Buying an investment property can be a smart financial decision. As you pay down debt, you accumulate equity in a property that ideally appreciates over time. Then there are the tax benefits. You can deduct your rental costs from any income you earn, including things like mortgage interest, property taxes, insurance, repairs and maintenance, and property management; it all saves you money come tax time.
Ideally, the investment property also provides a stable source of income while you collect rent each month. Because owning an investment property takes a lot of time, effort, and money, it might be a good idea to go with a friend. But with this move comes some challenges. Below are five common issues with buying an investment property with a friend.
Key points to remember
- If you are buying a house with a friend, remember that both of your credit reports are attached to the mortgage.
- There is no easy way out of the agreement, so you should have a full agreement written out with the terms of the agreement.
- If there are problems with the mortgage, you could both have problems getting loans in the future.
- Your friendship may be tested due to any disagreements that may arise.
1. A mortgage rate linked to both credit reports
Since you and your friend will both be on the mortgage, the lender will use both of your credit reports. A person’s bad credit can negatively affect the terms of the mortgage, including the interest rate you pay on the loan. Even a small change in the interest rate can make a big difference in how much you owe each month on your mortgage and in the total interest you’ll pay over the life of the loan.
2. No “easy button” to move
When you rent an apartment or a house with a roommate, it is quite easy to leave if you no longer get along or decide to move. This is not the case with a mortgage.
Since both of your names are on the mortgage, you are both responsible for making the payments, even if one of you wants out of the agreement. To remove one of the names from the mortgage, you must either sell the home or refinance the loan under one name.
Both options can be difficult: the sale can take several months and there is no guarantee that the lender will approve your request for refinancing. It’s a good idea to have a written agreement in place that details your agreed exit plan if either of you decides to move on.
Who gets the property if someone were to die is determined by the type of deed the parties hold. If the parties hold the property in joint ownership, the parties have no right of survivorship, which means that on the death of one of the joint owners, the other owner will retain the interest in the land. If the parties hold the property as a tenancy in common, the parties can transfer the right of ownership to the heirs in the event of death.
For financial protection, each partner should purchase life insurance from the other to pay off the mortgage in the event of death.
3. Credit Rating Risks
Since you and your friend are listed on the mortgage, you are both responsible for making the payments on time and in full each month. If both of you are late for any reason, the lender will report both of you to the credit reporting agencies for non-payment or foreclosure – if applicable – even if you have diligently paid your share of the mortgage payment each month. . Since both names are on the mortgage, your friend’s non-payment could end up costing you dearly on your credit report.
4. Difficulties in obtaining other loans
Even though you and your friend split the mortgage payment 50/50 each month, each of you alone is responsible for the entire mortgage payment each month in the eyes of the other lenders. This can make each partner’s debt ratio seem high and make it difficult to qualify for other loans. While married couples manage this by jointly applying for loans, chances are you don’t want your friend on your car loan and they don’t want to be there either.
5. Disagreement over responsibilities
A friendship can be quickly tested if there are disagreements over who is responsible for what, whether it’s paying for utilities or maintaining the property. To avoid this, your written agreement should include details about the distribution of expenses, how repairs and maintenance will be handled, who will do the work and how costs will be shared, and how deductions will be claimed. For example, make sure you firmly agree on who can claim the mortgage interest deduction or if you split it somehow.
Buying a house with a friend has many advantages. It may be easier to qualify for a mortgage, and you share all monthly expenses, including utilities, maintenance or repair costs, and the mortgage payment. And unlike leasing, you get equity as you pay off the loan.
But some challenges come with something as big as this, and it’s important not to rush the decision. Do your homework beforehand and make sure you and your friend both have enough income to meet the monthly investment expenses.