Heading off to university is an exciting time for many Canadians. While the 2020 school year was marred by online learning, many universities reopen for the 2021 fall semester to vaccinated students, which means returning to campus full-time.
For many students, the beginning of the school year also means finding accommodations with a group of friends. If you and your friends plan to rent a house for the school year, you may have considered – should we buy a house instead?
Can you buy a house with friends?
First of all, is it even possible to buy a house with friends? The answer is yes. The process is called co-buying, and while it is more complicated than buying a home with a spouse, it is possible. If you decide to purchase a house with friends, you'll buy it as tenants-in-common, where each tenant owns a portion of the property.
All tenants-in-common will need to sign the mortgage, and you'll need a single mortgage from a single lender that works with these types of purchases. All co-owners will be registered on both the title of the property and the mortgage.
Considerations When Buying a House with Friends
Buying a house with friends is more complicated than buying with a partner or a family member because you'll need to account for more circumstances. Here are some factors you should consider before buying a house with friends.
The first and biggest hurdle along the path to buying a house with friends will be finding the right lender and qualifying for a mortgage. Unfortunately, not all lenders work with co-owners, so a good first step is to contact a mortgage broker to direct you toward possible lenders.
Second, consider whether each co-owner will qualify for the mortgage. Most lenders require all co-owners to be on both the mortgage and the property title, so each co-owner will need to have a down payment and provide proof that they can afford the monthly payments. Proving you and your co-owners can qualify for a mortgage may be the most challenging hurdle if everyone involved is a student because incomes might be low, credit scores might be non-existent, and debt loads might be high.
If one or more co-owners can't qualify for the mortgage, excluding them from the mortgage application and property title may make sense. In this case, you would protect that co-owner's interest through a separate legal agreement. But, again, this option depends on the lender. Some lenders require all co-owners to be on the mortgage and the property title, while others are more flexible.
Percentage of Ownership
If you and your friends can clear the first major hurdle – financing – now it's time to consider how your co-ownership will be structured. You don't have to split up your interest in the property evenly. You could split it up according to the size of your respective down payments or who will get the most use out of the property. Remember that the percentage split of ownership will impact your individual mortgage payments' size and any profit when you sell the property. Whatever you choose, it's crucial to enshrine these details in a co-ownership agreement that is drafted by a real estate lawyer.
Buying a house with friends is a legal agreement that will bind you together for many years. Therefore, it's much more permanent than a rental agreement, which is why you must consider all possible scenarios and discuss how they will be handled ahead of time. For example, unlike a standard rental agreement, you can't just move out if you find out that your co-owners have habits that drive you crazy!
Here are some considerations that should be discussed in advance and laid out clearly in a co-ownership agreement:
- Will co-owners be able to rent out their spaces?
- Who is responsible for what expenses?
- How will repairs and maintenance be handled?
- Who decides what upgrades should be done and when?
- What rules should apply around operating a business on the property, including AirBnB?
Considering these types of scenarios in advance will help you quickly determine whether buying a house with friends is a good idea or if you're better off renting.
What happens if...
While looking to buy a house with a group friends is exciting, it can also have very serious negative implications for your finances, and it's important to consider whether these risks are worth the potential reward.
For example, from a lender's standpoint, every co-owner is 100 percent liable for the mortgage. Hence, if one co-owner defaults on the mortgage, the other co-owners are responsible, making you accountable for the entire mortgage payment.
Similarly, if one co-owner stops making their mortgage payment, everyone's credit scores are negatively affected. Unfortunately, if you're still establishing your credit score, this type of damage could take years to undo.
What if one co-owner wants to sell the property, but the other co-owners do not? In this case, you may end up with a new business partner who has their ideas of how the property should be used.
It's important to discuss these scenarios ahead of time with your co-owners and know that even if each co-owner is optimistic that these scenarios will not occur, life can get in the way of the best intentions. You may find yourself faced with one of these worst-case scenarios. Therefore, it's essential to carefully consider whether the potential financial gain from investing in real estate with your friends is worth the risks.
Selling a House with Friends
Finally, it's essential to have an exit plan when buying a house with friends. If you are purchasing the home as a place to live during university, for example, the expectation is that you'll sell the house after graduation. Don't leave this expectation unsaid—layout your exit strategy with your friends to ensure that all co-owners agree.
The bottom line
Buying a house with a group of friends during school could be a good way to avoiding spending money on rent and instead put it toward an investment that will appreciate in value over time.
That said, buying a house with friends is a complicated process with many possible hurdles and downsides. If you are confident in your group of friends and you can have frank discussions about buying property, including agreeing on an exit plan, then purchasing a house with friends is worth considering. Know that buying a home is a serious legal and financial commitment, and if you have any doubts about your possible co-owners, it's wiser to rent with them instead.