Buying a Home with a Friend: What You Need to Know

Partnering to buy a house with a friend makes sense in some scenarios. The rising costs of real estate often make it feel out of reach—especially for solo buyers or those starting out as real estate investors. That’s where buying a home with a friend comes in handy. Pooling resources and sharing costs increases your buying power. Perhaps you’d snag a better property than you would alone.

But hold up. This partnership comes with its own set of legal, financial, and personal risks. Skipping the proper preparation could leave your friendship on shaky ground, not to mention your real estate investment. Review all the pros and cons, plus steps to create a clear plan and agreement to buy a house with a friend the right way.

Is Buying a Home with a Friend a Good Idea?

Buying a house with a friend can be a fantastic way to make homeownership more affordable and accessible, especially in today’s competitive real estate market. But it’s not all roses and unicorns. Weigh the pros and cons before making such a big financial commitment.

Pros

“Two is better than one–” at least when it comes to resources! Buying a house with a friend amps up your purchasing power while decreasing expenses. You might find a better-located property than you could when purchasing on your own. You can put down a bigger down payment and afford more house with two incomes. 

Additionally, you can split monthly mortgage payments and other costs. Your arrangement might enjoy potential tax savings.

If this is a rental investment, the combined resources help you start building wealth through home equity and income. If you’re living together, it’s with someone you know and trust, and you’re still accumulating equity together.

Cons

Conflicts and disagreements can arise, especially if one person feels they do more of the “heavy lifting” than the other. Unequal financial contributions and differing opinions on property management may strain your friendship. Selling the property can also become complicated if one party wants to sell and the other doesn’t.

If not handled properly, co-ownership could result in unexpected tax obligations. No one wants an extra bill from Uncle Sam. Additionally, depending on how you structure the purchase, securing a mortgage may be more challenging.

Choosing the Right Friend to Buy With

A successful co-ownership experience starts with the right friend. Financial stability and trustworthiness are paramount. You need someone reliable who consistently makes timely mortgage payments and contributes to property maintenance. Someone who sees opportunity in real estate for the long-term. And can they separate personal and business? Even better!

Consider how well you know each other. This isn’t a casual arrangement; you’re entering into a legally binding contract that will significantly impact both your finances and credit history. Do you have a solid understanding of their approach to life and money? Choosing someone whose financial habits and priorities align with yours is essential.

Trust is another crucial factor. You need to be confident that your friend will uphold their bargain, whether that means making mortgage payments on time or handling their share of household responsibilities. You’ll also have a peek at each other’s finances. Open communication and mutual respect are the foundations of a successful co-ownership arrangement.

Set the stage for a positive and productive homeownership experience. Don’t let buying a house ruin your friendship.

Choosing the Right Ownership Structure for Split Ownership

Before you enter your first open house, tackle one of the most important decisions first: structuring your co-ownership with an official legal agreement. Although the house may be shared, legal and financial responsibilities must be clearly defined.

Trust comes back into play, as you’ll need to be transparent about your financial situation, including your credit history and the financial standing of your co-buyer. This understanding will help you approach the mortgage qualification process. It’s also informative for how you arrange the legal aspects of co-ownership. Some options:

Tenancy in Common (TIC)

With a Tenancy in Common, each party owns a percentage of the property. This allows for split ownership based on individual contributions; the percentages don’t have to be equal. For example, one friend puts down 60% of the payment and the other 40%. Your ownership stakes reflect those contributions.

It offers flexibility, as you can decide what happens to your shares if you decide to sell or if one of you passes away. It’s possible to buy or sell their ownership share in the future. You can also split the shares with more co-owners. Tenants can deduct their part of interest payments on income tax filings, but all parties are liable for property tax bills unless you live in a joint-and-several liability state.

Joint Tenancy

This option involves equal ownership and includes a right of survivorship, making it straightforward for co-buyers who want to share equal responsibility. If one of you passes away, ownership automatically passes to the other. Some states automatically give married couples this status.

While it simplifies things, joint tenancy doesn’t allow for unequal ownership stakes. That might not be ideal if someone is contributing more financially to the purchase. They also may want to leave their equity to other family members and not have the house automatically go to the friend. One tenant must also buy out the other if one-half wants to sell.

Legal Entities (LLC or Partnership)

Forming an LLC (Limited Liability Company) is a structured approach. It protects personal assets and simplifies management rules and exit strategies. Say goodbye to those “What do we do now?” panic moments.

While forming an LLC involves some upfront effort, it can simplify the purchase and ownership agreement process by clearly defining each party’s responsibilities. LLCs also provide more legal protection—a smart choice if you’re subtle about the details.

The downside is that many mortgage lenders won’t finance personal properties bought by an LLC. You may need alternative financing or more funds in cash.

Pro Tip: Speak with a real estate lawyer to determine which structure best suits your goals and circumstances. This is one area where you don’t want to wing it.

Setting Up a Business Arrangement

Treating this venture like a business will protect your finances and your friendship. A handshake deal might fly if you’re trading Pokémon cards but not when securing a home loan together. Clear legal agreements give all parties a road map to resolve many disputes, especially when it’s a six-figure real estate investment.

