Buying property with friends
June 15, 2022 11:13 AM   Subscribe

We are potentially thinking about buying a property with a couple who are good friends, mostly as a long term investment. Trying to think through the universe of issues to worry about and get advice from others who have done the same.

We have good long terms friends who are being priced out of renting in our area and potentially would like to buy but aren't immediately in a position to. We are looking to potentially buy as a long term investment, and would like to help them - and feel it could be a good match to buy with them. We are prepared to take some lower return over time, in exchange for derisking some aspects of owning the property (having people we know and trust living there etc.), and potentially offsetting taxes (having a co-owner living in the property allows a significant local property tax exemption). We'd be looking to buy a property that would provide them a place to live as well act as a rental (roommates) to recoup some cost. We own our current house and have the financial capacity to take on the investment in a second property. The other couple are younger than us by 10-15 years, and we know them very well, they have stability in employment, do not have children and are not planning any. They live with roommates now and have for several years. They are local to the County, but we are not.

Interested if others have brought property with friends and if it worked out, would they do it again, what challenges arose etc.

We are very much at the early "would this even make sense?" stage, so obviously would talk to lawyer etc. if we went ahead. This is really me querying the hive mind on the wisdom of jointly buying property with friends.

The things that could go wrong that I am most worried about (not saying this is the universe of all things that could go wrong...) are:
- The friendship ends for any reason or even because we have this property (we argue over who should pay for the new dishwasher or some such issue, etc.)
- Either couple needs to sell / wants to sell and the others don't for whatever reason (changes in income, family issues, divorce, medical issues, etc.) which forces a sale at a loss / low return
- The property becomes a money sink / a loss - due to market conditions or other factors and that strains either couple.
- Mismatch in our investment horizon versus their long term goal (we are older than them, though we have children so we see this is a long term investment mostly for their benefit than for ourselves)
- Legal issues / challenges (just hand waving this - I could think of lots of scenarios from them getting into an issue with the roommates etc.)

Other random data
- We'd be buying near us (say within 20-30 minutes drive)
- We are acutely aware the real estate market and interest rates are changing (hello Federal Reserve 3/4 percent rate increase!)
- I said "mostly as an investment" above. Partially this is also that we would rather not live in a community of of AirBnB homes where young couples are priced we are prepared to take a lower return over time for personal reasons.
- There is significant income disparity between us as couples (probably 50% of more)
- The area we would be buying in is likely a venue for either the 2030 or 2034 winter games (Park City / Summit County, UT) which gives us some confidence (based on historic trends) that prices won't plummet and there is potential for them to go up significantly (totally speculative - won't know until May next year likely if it gets awarded to SLC)
- We may be potentially looking at a property where joint "sweat equity" may raise the value of the property - say for example it was a larger property we built additional features into over time.

posted by inflatablekiwi to Home & Garden (23 answers total) 7 users marked this as a favorite
My mom did this with her sister and they are both practical people who sat down and drafted terms with a lawyer including inheritance if a death occurred, payment of capital gains when sold and how one could exit the relationship if needed. About ten years later my mom moved and the exit clause was invoked. I think this is a fine solution to a larger housing issue just sit down and write out all the issues that could come up. Including like what if they want to X and you’re like Oh Hell No. how is that mediated.
posted by St. Peepsburg at 11:22 AM on June 15, 2022 [6 favorites]

It is my mission in life to make sure that people who buy property with someone else consider not only that person dying, but also that person developing cognitive problems and being assigned a guardian who then gets to make financial decisions completely in opposition to that person's original wishes. People can develop cognitive problems at any age, and the unscrupulous guardian of someone you own property with can make your life a living hell for years. Ask me how I know.

I'm not saying don't do it - just make sure you have a very good real estate lawyer who can let you know if there's a way to avoid this. Honestly, if my co-owner had never needed a guardian, it would have been fine.
posted by FencingGal at 11:33 AM on June 15, 2022 [28 favorites]

When we were thinking of doing something similar with loooongtime friends who we knew very, very well for more than a decade, I asked our accountant what he thought of the idea. He said, "FYI every one of these deals I've seen eventually goes wrong over personal stuff." I shrugged it off -- we knew these people so, so, so well -- but then we moved slowly enough that we ended up missing a good moment in real estate pricing and our plans were put on hold.

Five years later that rock-solid friendship broke up. It often crosses my mind what a horrible pain in the neck + how financially painful + emotionally painful it would have been if we'd owned property together.
posted by BlahLaLa at 11:34 AM on June 15, 2022 [15 favorites]

If I were to do this, quite apart from all of the other concerns mentioned above, I would probably structure the actual owner as an LLC which is then co-owned. Maintenance, taxes, all of it, paid by the LLC.
posted by aramaic at 11:37 AM on June 15, 2022 [8 favorites]

Both my father and grandfather who were in business together and had real estate together, told me that they would never do business with family or friends ever again. FYI, my father and his father did not speak for 7 years.

