Buying a home with your BFF?
In an age where the cost of living and homeownership is soaring, the traditional image of the solitary homeowner is quickly giving way to a new trend – the home purchaser with a BFF (Best Friend Forever). This strategy has become increasingly popular among first-time home buyers who are looking to break into the real estate market without shouldering the financial burden alone. But what does this process entail, and how can you ensure success in this unconventional path to homeownership? In this comprehensive guide, we'll walk you through the do's and don'ts of buying real estate with a roommate.
The Appeal of Co-Ownership
The financial advantages of co-ownership are clear. Not only does splitting the costs make homeownership more affordable, but it also allows roommates to collectively build equity and potentially invest in additional properties. For millennials and Gen Z'ers, who often grapple with student loan debts and a stagnant job market, this path can be a game-changer, catapulting them into a realm of financial possibilities that might have otherwise been out of reach.
Financial Advantages at a Glance
Beyond sharing the down payment and monthly mortgage payments, joint homeowners share expenses like utilities, insurance, and maintenance costs. Consequently, they enjoy the benefits of owning a home, such as tax deductions and potential appreciation on the property, all while avoiding many of the financial downsides typically associated with renting.
Shared Responsibilities
Another compelling aspect is the distributive nature of homeownership when shared. Each member takes on specific responsibilities, from cleaning duties to property maintenance and repair, ensuring a more affordable and palatable experience for both parties.
Investment and Wealth-Building
Furthermore, the opportunity to invest in property is not only financially savvy but also a proactive approach to building wealth over the long term. It's a strong beginning to a real estate portfolio, one that can withstand market fluctuations and potentially offer early financial independence.
Buying in a more desirable area
Let's face it. Arlington is one of the more expensive places to live and is out of reach for most buyers. Buying together with one or more friends will allow you to buy in a place you want to be.
Legal Frameworks: Protecting Your Investment
Before the ink dries on the deed, it's crucial to establish a legal framework that protects both parties. Cohabitants should understand the different types of property ownership and associated legal rights and responsibilities.
Establishing Agreements and Contracts
Roommates turned homeowners must lay out their arrangement in a comprehensive agreement, covering items such as financial contributions, household rules, and what happens in scenarios like selling the property or one roommate wanting to buy out the other.
How to Hold Title
Choosing how you will hold title is an important decision. You basically have two options:
Tenants in common: Each party holds a separate, undivided interest in the property. This means that if one roommate wants to sell their share in the future, they can do so without requiring the other's consent. In addition, if a roommate dies, his/her share will be passed on based on their will. Or if there is no will, it be passed on according to the state inheritance laws - usually first to any children, second to any siblings, third to any surviving parents.
Joint tenancy: Each party holds an equal and undivided interest in the property. If one roommate wants to sell their share, they must receive permission from all other co-owners. If a roommate dies, their share is automatically passed on to the remaining co-owners.
Financial Considerations
The Mortgage and Down Payment
For most, a mortgage is a necessary part of buying real estate. With a roommate, this process requires joint and several liability, meaning both parties are equally responsible for the entire payment, which carries significant weight on credit reports and financial standing. Are you both putting down the same amount of down payment? If not, how does that affect things when you sell? Each party needs to be open about their financial situation including income, credit score, and any debts. This will impact the mortgage you're able to secure and how much each person can contribute.
Ongoing expenses and maintenance
Discuss with your potential partner how you are going to share the ongoing expenses, like utilities and insurance. Those are easy to split 50/50. What about a big ticket item that needs repair like the HVAC system? Consider putting money aside each month to a 'Capital Reserves Account' if one of you is a better save than the other.
Future Renovations
Discuss ahead of time what each others expectations are with any future renovations. One person might be fine with the shag carpeting in the living room where. the other wants to put in Brazilian Cherry hardwood floors on day one.
Insurance Considerations
Your lender will require you to have home owners insurance, but in addition to that, some friends buying together also have a life insurance policy where the other is named as a beneficiary. Another option is income protection insurance which can cover things like mortgage repayments if you lose your primary source of income.
Navigate the Exit: Planning for the What-Ifs
An often overlooked but crucial aspect of buying with a roommate is planning for the future. What if one person wants out? What if only one wants to sell? Having a well-thought-out exit strategy can prevent financial distress and legal disputes down the line.
If One Moves Out
It's important to decide how to handle the situation if one roommate's circumstances change, and they need to move out. Will they be bought out, and if so, how will the value of the property be assessed? It's questions like these that should be answered in advance. Can they keep their ownership share and rent out their share of the property?
If Only One Wants to Sell
Selling a home is a significant financial decision that requires the agreement of all owners. However, in situations where only one wants to sell, having a clear process outlined can facilitate the transition smoothly.
If Only One Wants to Rent Out
Maybe both owners are moving out for various reasons, but one wants to hold onto the property as an investment and the other wants to sell? What is your process to come to an agreement. If you hold property as Tenants In Common, one party can sell their share to a third investor.
Planning for the Future
Beyond short-term solutions, roommates should consider how their property aligns with their long-term investment and retirement plans. Additional property purchases and potential rental income should be contemplated in the early stages of collaboration.
Finding the Right Roommate for Real Estate
The search for a real estate roommate should be approached with the same diligence as a job interview. Consider compatibility, financial stability, and long-term goals to find a well-suited partner.
Compatibility Matters
Potential roommates should have similar lifestyles and values. Discussing habits, schedules, and long-term plans can help determine if you're a good fit for joint homeownership. Hopefully, you have lived together before and didn't just find each other on a Craigslist ad.
Communication and Financial Expectations
Open and honest communication about finances is non-negotiable. Be transparent about income, credit history, and financial expectations before making any commitments. There will only be one loan and you will both be joint and severally liable.
Setting the Financial Ground Rules
Roommates should discuss their financial contribution as well as how expenses will be shared. Will the down payment and mortgage be split equally, or will it be based on income? These are important considerations that require candid discussions.
Put it in writing
Put it all down in writing. Sit down with a lawyer and work on a cohabitation agreement. This document should address property rights and financial responsibilities that arise from living with someone else.
A cohabitation agreement is like a roadmap for folks who choose to live together without tying the knot but still want to set out clear rules on money, living, property uses, dispute resolution, and decision making. It's best to have this doc drawn up by a lawyer and officially notarized, but hey, even a spoken agreement can hold up legally (it is just harder to enforce).
Conclusion
Buying real estate with a roommate offers a host of benefits, from sharing financial burdens and responsibilities to building wealth. It is an innovative approach that allows young professionals and first-time buyers to enter the market with a strong foundation. However, it is not without its challenges. The key to a successful co-ownership arrangement lies in careful planning, clear communication, and a well-defined legal framework. For those willing to collaborate and commit, the rewards can be substantial. It may well be the beginning of your road to a more secure financial future.