LLC Benefits

• Protects individual assets from liability in the event of suits or claims.
• Provides a clear framework for investment property management, decision-making, and exiting the agreement.
• Tax benefits, depending on how profits or losses get split. 

Partnership Agreement

A bit less formal but still crucial:

• Define how finances will be split from the get-go, including the down payment, monthly expenses, and long-term profits. Include how you will pay closing costs, which can range from 2% to 5% of the home’s purchase price.
• Include dispute resolution. Arguments happen, even between friends. Having a game plan in place for resolving disagreements saves you time, money, and lots of headaches.

A written legally binding agreement under either scenario makes expectations clear and prevents misunderstandings.

Financing the Purchase and Down Payment

Now that you’ve nailed down your ownership structure and business arrangement, it’s time to tackle financing. Again, you want someone you trust because you’ll gain an understanding of each other’s credit history. A poor credit score can impact your mortgage terms.

Mortgage Options

• Joint Mortgages allow lenders to consider both applicants’ incomes, which might get you approved for a larger loan and better interest rate. Be aware you are co-borrowers; each of you is responsible for the payments. The loan may require private mortgage insurance (PMI) if your down payment is less than 20%.
• Certain situations may allow one party to contribute cash or another to focus on loan repayment. Just be sure all contributions and responsibilities are reflected in your ownership agreement.
• Buying through an LLC may require investment property financing or a 25% down payment, and borrowing costs may be higher.

Split Costs, Stress Less

• Open a joint bank account for mortgage payments, property taxes, and maintenance costs. Transparency with funds keeps everyone accountable. See exactly where the money for the house is going. That way, everyone sees their contributions meet the agreement and no one feels they’re carrying an unfair load.
• Use a property manager. Especially for a rental property, the property manager will oversee all other expenses with the property. They will give the co-owners a clear reporting of income and expenses.

Credit Considerations and Poor Credit Score

The combined income may boost your home purchase power, but poor financial health still influences your financing. Your friend’s credit score and debt-to-income ratio can affect your mortgage terms. A quick credit check before moving forward could save potential trouble—and awkwardness—later.

House Hunting and Property Type

Get on the same page regarding the type of property you want and the neighborhoods you’re interested in. Discuss factors such as location, size, and amenities to make sure your preferences align. Research the local housing market to see what’s available and their price points.

Getting preapproved for a mortgage or financing together will clarify how much a lender is willing to loan you. This helps narrow down your options and streamline your search. You’ll avoid paying too much for the home, keeping the housing costs manageable for all.

Work with a real estate agent who can assist with the home-buying process. Knowing the ownership terms, they can find the right house for your joint tenancy or LLC investment deal.

Allocating Financial and Household Responsibilities

When buying a house with a friend and living in it together, allocate financial and household responsibilities to avoid conflicts and misunderstandings. Discuss how you will handle mortgage payments, property taxes, insurance, maintenance, and repairs. Know who will be responsible for what.

Additionally, talk about how you will split utilities, household expenses, and other costs. Splitting these can save money, but it’s not the correct setup for everyone.

Transparency and open communication are key so no one feels like they’re carrying an unfair load. 

Consulting with a real estate attorney to create a cohabitation agreement is wise. A written agreement can help establish boundaries and responsibilities, providing a reference point if any disputes arise.

Legal Considerations and Contracts

Here’s where things get serious. Buying property can bring out the best and worst in people. That’s why we have legally binding agreements–to avoid potential pitfalls or one owner being left on the hook unexpectedly.

Co-Ownership Agreement

A co-ownership agreement isn’t optional—it’s essential:

• Specify how decisions will be made (“Can I turn the garage into an art studio?”).
• A written document on who pays for maintenance and essential bills.
• Clarify what happens when one of you wants to sell their share. Planning for an exit now can save arguments later.

Dispute Resolution Clause

Sometimes, even the best-laid plans go sideways. Having a plan for mediation or legal intervention is like carrying an umbrella. You hope you won’t need it, but you’ll be grateful it’s there.

Estate Planning

Nobody likes to think about what happens if someone passes away. Outlining inheritance plans will protect your investment and loved ones if one owner dies.

Managing the Property Together

Congratulations, you’re officially co-owners! As co-buyers, it’s important to establish clear guidelines for managing the property. But real life is rarely as picture-perfect as the Instagram-worthy keys-in-hand moment might suggest.

Maintenance and Repairs: Create a plan for handling costs and division of labor for upkeep. One of you might be better at DIY repairs, while the other covers costs.

Renting or Subletting: Thinking of renting out a spare room or listing the property on a platform like Airbnb? Have a plan for sharing the income and responsibilities before a tenant starts paying rent.

Selling the Home: When it’s time to part ways, make sure you’ve agreed on how to handle timing, splitting profits, and market fluctuations. What if one of you wants to sell and the other doesn’t? That also needs to be in your contract.

Protecting Your House and Friendship

Buying a home with a friend is one of those “better together” situations—if you do it properly. Treat the arrangement like a business venture by planning ahead, communicating openly, and seeking professional legal and financial advice. With a solid foundation, you’ll get more than just a house. You’ll have a home to enjoy without the financial elephant in the room.

Not sure how to start? Keep doing your homework, talk to experts, and think about what best fits your goals. Work with a local real estate expert who can help with buying a house that will build equity.