If I were looking to help a friend, I would sooner lend them the money with specific terms documented in writing than actually get tangled up together with an investment. Or, buy the housing yourself and rent to them at cost or below market rate.

I would decouple the investment idea from helping friends idea. You can do both independent of each other as well, actually better, than together.

This is me. I have a bias seeing my family. You and your friends could have a very different experience. Bottom line is go into it, if you do, with eyes wide open.
posted by JohnnyGunn at 11:59 AM on June 15, 2022 [12 favorites]

I can see complications around questions like what purchasse/investment decisions - what kind of roof to put on, what kind of dishwasher to buy where quality and taste can both play a role. Also, sweat equity is very complicated since it is unlikely to be equal. Lots of money that you put into a house doesn't add that much to the value beyond the general difference of well maintained vs run down. So you do change the equity percentage? Ask both parties to contribute new money for maintenance?

We bought a home for a relatives to live in. They paid us rent and paid for any routine maintenance, we paid for anything that became a permanent fixture (like termintes in the porch or a new heater) plus property insurance and taxes. Their rent was below market (more so over time since we only raised it once). We sold the house this year and made a nice but not phenomenal profit but only because we sold into a crazy good market. All of the profit/loss on the property was ours, they were renters and had no equity but had a nice house that they could afford for as long as they needed it.

When my kid buys a house, the plan is to do the opposite. We will loan him money, interest only probably at something close to the fed fund rate, when he sells he will repay us. The house will be his to maintain however he wants and the appreciation will be his. We will earn less than we would if we invested it in the stock market - more like a CD but with greater risk of default - but that works for us because we want to help him out.
posted by metahawk at 12:26 PM on June 15, 2022 [1 favorite]

I can see a million complications around any kind of joint equity arrangement, many not easy to foresee and build into a lawyer-drafted agreement. I suggest carefully considering Metahawk's second paragraph arrangement: you buy the house; they pay you rent. You pay for capital improvements, maintenance, insurance, taxes, etc. as a landlord would You can give them an option to purchase, and/or a right of first refusal if you decide to sell. If you put sweat equity into improvement, the resulting increase in value belongs to you. If they want to put in sweat equity, you can compensate them in the form of temporary rent reductions. (And you could also have an agreement that gives them some percentage of the gain in any sale to a third party, if you still want to regard them sort of as partners in the deal.) An arrangement of this nature is easy to structure legally, minimizes complications in the event of fallings-out, divorces, deaths, etc., and fairly compensates each party for the money and work they put into the property.
posted by beagle at 12:40 PM on June 15, 2022 [4 favorites]

I live in a house that is technically owned by an LLC that is co-run by my housemate and a member of his family. We’ve been very close friends for over twenty years. The LLC confused me at first but it helps simplify a lot of the processes that would otherwise be across different states and even makes it feasible to eventually include me if it became financially logical. This kind of setup varies a lot but it’s definitely doable.

I think that single family living is increasingly a thing of the past and that group setups of multiple families sharing responsibilities and liability where everyone brings something different but crucial to a home is going to become the norm in less time than most people think. Working out a setup for this that functions for you, your kids, and your friends is probably going to be difficult and annoying but ultimately worth it.
posted by Mizu at 12:41 PM on June 15, 2022 [2 favorites]

Just know that psychologically, something weird happens with people and the place where they live. A strong emotional attachment forms.

A sense of entitlement also develops, regardless of how fair a deal it is or not. It's completely different from any other investment. With that in mind, a well-written legal agreement can protect your assets, but it won't protect the relationship.
posted by dum spiro spero at 1:09 PM on June 15, 2022 [8 favorites]

I think that single family living is increasingly a thing of the past and that group setups of multiple families sharing responsibilities and liability where everyone brings something different but crucial to a home is going to become the norm in less time than most people think.

Yeah, and if the OP were planning on living in the house they would buy with their friends I would say "go for it" but if OP is thinking of it as an investment opportunity and they're not going to be living there I think it's more trouble than it's worth.
posted by mskyle at 1:10 PM on June 15, 2022 [7 favorites]

Ah, Hrmm, good point mskyle. I appear to have misread the question. I retract my whole hearted support and notch it down to shrug emoji.
posted by Mizu at 1:16 PM on June 15, 2022 [1 favorite]

I usually air on the side of "make sure you talk to a lawyer but then give it a try" on alternative home ownership ideas, but this sounds a little fraught to me, especially with the added dynamic of their potential roommates. It would be a shame to damage what sounds like a great friendship over this deal.

