Author Topic: Cohabitating with friends - rent or split ownership?  (Read 4176 times)

Mr. Green

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Cohabitating with friends - rent or split ownership?
« on: February 08, 2017, 03:08:47 PM »
My wife and I are very close friends with another couple. We own a lot just down the street from them and we planned to build a house and move there. The possibility of cohabitation has recently come up, as their house is very large (4 bed, 3.5 bath, 3,000 sq.ft.). I'm very aware of the personal quirks that come into play when living together, and I'm not really seeking advice on that aspect of this scenario. The fact that we continue to own a lot down the street from them makes it easy to default back to our original plan of building our own house if we find that living together strains our friendship.

If we're able to address all of our concerns regarding the logistics of living together, then we'll probably do it. The topic of how money would work has also come up. Since this is a house they already own and can afford on their own, there's not really a concern regarding us choosing to move out and that creating a financial hardship for them. I'm trying to figure out what the pros and cons are of "renting" our half of the house from them vs. legally splitting the ownership of the house. I would prefer to rent, as it leaves no room for any disputes about ownership. It also keeps my capital liquid. I haven't done the math yet on whether us giving them money like rent is disadvantageous to them compared to an infusion of capital from us, which would lower their mortgage expense. There are costs associated with refinancing, putting our names on the deed, etc., so the equation is not quite as simple as comparing a smaller mortgage to the effect our added rent would do to their mortgage every month.

Has anyone split ownership of a house with friends? What was your experience, financially? Are there other FINANCIAL considerations I should be thinking about?

Edit: spelling
« Last Edit: February 08, 2017, 03:12:22 PM by Mr. Green »

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Re: Cohabitating with friends - rent or split ownership?
« Reply #1 on: February 08, 2017, 03:21:29 PM »
I think that you are right and it would be better to rent. In my opinion, it would be a huge financial mistake to split ownership because all four people would have to agree to sell the house.

Lacking a previous agreement, in writing, for the other couple to buy you out at the market rate, you and your wife would need the permission of your friends to liquidate your investment.

And what if they get divorced? In a way, it would be your divorce too. I cannot imagine why anyone would want to strap themselves in to such a situation.

ketchup

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Re: Cohabitating with friends - rent or split ownership?
« Reply #2 on: February 08, 2017, 03:24:09 PM »
I'd say renting is definitely the way to go.  I've done something similar, and I'm glad we did it that way.

Mezzie

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Re: Cohabitating with friends - rent or split ownership?
« Reply #3 on: February 08, 2017, 03:28:59 PM »
Definitely rent. The couple that rents from us is awesome and I hope they feel as welcome in our home as they are, but that separation, I think, is important for everyone's well being. They can leave whenever they like, and we can have our house to ourselves again (with reasonable notice) if we like.

yachi

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Re: Cohabitating with friends - rent or split ownership?
« Reply #4 on: February 08, 2017, 03:39:41 PM »
The fact that we continue to own a lot down the street from them makes it easy to default back to our original plan of building our own house if we find that living together strains our friendship.

And then you'll be dealing with the stresses of building a house while living with strained friendships in a house that isn't yours?  Living in a tent in the future back yard of the house that's being built?

Kidding aside, I actually think could work.  I would favor paying rent.  I guess you would be financing in 4 people's names?
Things to consider:
Who makes appliance upgrade/replacement decisions
Who fixes, repairs, remodels the house
What if you want to pay off the mortgage but friends don't
Does rent rise with inflation, or is it more like a mortgage cost sharing+ % of taxes deal
Do you share the house appreciation?
Are there any inheritance issues to think about?
It's a little hard to be mustachian in many ways without your own place (control over thermostat, insulation levels, lawn care, cleaning services).   You're combining your lives together in a lot of ways, so if you're not financially compatible, it could lead you to spend more.

Mr. Green

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Re: Cohabitating with friends - rent or split ownership?
« Reply #5 on: February 08, 2017, 03:52:20 PM »
I think that you are right and it would be better to rent. In my opinion, it would be a huge financial mistake to split ownership because all four people would have to agree to sell the house.

Lacking a previous agreement, in writing, for the other couple to buy you out at the market rate, you and your wife would need the permission of your friends to liquidate your investment.

And what if they get divorced? In a way, it would be your divorce too. I cannot imagine why anyone would want to strap themselves in to such a situation.
Their house is way bigger than anything we'd build. If they wanted to sell (for any reason) we would want to sell as well. If we wanted to sell they would have to do a cash out refinance to cash out our half of the ownership, which would simply put them back in the position they're in currently (paying the whole mortgage). Though, their credit worthiness could take a hit making that refinance troublesome. Interest rates could change, creating an unexpected financial burden for them as well. This route is certainly not without possible headaches in the world of "what could go wrong" scenarios. I think it's highly unlikely that we would go this route. Maybe I wouldn't even consider it after I've had time to flesh everything out. I just wanted to pull from the Mustachian pool of experiences, as I have none here.

bugbaby

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Re: Cohabitating with friends - rent or split ownership?
« Reply #6 on: February 08, 2017, 11:31:48 PM »
I can't imagine why your friends would want to share ownership with you. Who first brought up the idea and why?

