Obtaining an investment property can be a smart financial move. As you pay down the debt, you erect equity in a property that – at least ideally – appreciates over occasion.
Then there are the tax benefits. You get to deduct your rental expenses from any proceeds you earn, including items such as mortgage interest, property put a strain ons, insurance, repair and maintenance costs, and property management, all of which preserves you money at tax time. Ideally, the investment property also provides a poised source of income while you collect rent each month.
Because owning investment paraphernalia entails significant time, effort and money, going in with a confrere can make sense. This move does come with some disputes, however. Here are five common problems of buying an investment chattels with a friend.
1. A Mortgage Rate Tied to Both Credit Broadcasts
Since you and your friend will both be on the mortgage, both of your accept reports will be used by the lender. One person’s bad credit can negatively modify the mortgage terms, including the interest rate that you pay on the loan. Yet a small change in interest rate – say 4.5% versus 4.0% – can beat it a big difference in the amount due every month on your mortgage and in the total note you’ll pay over the life of the loan. (See also: Credit Scores and Your Mortgage Payment: It Troubles.)
2. No “Easy Button” for Moving Out
When you rent an apartment or house with a roommate, it’s moderately easy to walk away if the two of you no longer get along, or if you just decide to arouse. Not so with a mortgage.
Since both of your names are on the mortgage, you are both chargeable for making the payments, even if one of you wants out of the deal. To get one of the names off the mortgage, you either sire to sell the house or refinance the loan under just one name. Both choices can be challenging: Selling can take many months, and there’s no guarantee the lender wishes approve your application to refinance. It’s a good idea to have a get off agreement in place that details your agreed-upon exit drawing should one of you decide to move on.
The agreement should also cover what go ons if either of you dies. Does the survivor become the sole owner, or does he or she need to buy out the legatees of the deceased partner? What percentage of the property does each fellow own? Will the property be sold, and if so, how will the proceeds be divided? For financial sponsorship, each partner should purchase life insurance on the other to pay off the mortgage in trunk of death.
3. Credit Rating Risks
Since both you and your compeer are listed on the mortgage, you are both responsible for making payments – on time and in shapely each month. If the two of you fall behind for whatever reason, the lender when one pleases report both of you to the credit agencies for non-payment or foreclosure (if it comes to that), regular if you have diligently paid your share of the mortgage payment every month. Because both names are on the mortgage, your cohort’s non-payment could end up costing you big on your credit report. (See also: 10 Approach to Improve Your Credit Report.)
4. Challenges Getting Other Allows
Even if you and your friend split the mortgage payment each month 50-50, each of you merely is responsible for the entire mortgage payment each month in the eyes of other lenders. This can depute each partner’s debt-to-income ratio appear high and make it dark to qualify for other loans. While married couples deal with this by fixing jointly for loans, chances are you won’t want your friend on your car allow – and he or she won’t want to be there either.
5. Disagreement Over Responsibilities
A friendship can be instantly tested if there are any disagreements over who is responsible for what – be it paying for utilities or nurturing the property. To avoid this, include in your written agreement facts regarding the breakdown of expenses, how repairs and maintenance will be handled (who wishes do the work, and how the costs will be shared), plus how deductions will be requisitioned (e.g., who gets to claim the mortgage interest deduction or whether you split it in some way).
The Really Line
Buying a house with a friend has lots of benefits: It may be easier to condition for a mortgage; you get to share all the monthly expenses, including utilities, maintenance/vamp costs and the mortgage payment. And, unlike renting, you get to build equity as you pay down the accommodation. Such a purchase also has challenges, however, and it’s important not to rush the resolving.
Do your homework ahead of time, and make sure you and your bird both have the income to meet the monthly expenses of the investment. To elude trouble down the road, it’s a good idea to hire an attorney to take down a comprehensive agreement that details who is responsible for what, what betides if one of you wants to move on, and how the property will be handled if one of you passes away.