Like many working adults in our late 20s and early 30s, my friends and I are serial renters. Only 35% of Americans under the age of 35 own homes today, down from 39% at the end of 2009, according to the U.S. Census. We all talk about buying a home one day. But as the cost of renting just about everywhere soars, the road to homeownership can start to feel like a treadmill — moving fast, getting nowhere.
On a recent group trip, a friend had an idea: What if we pool our cash and buy a house together? The concept was simple enough. We’d each chip in enough for a down payment on a house somewhere we like. When we weren’t using it for the occasional group vacay, we could rent it out, creating a passive income stream evenly split among us.
It’s not uncommon for more than one person to buy a house. Couples and family members do it all the time. But we’re a group of eight individuals living in three different states who are still getting used to the whole “adulting” thing and have a hard enough time trying to organize our annual camping trip. Could our friendship — and our finances — survive it?
As of now, it's still just a fun idea we're toying around with. But I decided to reach out to some experts to see how it might work. I have to admit, they didn't exactly help allay my doubts.
Good luck getting approved for a mortgage.
Is it possible for more than one person to apply for a mortgage loan as a group? Certainly. There are no restrictions on how many people can apply for a mortgage. However, it will be mighty difficult getting a bank to approve a group of three or more.
“Having multiple people on a loan can be tricky,” says Sebastian Rivera, a loan officer in Fairfax, Va. “Not all lenders allow more than four people to be added on a loan, and not all loan products allow this either.”
If a weak link in the group has a sub-par credit score, he or she could drive up your mortgage rate. You could drop them from the mortgage loan to get a better deal but will their name still go on the title? You’ll have to hash that out as a group, ideally with help from a real estate attorney.
But if you take out a mortgage loan, only those whose names are listed on the loan will be liable for any missed payments, says Christopher Ling, mortgage expert at Nerdwallet. If that’s the case, you’ll have to decide whose name goes on the mortgage and be sure to include language in your operating agreement that binds all owners to sharing responsibility for mortgage payments.
The ideal situation, says Craig L. Price, a New York City real estate attorney, is to leave mortgage lenders out of the picture and pay cash.
You’re going to need a seriously good real estate attorney.
If you think you can pull this off without an attorney’s help, you’re fooling yourself. There are multiple ways to structure a group home purchase, the most common of which are forming an LLC or purchasing via Tenants-in-Common agreement. If you’re purchasing the property as a group investment and don’t intend to live there, Price recommends forming an LLC. This is fairly easy to do through your state department website. One of the main benefits of an LLC is that it cuts down on each individual’s liability. For example, if you have a party and a guest is injured and decides to sue and the house is owned by an LLC, that person could only go after the assets owned by the LLC, leaving the personal assets of each individual owner protected.
As an LLC, you’d also come up with an operating agreement — guidelines that will lay out how the group will manage just about every hypothetical complication of group homeownership. This is where you decide how to split up the equity, how to finance renovations, what happens if one party wants to sell, what happens if someone gets married and wants to add their spouse to the title, etc. The downside to going the LLC route is that you can’t claim typical homeowner tax credits, like deducting mortgage interest or property taxes.
If all you want to do is purchase a home with friends and co-own equity, there’s another option: Tenants in Common. A TIC agreement essentially stipulates that these people own this home, this is what share each individual owns, and it allows each person to decide who will inherit their shares when they pass away. Under a TIC set-up, at least one individual can claim homeowner tax deductions and divide the savings among the group.
“A Tenants in Common agreement is typically how I see friends who are going into an investment together wanting to go,” says Price.
No title? No ownership.
If you contribute funds to a group real estate investment but don’t have your name on the property title, then you have no ownership rights, says Suzanne Hollander, a real estate attorney in Miami.
“People come to me all the time saying I invested money with my friend in a home but my name wasn’t on the title,” Hollander says. “They think because they’re friends they don't need the formality of written agreements. But you do. Once you buy property together you’re more than just friends. You’re partners.”
You can have as many names on a title as you wish, which gives each person equal rights to the property.
Everyone has to have an exit strategy.
When life happens — someone takes a financial hit, passes away suddenly, or simply wants out — you have to have a clear exit strategy in place. Yes, it feels like a semi-morbid estate plan, but it’s arguably the most important part of a successful operation agreement, says Hollander. “You have to decide what will happen when one or all wants to sell or has to sell,” she says. It also gives each co-owner peace of mind that they have an out, should they need it.
The simplest way to assign equity to is divide the home’s value by the number of owners. Will you buy out each other’s shares if someone wants out? That could require an appraisal to determine how much the property’s value has appreciated (or fallen) since you bought it. If you have children, will your shares be passed on to them, or distributed among the surviving co-owners? Also, is it possible for one person to sell their shares to another investor? Would the whole group have to vote in order to approve it?
Don’t be surprised if this is the part in the group homebuying process where you start to have second thoughts.
“Just because you’ve been best friends since college doesn’t mean they all have the same values that you do as an investor,” says Hollander.
You may not be ready for it.
If this kind of communal setup sounds appealing to you, forget all the legalese for a second and take Hollander’s advice: Sit down with your friends and have a frank discussion about your finances — how much each earns, how much cash they have available and what their credit score is now. If you can’t even get past this step, maybe you’re not ready to take the leap just yet.
“The way you talk to your friends about personal issues, you need to talk with that same frankness about your financial background if you want to invest in property together,” says Hollander. “It might be an uncomfortable conversation but it will save headaches, legal fees, all sorts of problems in the future.”
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