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Re: Cohabitating with friends - rent or split ownership?
« Reply #7 on: February 09, 2017, 03:06:10 AM »
I did a shared ownership with my brother, as a way for us both to get on the London property market.  It worked out fine for us both, but I would never have risked it with anyone else.

For you, rent, all the way.

Little Aussie Battler

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Re: Cohabitating with friends - rent or split ownership?
« Reply #8 on: February 09, 2017, 03:18:13 AM »
Rent > co-ownership.

Living elsewhere > living with friends.

Mr. Green

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Re: Cohabitating with friends - rent or split ownership?
« Reply #9 on: February 09, 2017, 05:29:38 AM »
I can't imagine why your friends would want to share ownership with you. Who first brought up the idea and why?
My friend brought it up. I think he thought, without doing any of the math, that it would help them more in the long run if we split ownership because our equity would make their mortgage smaller so they would pay it down faster. Off the cuff, I thought this was possible as well. However, I made a couple amortization schedules last night that simulated a scenario where we'd "buy" half the house and they refinance the remaining mortgage down to a 15 year note, then cash us out at some later date by refinancing back to a 30 year note. If they put our rent directly toward the mortgage, the rent scenario is better for them financially. In 3 years it pays their 30 year mortgage down by $7,000 more than if they had a 15 year note and then cashed out our equity. I imagine this happens because, even though the split ownership scenario means a more aggressive mortgage schedule for them, the balance is smaller so the monthly pay down is still much less. On top of that, my check doesn't even include the increased interest deduction they'll get from the 30 year note, which widens the gap even more.

After having a chance to really think about it and brainstorm pros/cons and do the math, I've yet to come up with one beneficial reason to any of us for splitting the ownership of their house. I think once I have a chance to show my analysis to them they'll agree.
« Last Edit: February 09, 2017, 05:56:43 AM by Mr. Green »

historienne

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Re: Cohabitating with friends - rent or split ownership?
« Reply #10 on: February 09, 2017, 07:11:42 AM »
Renting seems likely to be financially better for them, since they'll presumably convert your rent into equity.  When you run the numbers, though, make sure that you are budgeting for maintenance appropriately.  If you are renters, then when the roof needs to be replaced, that should be their expense and not yours.  They will want to be saving enough from your rent to cover those costs.

Retire-Canada

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Re: Cohabitating with friends - rent or split ownership?
« Reply #11 on: February 09, 2017, 09:10:41 AM »
I would not want to own property jointly with other people. If it makes sense financially to rent go for it.

nobody123

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Re: Cohabitating with friends - rent or split ownership?
« Reply #12 on: February 09, 2017, 10:58:45 AM »
I would rent.  Come up with a 4-month trial period contract (see if the realities of living together match the expectations) where either couple can opt out of the agreement without having to explain why (Do you really want to have to tell your buddy that his wife sounds like a stuck pig when they are being intimate, or that she is a slob, or get pissed about them eating your food, etc.) at the end of month three.  Assuming all parties are willing to extend the agreement, maybe do a 6 month agreement with the opt out at 5 months into the contract, rinse and repeat.

I agree with the other posters that joint ownership just mingles your finances with the other couple's.  What if one of the other couple gets sued, then there is a lien on the house, etc.  How would you agree to pay for maintenance / upgrades?  Are you really willing to pay half for the granite countertops the other wife MUST have when she has them installed without consulting you?  What if they can't come up with their half of the money to fix a leaky roof because they are poor planners?  Just a bunch of potential headaches.




charis

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Re: Cohabitating with friends - rent or split ownership?
« Reply #13 on: February 09, 2017, 11:19:19 AM »
I agree that renting is the only scenario that makes sense.  But I can't fathom why anyone would actually want to do this, apart from financial need.  Will you have separate living quarters, or will you be sleeping across the hall from this couple?

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Re: Cohabitating with friends - rent or split ownership?
« Reply #14 on: February 09, 2017, 11:20:04 AM »
Buying is a potential financial WEB of disaster.  Market rent/2.

Ann

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Re: Cohabitating with friends - rent or split ownership?
« Reply #15 on: February 09, 2017, 12:00:39 PM »
Another vote for renting.  There are so many household decisions to make.  It can even cause some friction between two committed partners.  I would imagine it would only cause strife between four different individuals.  These are the same people who elected to buy a HUGE house (very unmustachian).  So now they are looking to cohabitate with another couple (more mustachian than I am willing to do at this point) -- but that resolve is untested.

Houses are not always easily liquidated, and the funds to "buy out" partners are not always readily available.  Sounds like trouble to me.

