Ask Jill: Should I Buy a Home With My Friends?

Welcome to our new feature, “Ask Jill”, where Jill Schlesinger, CFP®, the award-winning Business Analyst for CBS News, answers your financial questions. You can email her directly at: askjill@jillonmoney.com.

Ask Jill

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Q

My wife and I are half-seriously talking about splitting a house with her brother and his wife, and I feel like that’s probably not super uncommon. Should I split a house with family members or friends right now?

A

I’ll deal with the financial implications in a moment. But this answer depends less on money concerns than on the relationship itself.

Just like a marriage, nobody enters into a joint real estate venture thinking, “What could go wrong?”

But I encourage you to do just that. Splitting a house with friends or family sounds like a great idea: you get a shortcut to homeownership, in the middle of a rock-bottom interest rate environment. And you only have to pay half the bills!

But I have heard terrible tales—and the financial disasters associated with them—of families who have done this. One group of homeowners actually stopped talking to each other because of owning property together. It’s up to you whether you are willing to take that risk for the sake of home ownership. For two-family home purchases…sure, I have heard about great outcomes. When it comes to a single-family primary or vacation home, however, the relationship you have with your prospective co-owners is likely the more critical aspect of planning than the financials.

How would you go about doing it? Presuming that both couples are in similar financial shape, the best approach would be to split the property evenly and make sure that everyone’s names are on the mortgage. I recommend that you hire a real estate attorney who will provide guidance on ownership type, either tenancy in common or joint rights with right of survivorship. Chances are, you would choose tenancy in common, which would mean that if one of you were to die, that portion of the property goes to designated beneficiaries, not to the other owners.

The lawyer can also draft an ownership agreement that outlines how you’ll jointly manage the property and what could happen in the future under a variety of circumstances. Think of this as a pre-nuptial agreement (“prenup”) for your real estate endeavor, because it outlines current issues, like financial responsibility for the property and its monthly payments, taxes, and fees. Plus, it helps to avoid conflicts that could arise in the future. Anything could happen—like divorce, when one party wants to buy out the other’s share, which may be important if you are contributing different amounts to the transaction.

Next: what kind of mortgage should you get, and how much should you put down?

Ideally, the combination of two households coming together to purchase the property would allow you to put down 20% as a down payment, which along with your credit histories will determine whether you qualify for the rock-bottom interest rates currently available. I’m a big fan of 30-year loans, as opposed to 15-year loans, because they afford maximum cash flow flexibility. This may be more important for one couple versus the other, but a longer term means lower monthly payments, which improves your ability to fund other goals like retirement or college. If both sides find themselves in a place where they can pay the loan down sooner, that’s great. But with a 30-year, you are not tied to a higher monthly payment.

Let’s talk about the housing market for a second. In a word: it’s hot.

While it took more than 10 years for residential housing purchase demand to rebound to pre-recession levels after the Great Recession, in the Covid-19 Pandemic Recession, it took less than 10 weeks. There are a few factors that contributed to the rapid recovery. The first is a trend that has persisted for a while: there are just not a lot of houses for sale. The lack of inventory has meant that prices have remained elevated.

According to data firm Core Logic, nationally, home prices increased by 4.9% in June 2020, compared with a year ago. The strength and resiliency of the housing market “reflect improved affordability, demographic demands, supply constraints and continued strong interest in purchasing a home. These factors combined to keep home prices steady despite the continued pressure of the pandemic and related economic fall-out.”

The affordability reference is not about prices, but about mortgage rates. After the Federal Reserve slashed short-term interest rates in March, the cost of borrowing across the board has also dropped. The 10-year treasury, the benchmark to which mortgage rates are tied, has plummeted to under 0.60 percent, which has pushed down mortgage rates to record lows. As of August 6th, the rate for a 30-year fixed rate loan stood at 2.88 percent (with fees and points totaling 0.8 percent), and a 15-year loan was 2.44 percent, according to Freddie Mac.

That’s a good deal—if you can find the right home and the right people with whom to share it.