OK, so in today's video, we're going to talk about,
have the millennials solve the affordable housing?
So would you buy a house with your best friend?
That's what a lot of people are doing, who can't afford to buy a place
by themselves and are sick and tired of waiting.
Millennials, especially, are pooling their resources to co-own property.
So how does it work?
And what are the drawbacks?
It's one thing to butt heads with your roommate over
who took the last White Claw,
but when you own a property together, there's a whole lot more at stake.
So we're going to get to all of that.
But first, if you've been enjoying our content,
we would encourage you to hit the like or subscribe button to this channel.
Thank you.
So even before the pandemic, a lot of people were deciding that
they'd rather team up with their friends to buy property together.
As of 2019, about 3% to 7% of all purchases
actually involved friends buying together.
The number of cool buyers with different last names increased
by 771% between 2014 and 2021.
For friends who plan on buying together, it's essential that they put
their respective financial obligation and expectations in writing,
especially how much of the mortgage payment each person is going to pay.
And, of course, how the equity will be distributed among the ownership.
It'll require that you have
some difficult conversations, but when you're combining friendship
and finances, a little discomfort is inevitable.
So assuming that you and your friend are compatible co-owners,
what are some of the advantages of this agreement?
The biggest advantage right away is that you can boost
your purchasing power with the combined financial resources of two buyers.
It's a lot easier to buy.
You'll be able to afford properties that otherwise would be
out of your price range.
Another advantage is how much easier it will be to get a mortgage.
There are a couple of reasons for this.
first, lenders would far prefer to have two borrowers
because that increases the likelihood that they'll get repaid.
The other advantage, of course, is that two borrowers are far more likely
to pool their resources for a 20% down payment.
That 20% figure is important.
If you're able to provide a 20% down payment, you'll be able
to also avoid the added expense property mortgage insurance, or PMI.
PMI can fluctuate, but it's typically
a half a percent to 1% of the home's value.
Once you've moved in, you'll be able to split your expenses.
As homeowners know, the mortgage payment is just one
expense that homeowners are responsible for.
When you buy with a friend, you'll be able to split property taxes, maintenance
repairs, H-2A fees and utilities, and those can really add up.
So having other people to share the cost will really free up your resources.
OK, so those are the advantages of homeownership.
Here are a few of the cons.
first, when you're applying for a mortgage, your credit scores are averaged.
Lenders will look at the credit scores of both borrowers.
If one of you has a significantly lower credit score,
that could actually limit the amount that you can borrow.
That's why you and your friend need to be transparent with each other
about your finances, even before you go approach the bank.
Another disadvantage is that your friends mistake could lower your credit score.
If one of your co-owners falls behind on their payments,
their credit score and yours could take a hit
even if you've been current with your payments.
This next one is a big issue.
If one of you ever decides to move out, the remaining party
would need to refinance,
which may not be a possibility depending on their financial situation.
The party that moves out could stay on the mortgage
and rent their space out, but it might be difficult to get
a nonresident co-owner to pay their share of the expenses indefinitely .
Another issue with car ownership is that your debt to income
ratio will be affected even though you are splitting the mortgage payments.
You and your friend are individually responsible for the entire mortgage.
That means that you'll be carrying a high debt to income ratio,
even though you're financially responsible for only 50%
or less of the home's value .
If you apply for another loan, your DTI or debt to income
will appear much higher than it actually is.
The other big disadvantage to this is that your friendship
could harm your finances or vice versa.
Make no mistake, you're combining friendship and money,
which is a massive commitment and an incredibly delicate balance.
Think of it as if it's like entering into a marriage because.
Acting yourself from a homeownership can be as complicated as a divorce.
So those are the pros and cons that you need to know
if you decided that this is still a good arrangement.
There are a few things you need to know about the legal framework.
There are two different structures for homeownership between two or more friends.
one is called a joint tenancy
and the other is referred to as tenancy in common.
first, let's look at tenancy in common with this setup.
Each person can actually own a different percentage of the property,
and it's not limited to two people.
For example, you can own 50%.
Another friend can own 30, and the last person can own 20%.
Even with those different percentages, each roommate
would have a claim on the property.
The other advantage of a Tennessee in common is that new
partners can be added to the ownership agreement at a later date.
Tenancy in common offers each partner the flexibility to sell or transfer
their share of the home without the other co-owners approval.
Obviously, this also makes each co-owner vulnerable
to a change in ownership that they may oppose.
So you'll need to make sure you have a clear understanding about each co-owners
plans and their expectations with joint tenancy.
All co-owners have equal ownership and must enter in this agreement together.
At the same time, Joint Tennessee does not allow for owners to sell
or transfer their portion of the property to anyone else.
So here's an unpleasant topic What would happen in the event
that one party were to pass away in a joint tenancy agreement?
The surviving owners would inherit the deceased's share of the property.
Tenants in common, on the other hand, don't have any automatic inheritance
rights.
It's a tough subject, but these are the conversations that you need to have
if you're going to enter into this kind of a partnership.
So now you've heard the pros and cons and understand the different types
of arrangements.
Here's my advice on how to make this work.
first, be honest with yourself about your friend.
There might be tons of fun and a great wingman,
but how are they when it comes to money?
If they have a low credit score or have a habit of spending
too freely, this probably is not a good fit.
If there is a major repair, will they have the resources to split the costs fairly?
You definitely don't want to be the one who has to repeatedly pick up the slack.
You can create a contract that outlines who is responsible for
what and how much of the home equity each party has.
Think of it as the friend equivalent of drafting a prenuptial agreement.
Another point you should discuss is the goals you have with the CO owning
property.
If one of you wants to live there as long as possible
and the other one wants to turn it into a rental property,
you shouldn't move forward in the hopes that someone will change their mind.
So those are the key things to know about how to make this arrangement work.
As I said earlier, it's no exaggeration
to think of this as just like a marriage.
If you are combining your finances
and buying a major asset together, you need to be careful.
And while it's unrealistic to promise your friend
that you'll live there together forever, you should both agree
on at least a minimum length of time for this living situation.
You should also get very clear on how much each person
can contribute in the event of a major repair.
You don't want to suddenly need a new roof and find out
that somehow you don't have enough money between the two of you to pay for it.
So those are some
things to consider, but this is an arrangement worth
considering, especially if you've been wanting to buy for a while.
OK, until next time. I'm Ken McIlroy.