Mr. Green

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Re: Cohabitating with friends - rent or split ownership?
« Reply #16 on: February 09, 2017, 04:01:36 PM »
I agree that renting is the only scenario that makes sense.  But I can't fathom why anyone would actually want to do this, apart from financial need.  Will you have separate living quarters, or will you be sleeping across the hall from this couple?
We will be down the hall from them, in a separate bedroom with our own bathroom, but not right next to them. None of us financially need to do this, but we're practically family. I think multiple families living together (whether related by blood or not) is quite common in many parts of the world. Our (American) views of what "space" is required for a household is quite skewed.

I see a number of benefits from this situation and relatively few drawbacks. The biggest benefit for me is the ability to travel post-FIRE and not have to worry about a house that's left unoccupied. This scenario also lets me keep the money I would have spent build a house (assuming we were renting) invested and earning me more money. We don't expect this to be a decade long deal but it could go a few years if we all like how it works out. I will continue to own the property down the street until we're comfortable with the situation, that way if it becomes a no go we just default back to the original plan and build our own house.

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Re: Cohabitating with friends - rent or split ownership?
« Reply #17 on: February 13, 2017, 10:21:07 AM »
Rent, and use an actual lease, not a verbal agreement.

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Re: Cohabitating with friends - rent or split ownership?
« Reply #18 on: February 13, 2017, 05:27:43 PM »
Rent, it solves all the future disputes. It also allows a quick unwinding of the situation if things change; new girlfriends/boyfriends, kids, jobs across the country etc. If you ever feel the need to own property just buy some rentals.

I would gladly cohabitate with friends, I still miss my former roommate, she left to live with her husband. I had lots of others in my 20's, lots of good memories. Its great having really close friends to hang out with every night, if you need alone time we all retreated to our bedrooms.

My cousin travels a lot with work, he rents from a friend now. He had a house but found the upkeep a pain when he was travelling a lot. Now he has a place to call home when he needs it (pretty sure he has the entire payment for a house in an account). Lots of people do it for lifestyle reasons and for the social aspect

Lews Therin

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Re: Cohabitating with friends - rent or split ownership?
« Reply #19 on: February 14, 2017, 05:19:25 AM »
While reading the points on equity, it seems to me that the difference between you renting or you being a part owner would be the decrease in interest they would have to pass (you would all have to pay) if you brought in a lump sum to decrease the mortgage. Talk to the owners about what exactly the amount they were thinking your lump sum would've been* (if they thought you would put in X amount as equity) and calculate the difference in yearly interest. You then have both numbers, (Cost if you were a part owner) and the Cost if you are simply a renter. The main points of interest as you mentioned is that you would not want to keep the house I.E. buy them out, so you have no reason to be owners.

A point you can mention, is that the gains of the house will remain with them if you only rent ;) . You will also save all the legal paperwork of having to change the owners.

100% it is simpler to rent, there really is no upside for anyone for you to become owners, the monetary gain of adding equity could easily be solved by having a reasonable rent (as you would likely have a lower rent/mortgage if you put in equity, so the rent will be slightly higher than if you were an owner, but you have no opportunity costs with the money. You can invest right away.

Final thoughts: Do you really want to add money into that house, when the plan is to build another house on a different lot? They would still have to buy you out, unless that money is unneeded for other plans.

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Re: Cohabitating with friends - rent or split ownership?
« Reply #20 on: February 14, 2017, 05:51:56 AM »
+1 to what's been said. Rent, have a lease, and remember they are your landlords. That means you don't get ownership, but it also means you don't cut half a check for the roof repairs. Make it a reasonable market-based rent so no one is doing any one any favors, and enjoy your cool roomates!

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Mr. Green

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Re: Cohabitating with friends - rent or split ownership?
« Reply #21 on: February 14, 2017, 07:20:58 AM »
100% it is simpler to rent, there really is no upside for anyone for you to become owners, the monetary gain of adding equity could easily be solved by having a reasonable rent (as you would likely have a lower rent/mortgage if you put in equity, so the rent will be slightly higher than if you were an owner, but you have no opportunity costs with the money. You can invest right away.

Final thoughts: Do you really want to add money into that house, when the plan is to build another house on a different lot? They would still have to buy you out, unless that money is unneeded for other plans.
I'm completely sold on renting at this point. Though if we liked how the situation worked out, it's possible we could live with them for a number of years and forgo ever building a house near them. I still like the idea of renting if it's a long term arrangement. We don't need the house equity. We're also FI, and trying to figure out how to RE, so I like the idea of being able to take longer trips and not have an empty house to worry about. I'm hoping that presenting all the facts and numbers to them will also bring them on board with the rent scenario.

Lews Therin

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Re: Cohabitating with friends - rent or split ownership?
« Reply #22 on: February 14, 2017, 08:23:03 AM »
+1 Everyone.

Easy enough when everyone agrees on the same thing!

For your FI/RE; it'll be good for your stash as well, the Down payment will be working for you at 4-7%! (invested)

 

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