Four factors to consider before investing in real estate together
For first-time homebuyers and real estate investors alike, it’s no secret that buying into the housing market has become a bigger challenge over the last couple of years. The national average home price in Canada is just over $711,000, up 3.4 per cent year over year.
So what’s a prospective buyer or investor to do? One answer may be to join forces to increase your purchasing power and split the carrying costs. There are different ways to accomplish this, from siblings pooling their savings to purchase a place as roommates, to friends investing in a vacation property they can enjoy and also rent out. It doesn’t have to be a family member or friend. You could also have a business partnership with another investor.
Here are some important factors to consider when deciding if going in on it together is the right move for you.
An honest conversation is a good place to start
Whether it’s your first home or a relaxing retreat, planning to buy property together can be exciting. Keep in mind though that it’s a bigger commitment than renting as roommates or going on vacation together — you’re basically going into business.
All of the potential co-owners should have an open discussion about their finances and life goals as this will impact how the partnership plays out. Do all of the co-owners have stable income and a manageable amount of debt? Remember that with a joint mortgage, anyone who is on the mortgage is individually responsible for ensuring that the full mortgage amount is paid in full each month. In other words, even if you pay your share of the mortgage payment but the other owner doesn’t, you’re both on the hook.
Deciding how to split the pie
There are two main ways to co-own a property: as joint tenants or tenants in common. The agreement you choose will determine how the ownership is divided and what happens if one of the owners dies.
The ownership of the property is divided equally between all of the owners. If one of the owners dies, they are removed from the title of the property, and the property ownership remains equally divided among the other surviving owners.
Tenancy in common
Each owner can own a different size share of the property. For example, one owner could own 75 per cent of the property and the other could own the remaining 25 per cent. When purchasing the property, one person may have more saved for a down payment or want to make a bigger investment. Tenancy in common can allow you to divide the property into shares based on each owner’s contribution. If one of the owners dies, they can leave their share of the property to whomever they like in their will.
There are other legal considerations, and a real estate lawyer can draw up an agreement so that the partnership expectations are clear. Some of the top things to consider are:
- Who will have the rights to use and enjoy the property?
- Who will be responsible for certain costs?
- What happens if one owner wants to sell or buy the other out?
How to finance it
So, you’re ready to find the perfect property. First, you need to figure out how much mortgage you qualify for together as well as what you can each afford to carry on a monthly basis. To get an estimate of your price range that fits your budget, use CIBC’s Mortgage Affordability Calculator. Since you’ll be applying for a joint mortgage, your mortgage qualification will be based on the total debt-to-income ratio including your combined:
- Credit score
- Credit card debts
- Existing mortgages
- Other loans and debts
You’ll also need to decide on a mortgage term that works for everyone. A fixed-rate mortgage can provide you with more certainty about your monthly costs, while a variable rate mortgage may allow more flexibility if you decide to sell before the end of the mortgage term. Discuss your options with a mortgage advisor.
You may also want to talk to your co-owners about Creditor Insurance. This can help you cover the mortgage loan in case one of you is unable to work due to a disability, involuntary job loss, critical illness, or in the event of your death.
First comes the purchase, then comes the maintenance
There’s no getting around it, it takes time and money to maintain a property. A benefit of co-ownership is splitting the costs and work involved in keeping it up, from paying for insurance and utilities to fixing a leaky sink. Discuss upfront how you will divide the chores and the bills. This can be included in a co-ownership agreement that you both sign.
One way to manage the costs together is by setting up a joint chequing account. All owners can contribute to the account on a monthly basis and you can use this fund to pay the bills. Contributing more than what’s required to cover the monthly costs will help you build a reserve fund for when bigger expenses come up, like replacing windows or shingles.
Make it a good investment – and a good experience – for everyone
Buying property with a friend or family member can help you invest in real estate by combining your purchasing power and dividing the costs and maintenance. It’s important to discuss finances, plans and goals up front and consult professionals along the way so that you can enjoy the process as well as the return on your investment.
Visit the CIBC SMART ADVICE™ hub for financial advice for all life’s moments.
Advertising feature produced by CIBC. The Globe’s editorial department was not involved.