Are you waiting for housing prices to drop so you can finally buy the home of your dreams?
Homeownership may seem out of reach for many in our current housing market. While housing costs dipped slightly in 2023 compared to the peaks we saw in 2022, the high cost of owning a home in Canada is still a significant barrier to many would-be homeowners.
That being said, a growing number of financially savvy Canadians have discovered a way to make homeownership more affordable by purchasing a home with friends.
Below, I’ll explain the basics of how co-owning a home works, outline some of the pros and cons, and give you some food for thought to help you decide whether it’s right for you.
How does buying a house with friends work?
Due to rising housing costs and high-interest rates, the market has slumped considerably since May 2023. The Greater Toronto Area, Vancouver, and Montreal have all seen the total number of real estate transactions in their regions cut in half over the past six months, according to the latest Canada Housing Market Report by real estate platform Wowa.
With interest rate cuts by the Bank of Canada looming in the near future, the market could start to reverse, though.
For those considering buying a house with friends, this could be the time to strike.
The basics of co-ownership
When buying a house with your friends, each party agrees to become a co-owner of the property. There are two key types of co-ownership that you should be familiar with:
Joint tenancy: An ownership structure where each co-owner owns an equal share of the property. For example, two friends may have a 50-50 joint tenancy agreement on a single two-bedroom home.
Tenancy in common: In this ownership structure, co-owners may own a certain percentage of the property, usually depending on their financial contribution.
One of the biggest differences between these two co-ownership structures is the “right of survivorship.”
In a joint tenancy agreement, each co-owner has the right of survivorship, which means that if they pass away, their shares of the home are automatically passed to the other co-owner(s). This form of co-ownership is more common among immediate family members or for inheritance properties.
Friends, business partners, or acquaintances buying a home typically opt for a tenancy in common co-ownership agreement. In this model, each co-owner can sell or pass their share of the property on at any time. Their share of the property does not automatically go to the other co-owners if they pass away.
Mortgages and financial planning
While obtaining a joint mortgage can certainly make home ownership more affordable for all parties involved, it also involves more paperwork, as the bank must do homework on multiple mortgage applicants instead of a single buyer.
Before agreeing to anything, you and your friends should all get pre-approved for a mortgage to ensure that your credit and income history won’t be a barrier once the ball starts rolling.
Benefits of co-owning a house with friends
Owning a home among friends can come with a lot of benefits, including:
Your individual share of housing costs will be lower than if you were the only owner
Your housing costs may be considerably cheaper than renting a house among friends
You’ll have the opportunity to build equity in the property and may be able to sell it for a profit in the future
You get to live with the people you enjoy being with the most (hopefully)
Drawbacks of co-ownership
However, there are also some drawbacks and potential problems that could arise, such as:
Each co-owner will need to get approved for the mortgage (this could be a problem if one co-owner has below-average credit or a checkered income history)
Potential for disagreements in the home
Selling the home (or your share of it) may be more difficult compared to if you were the sole owner
Things to consider before buying a house with friends
If handled correctly, buying a home with your friends can be a great idea -- especially if all parties involved agree to treat the arrangement fairly and with mutual respect.
Here are some things you should think and talk about with your potential co-owner(s) before making the decision.
Shared property responsibilities
Most homes and properties require maintenance. Aside from regular maintenance like landscaping and house washing, you’ll also need to consider periodic (and often costly) repairs such as replacing the roof, buying new appliances, or electrical/plumbing repairs.
When these issues arise, everybody needs to be on the same page regarding how quickly the issue is fixed and/or how often maintenance items are performed.
For example, partner A agrees to split landscaping duties with partner B, and if both partners are unable to do so, they agree to split the cost of hiring a professional landscape maintenance company.
Conflict resolution strategies
Even the best of friends can become divided when living in close proximity to one another. Just ask former best friends who became college roommates. Some friends loved the experience and would repeat it, while others would never do it again.
Inevitably, you and your other co-owner(s) are going to disagree about something that concerns everybody. When this happens, you should have a conflict resolution strategy in place. You don’t want the situation to get blown out of proportion.
Whenever disagreements come up, agree to sit down at the table, calmly discuss the issue at hand, and find a solution that works for everybody. It may even help to appoint a third-party moderator when these types of discussions come up.
Exiting the deal
You or one of the other co-owners may want to exit the deal at some point. Perhaps one party gets married or has a kid on the way, or another party decides they want to move away and sell their stake in the property.
Either way, friends buying a home together should have a written contract in place with the help of a real estate lawyer to outline responsibilities, financial contributions, and terms for scenarios like selling or moving out. This legally binding agreement promotes clarity and protects the interests of all parties involved.
Should you buy a house with friends?
Buying a house with your friends is typically far more attainable and affordable compared to trying to purchase a home on your own. However, it’s important that the co-owners involved in the deal respect each other and write out legal agreements to handle any issues that may arise between them.
If the housing supply increases and the Bank of Canada cuts its rates, then home ownership could become more affordable in the coming year. Keep reading to see why TD Bank believes that home prices could fall by as much as 10 per cent this year.
Christopher Liew is a CFA Charterholder and former financial advisor. He writes personal finance tips for thousands of daily Canadian readers on his Wealth Awesome website.
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