefits everyone.