Co-owning Property Offers Financial Benefits and Considerations
The financial benefits of co-owning a property can be huge, and that's why so many people are doing it right now.
Imagine getting into the housing market years earlier (or even just into the next-stage house): Not having to come up with such a massive down payment. Finding it easier to qualify for a mortgage with the added income from your friend or family member.
The monthly operating costs of the home can be split, if both (or all) parties are living in the property. Larger home maintenance and repair costs, like replacing siding or a roof, can be shared.
If there's a rental suite within, the rental income can be shared. You might collectively be able to afford a better quality home than if you tried to buy on your own. Plus there's the incredible benefits of a healthy social connection that can come from living together.
Buying together sounds great, right? I mean, it's very common in other parts of the world.
Perhaps, but the last thing you'll want is to co-own with super flaky or toxic people who don't pay their share, respect the space or wind up being difficult to live or co-own with.
Before you take your BFF and sister up on their "brilliant idea" to buy together, work through these considerations.
The more clear and thoughtful the parameters for your real estate transaction and ongoing business relationship -- because that's what this is -- the better it'll work financially and emotionally!
You've established you all like each other and think this could work. What are you each bringing to the table?
How much money do you each have to put toward the purchase -- down payment, taxes, legal fees? Where is it coming from? Is it through the RRSP Homebuyer Plan or a First Home Saving Account? A gift from family? Is there equity tied up in another property where a refinance or sale would be required before funds could be released? Is the down payment coming from savings, or expectations of a bonus?
What kind of income or mortgage-qualifying power are you each bringing to the table? Many factors go into an approval, including credit scores, regular and bonus income (whether it's T4 income, spousal support or self-employed income), length of time at your current employer, debts, assets, monthly obligations for loans and car payments, and so on.
Go to a mortgage broker together to secure a pre-approval. The qualifying process is very revealing. If you unexpectedly discover that your potential purchase partner(s) has a bad track record of skipping payments, hopping from job to job, bending the truth about their income or taking on too much debt, or has taken on a consumer proposal or declared bankruptcy, they will have a negative impact on your ability to qualify for a mortgage ... and isn't the point of coming together to strengthen the application? If it's looking like your potential co-owner is bad news financially, walk away from the deal.
The other revealing aspect of a preapproval process is you'll get a clear view of everyone's capacity to keep paying the costs on an ongoing basis, and whether there is any risk that you or the other party might not be able to pay. Imagine you learn that your co-purchaser's employment contract is about to expire, and they don't have anything else lined up.
If all goes well, though, you'll go through this process and have a solid understanding of what you can collectively afford, and can start shopping for the ideal property. A qualified realtor can help navigate the market and neutralize any tension in the purchase process.
I always encourage flexibility when the ultimate mortgage product is chosen in these kinds of co-purchase scenarios. If life circumstances change -- you (or they) get married, divorced, have a child, want to sell and so on -- you'll want to ensure there is some kind of way out of the mortgage or the whole ownership arrangement altogether. Breaking mortgages can be costly with penalties and fees, so understand what that looks like and see if there are more flexible options.
Draw up a legal agreement
It should outline the details of the ownership arrangement, how the finances and responsibilities will work, and what happens if one of the owners needs to get out. Think about how the ownership split will get established (e.g. based on the down payment, or on how much of the mortgage costs get covered by whom). A lawyer can help pin this down and advise you on what happens if you (or your co-owner) pass away, get married or divorced. This leads to another important reminder about ensuring everyone has an up-to-date will.
Lay out the rules of the house, including the flow of money
Are you sharing the whole space? Is it being split up (how)? Who gets the parking spot or largest bedroom? Be precise about how the home will be shared, and work through differences of opinion and any proposed proportional splits of costs. Maintenance responsibilities should also be discussed in detail regarding shovelling snow, clearing the eavestroughs, cleaning the interior of the home, changing the furnace filter, cutting the grass and so on. Are all the owners able to do this kind of physical work, or should you plan to hire it all out?
Will the most responsible person be on the hook for paying the mortgage and utility bills from their personal account? Will everyone e-transfer their share to that person? Or will everyone contribute their part to a joint account? It's a really good idea to build up an emergency reserve fund for unexpected home expenses together. Whoever's name is on a bill or the mortgage, no matter what happens, is the person (people) on the hook for coming up with the money. That's right: even in an unfair situation where a co-owner just stops paying their share, you'll still need to pay the full amount.
I have plenty of students entering into co-ownership scenarios right now and having a process to collaboratively resolve issues amongst the owners is extremely valuable. Some host monthly meetings to talk through issues and money matters; oftentimes it turns into a barrel of laughs and good times, knowing that everyone is benefiting financially from this situation. If things simply aren't working out, protect yourself financially and emotionally and make a smart plan to exit the situation.
