With the price of homes still at record highs, some Millennials are coming up with a new strategy to get into home ownership: buying homes with friends. Millennials are growing tired of paying higher rents and losing out on building equity in real estate and the appreciation on home values. Therefore, some are partnering with friends and roommates to buy a nicer home than any of them could afford on their own.
While on paper this method sounds like it could be a good idea, life rarely goes smooth enough for this to go well in the long run. Here are a few important issues to consider before buying a home with anyone other than a spouse:
- Can you afford to keep the house if your co-owner can’t pay, dies, or wants to sell?
- Whose name(s) goes on the title?
- Are you using a partnership/LLC to own the house?
- Who’s responsible for:
- Collecting and making the mortgage payments
- Overseeing maintenance and repairs
- How will decisions be made around:
- Houseguests and visitors
- Decorating and furniture-buying
- What happens when:
- Someone is unable to pay their part of the mortgage
- Someone dies
- Someone wants to sell their portion of the home
- How will you resolve disputes on any of the above?
This is not an exhaustive list, because owning a home with others is more complex than renting with others. There are reasonable alternatives to buying with others, such as purchasing a home and renting out rooms/space to others (“house-hacking”). For example, rather than get two friends to buy into a $300,000 house together, save up the 3.5% minimum down payment required (plus closing costs) to purchase a home. Next, rent out rooms to the two friends. Obviously, only you would be the one to build equity; however, you would be the sole-owner of the home and your friends would have leases. This outlines clear rights and responsibilities for everyone involved and may avoid many of the potential issues listed above. Note, certain local laws prohibit renting out individual rooms of a house.
Before you buy real estate with others, read some horror stories of how this can go terribly wrong and destroy friendships. Remember, when people rush to join a trend or buy a hot asset, those people can easily make mistakes or stupid decisions out of greed. Recent examples of this were the dramatic rise and fall cycles of AMC and GME stock. Someone will always be the person to chase a trend and buy the top of the market.
Also, a house is an asset, but not the best place to tie up all of your money. The right reasons to buy a house are (1) when you are going to be in an area for at least the next 5-7 years; (2) buying the home is cheaper than renting; and (3) the total cost of owning the home is less than 50% of your take-pay each month, or, using the Money Guy’s metric, 25% of gross pay.
Ferdinand, Pamela. “Co-Buying: How Cash-Strapped Millennials Are Becoming Homeowners without Family Help.” Real Estate News & Insights | realtor.com®, February 20, 2020. https://www.realtor.com/news/trends/millennials-co-buying/.
Janin, Alex. “Millennials Team up to Fulfill the Dream of Homeownership.” The Wall Street Journal. Dow Jones & Company, October 11, 2021. https://www.wsj.com/articles/millennials-dream-of-homeownership-11633698676.