If you can afford to buy the house on your own, I think there might be better options to meet your goals than co-ownership. Like other commenters have said, you buying a house and renting it to them (and maybe other roommates too) at a rate everyone can afford is the most straightforward way to handle this. But if homeownership is important to them, or you want a way to get "out" of the deal eventually, you buying the house and then entering into a land contract or a rent-to-own agreement with them could be worth exploring too.
posted by mjcon at 1:46 PM on June 15, 2022 [2 favorites]

A friend just had a similar arrangement dissolve with substantial bitterness on both sides, consuming their lives and attention and causing much anguish. Two sets of partners, both sets entering into a legal agreement with provisions for dissolution thought out well in advance; both sets of partners post-Obergefell v. Hodges, both sets certain they had foreseen all the possible problems. It was effing awful.

Home ownership is fraught in the USA, and dissolving it with the dissolution of any kind of partnership is painful (harking back to the instant poverty my mother fell into, and the loss of her home, when my parents divorced), and in many countries it is not the primary mode of housing for people, oddly enough. Others will disagree, but I don't think of it as a terribly good investment nor does it provide much in the way of security. But a home is a nice place to live, and I have one with my spouse.

I would recommend using the heck out of a couple of lawyers (one for you, one for them) and planning for the worst case if you go ahead. Think of it as having a heck of a good prenup for something you don't realize is a sort of marriage.
posted by Peach at 2:25 PM on June 15, 2022 [3 favorites]

We are looking to potentially buy as a long term investment, and would like to help them - and feel it could be a good match to buy with them.

You do not have to have own the property your friends are using as a rental to help them out. Presumably, you want to co-buy the property with them, then charge them a less than market rent. You can instead buy a property, rent it at market rent to people other than your friends, and then just pay your friends the difference between market rent and the less-than-market rent you would otherwise get from them. This has the same result in net rent for your friends. It is, in fact, exactly what you were going to do otherwise (since charging them less than market rent is a subsidy).

As you mention, you would not be able to claim any property tax benefit you may otherwise receive. However, I would happily trade that tax benefit for having a clear legal distinction between my tenants and my friends.
posted by saeculorum at 2:28 PM on June 15, 2022 [5 favorites]

Nope. Don't do it. It's a nice thought, if you do it, I hope it goes well for you, but putting such a large imbalance of power into an existing friendship will change it. If you were sharing a home, or perhaps an empty parcel of land, it would be doable. But you'd essentially be subsidizing their home, and they would still have roommates which means an even more complicated scenario with tenants.

A lot of people above have given worst case scenarios above- but just to add a few: what if something happens to you? What if you have to liquidate your ownership? Would you co-sign a loan for these friends? What if they decide to move, and want to sell out their part of the ownership? What if the value of the property goes down? Who decides on changes and updates to appearance, who deals with the insurance costs, who gets to decide on tenants/roommates?
posted by Torosaurus at 2:47 PM on June 15, 2022 [2 favorites]

I do not have an opinion about whether you should buy this house with/for your friends. However, I have owned a house with my sister (that neither of us lives in, but I use as a summer place and she comes to occasionally) because we inherited one and decided to keep it. We get along very well, here are some of the challenges I've observed.

- We have differences in values and I think both of us feel we do not get to "live our values" with this house for various compromise reasons. This is not a big deal for us since we value familial harmony more than this specifically but if you have strongly-held principles just simple issues like "Do you compost?" can get fraught. Think about your emotional makeup and that of your friends around this question.
- We contribute in uneven amounts, mostly in effort. This house "came with" money (i.e. money that neither of us need for our day to day lives) that we use to run it but I'd be lying if I said I couldn't see a better use for this money. And we make compromise-position decisions about some things. Since I am there more often I usually have to do more of the "call a guy" work for repairs and that can bite into my time in ways that can be a hassle. Again, I mostly don't mind but I COULD mind.
- Our ownership model (both on the deed) can get confusing since we are not married to each other. When I wanted to apply for a mortgage to buy my own house, this was complicated by the fact that I own this other house and the mortgage company didn't understand how only half the bills/debt with it were mine. Not a huge deal but might have been.
- I have a partner who is uninterested in having any dominion over this place. When my sister had a partner he really wanted to do his own fixit stuff there (not okay, he was a terrible fixit guy) and they are no longer together (phew) but while I trust her 100% she doesn't have the best taste in men and I worry, a little, that our flexibility and ability to compromise will get hampered if she is with a partner who is less flexible and wants to have some sort of say in how we manage the place

I think it could work? I could see how it could not work? I like the LLC model if you move forward with this, and make sure that all the disparities that you see so clearly here are also stated clearly with the people you are considering this with.
posted by jessamyn at 3:17 PM on June 15, 2022 [2 favorites]

I did this with a friend. A few differences, like it not being a place either of us used as a primary residence.

