Buying and owning an investment property requires significant time, effort, and money, so going in with a friend can make sense. But the move does come with five common challenges, from financial to personal.
On the bright side, you'll build equity in a property as it hopefully appreciates over time and as you pay down the mortgage debt. The investment property will ideally provide a steady source of income as you collect rent each month and it can offer tax benefits as well.You can deduct expenses including mortgage interest, property taxes, insurance, repair and maintenance costs from any income you earn. All this can save you money at tax time.
But buying an investment property with a friend is a little like getting married. There may be challenges along the way regardless of how strong your relationship is.
Key Takeaways
- Both your credit reports are attached to the mortgage when you buy a house with a friend.
- There's no easy way out of the deal after you commit so you should have a comprehensive agreement drawn up detailing the terms of your partnership.
- You may both have problems getting loans in the future if there are issues with paying the mortgage.
- Your friendship may be tested because of any disagreements that may arise.
1. A Mortgage Rate Is Tied to Both Credit Reports
You and your friend will both be on the mortgage so the lender will access both your credit reports to determine if you qualify. One person's bad credit can negatively affect the mortgage terms, including the interest rate you'll pay on the loan. Even a small change in the interest rate can make a big difference in the amount due every month on your mortgage and in the total interest you'll pay over the life of the loan.
2. There's No "Easy Button" for Moving On
It’s fairly easy to walk away because the two of you no longer get along if you rent an apartment or house with a roommate, but that's not the case with a mortgage.
- Both of your names are on the mortgage and you're both responsible for making the payments even if one of you wants out of the deal. You'll either have to sell the house or refinance the loan under just one name to get one of the names off the mortgage. Both options can be challenging. Selling can take many months, and there’s no guarantee that a lender will approve your application to refinance.
It’s a good idea to have a written agreement in place that details your agreed-upon exit plan should one of you decide to move on.
3. Credit Rating Risks
Both you and your friend are on the mortgage so the lender will report both of you to the credit agencies for non-payment if either of you fall behind for any reason. The lender could even foreclose regardless of whether you've personally paid your share and it was your friend who lapsed.
4. Challenges Getting Other Loans
Each of you is individually responsible for making the entire mortgage payment each month in the eyes of other lenders, even if you and your friend split the mortgage payment 50/50 each month. This can make each partner's debt-to-income ratio appear high and make it difficult for either of you to qualify for other loans.
5. Disagreements Over Responsibilities
A friendship can be tested if there are disagreements over who is responsible for what, whether it's paying for utilities or maintaining the property. Your written agreement should include details regarding the breakdown of expenses to avoid this, as well as how repairs and maintenance will be handled, who will do the work, and how the costs will be shared.
You'll also want to determine how tax deductions will be claimed. Make sure you firmly agree on who gets to claim the mortgage interest deduction or whether you'll split it.
Can I split tax deductions with someone I'm not married to or related to?
You don’t have to be married to your co-owner or related to them to share home-related tax deductions, but the IRS does impose some rules. You can each only claim the portion of the expenses that you actually paid from your own income.
Claiming home expenses requires itemizing on your tax return, so you’ll each report your share of paid expenses on IRS Schedule A. It’s likely that your lender will only send a Form 1098 showing the total mortgage interest paid for the year to one of you and in one name. The other owner should note on Line 8b of Schedule A that the interest wasn’t reported to them. You should both include a statement with your tax return detailing how you determined which of you paid what.
What mortgage options can we choose from?
Mortgage types commonly offer different options for three factors: the term or duration of the mortgage, the type of interest rate you'll pay, and whether the mortgage is backed by a government agency. Mortgage terms typically last from 15 to 20 years so you'll want to shop for one that best matches up with both of your future plans. Your interest rate can be fixed and unchanging or adjustable, in which case you'd have to take into consideration how well each of you handles surprises and changes in finances.
What happens if one of us dies?
The type of deed you enter into will determine who gets the property should one of you die. Joint tenancy deeds typically give you rights of survivorship. The other owner will automatically inherit full ownership of the property when and if their co-owner dies. The parties can transfer their ownership interest to their heirs upon death if they hold the property as a tenancy in common.
Each partner should purchase life insurance on the other for financial protection so it pays off the mortgage in case of death.
The Bottom Line
Buying a house with a friend has a lot of benefits. It may be easier to qualify for a mortgage with two incomes and you'll get to share all the monthly expenses, including the mortgage payment, utilities, and maintenance or repair costs. You get to build equity as you pay down the loan.
But some challenges come with responsibilities as big and expensive as this. It’s important that you don't rush the decision. Do your homework and make sure you and your friend both have the necessary income to meet the monthly expenses of the investment and that your understandings regarding the property are the same.