We met with a lawyer who helped iron out most of the details you express concern about, and came up with a contract that worked for both of us. That included me lending the friend a big chunk of the down payment, to be repaid at a very low interest rate. At the time, we had about a 3x income disparity.

It involved ongoing negotiations about expenses, plans, personal space, etc. At times it got very challenging and we came pretty close to one of us requesting the other buy them out or sell entirely. Eventually after 10 years of owning it together, we both realized we wanted to sell and made a very nice profit on it. So it did work out in the end. But it could have ended very badly.

We were just friends when we bought it over 10 years ago, and we ended up getting married. So, uh, watch out for that possibility!
posted by MonsieurBon at 8:19 PM on June 15, 2022 [3 favorites]

I say unlikely to be a good idea, though if it's to get somewhere to live then maybe. But even then, that just raises the stakes.

Just imagine being these people who seem perfectly nice -

Property battle between 2 friends results in precedent-setting B.C. Supreme Court case

Even if there's nothing wrong with the friendship, it's unnecessary tension when one person wants to sell for compelling reasons and the other person wants to not sell for compelling reasons.

But if you do, lawyer the hell out of it. Write everything down. Talk about every possibility. Where people run into trouble is where they think because they're friends they don't need to do this. Do it more! You won't remember what you agreed to do in 5 years. Ask absolutely any lawyer. (But I'm not yours)
posted by lookoutbelow at 8:55 PM on June 15, 2022 [2 favorites]

Red flags:

- We'd be looking to buy a property that would provide them a place to live as well act as a rental (roommates) to recoup some cost
- we are older than them, though we have children so we see this is a long term investment mostly for their benefit than for ourselves
- significant income disparity between us as couples
- potentially looking at a property where joint "sweat equity" may raise the value

There are too many details and developments which would need to be negotiated, and re-negotiated, for years. Your children would inherit a string-strewn asset and continue managing the business relationship you entered into with your friends.

[Right now, in an entirely different state, I'm going through considerable unpleasantness with joint co-owners of a property; specifically, there's conflict over selling. Per the RE lawyer, partition proceedings to compel sale is an option, because this property was purchased by individuals, not by a corporation or LLC. Utah partition link; an example of its usefulness: "What Can a Utah Property Owner Do When a Co-Owner Fails to Pay Property Expenses?" Check on the pros and cons of purchasing property as an LLC in your area.]
posted by Iris Gambol at 12:24 AM on June 16, 2022 [1 favorite]

I'm not entirely clear what you plan to do. I'm guessing that part of the attraction is that a mortgage would be cheaper than rent. It also sounds like you intend your co-owners will pay rent to you. There are likely to be different ways of structuring how the payments between you will work, with a risk that different arrangements will seem fairer to each party. This is particularly the case if the market rent of the property changes significantly from when you buy.

I think that if you pick a potential property and work out the math on paper about how the money will go, it would help you see whether you are all really on the same page about this idea. If you're not on the same page now, then you're never going to be.
posted by plonkee at 3:25 AM on June 16, 2022 [1 favorite]

Response by poster: Thanks all - enough good thoughts above to give me pause and reconsider doing this. Possibly we'll rethink about us buying the house directly and maybe agreeing a way they could buy at discount in the future or paying us discounted rent etc. Again this was *very early* thinking. I appreciate the time people gave in inputs and all the links - thanks again.
posted by inflatablekiwi at 10:16 AM on June 16, 2022

I saw your response, but wanted to add one more: what happens if one of you decides you want to move away but still co-own the place. Does the couple living close get stuck with all the maintenance that requires in-person checkups, such as inspections and showing apartments to tenants, overseeing repairmen and contractors, etc? You could get a management company, but just something to discuss.
posted by at 6:35 PM on June 16, 2022

For me the fallout of buying with a friend cost me exponentially on many levels. But mine was a fake friend, in the end. So hopefully you're on stronger ground.

Consider generally... booms and slumps, that money can make a lot of people go gaga, change in life circumstances.. what then?
Whatever and however you do things at the start sets the tone for later..
Eg if something feels icky, it is.

Consider a second legal mind looking at any docs before committing.

I have heard of it working out and understand the rationale. Good luck with whatever you decide to do.
posted by tanktop at 9:46 AM on June 17, 2022

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