Should You Buy a Vacation Home With Your Friends?

You may have seen the headlines and polls that show millions of millennials and Gen Z-ers simply don’t expect to buy a home. According to CNN, last year the median first-time homebuyer age rose to 38 years old, a far cry from a few decades ago when the average new homebuyer was in their late 20s. To overcome these challenges, some savvy younger investors may try to team up with friends in similar financial situations to invest in real estate — either as a vacation home in a less-expensive market, as a rental unit for side income or even to live together as co-owning roommates. But while the cocktail napkin math on such an arrangement might make sense, what does co-buying a property with people who aren’t your relatives really entail? We asked real estate lawyers and home loan experts to weigh in. Here are the main considerations they said you should make before buying a home with friends.

Get everyone on the same page

What’s the purpose of the investment and what are everyone’s expectations for how the home will be used? Is it purely for personal or group getaways, or will the property be used as a source of rental income? (If the latter, you may not qualify for a smaller down payment like those the FHA offers first-time homebuyers — but only for primary residences.)

“Everyone needs to be on the same page,” says Eric Teusink, founding and managing partner of the Atlanta-based real estate law firm Williams Teusink. “One family might want to rent that beach house out for the 4th of July or Spring Break, while the other is thinking they should cash in on those weeks. One family might think they can do a good enough job cleaning themselves, while the other demands maid service.” In other words, make sure you’re all going into this with the same expectations. Teusink says, “It can be done, but the degree of difficulty should never be underestimated.”

Be prepared to reveal everything

“Even the best of friends may have vastly different financial situations and standings,” explains Darcie Gore, Executive Director and Senior Lending Manager at Chase Home Lending. “This may not be cause for concern when going out for dinner as a group, but buying a home is a larger commitment.”

“Before entering any sort of legal or financial agreement with someone, it’s generally a good idea to understand the other parties’ financial situation,” Gore says. “Talking about money can be awkward, but it’s necessary for proper planning.”

That doesn’t just mean showing everyone what’s in your savings account. It also means talking about salaries, investments and other loans you’ve taken out as well. “As taxes and maintenance can add up, it’s probably smart to understand their yearly income and whether they’re dealing with debt so you can plan accordingly,” Gore advises. “If a co-buyer seems evasive during these conversations, it may not be a good idea to invest in a home together.”

Discuss your budget

As with any real estate or business opportunity, there are pros and cons when it comes to co-buying. “Combining your assets may help you put down a larger down payment, which could lead to a better loan offer,” Gore says. Plus, while it can take years to save up a down payment on your own, looping in friends can allow for more immediate investment.

“In terms of cost, the good thing about shared ownership is that it opens up high-demand markets to people that may not have been able to afford to rent or buy otherwise,” offers Seann Malloy, Founder & Managing Partner at Bethesda-based Malloy Law Offices. “For example, three buyers can each throw in $200,000 — and that would make a $600,000 cabin on the lake possible.”

Gore points out that transparency in finances can also offer more options for the mortgage structure. “If one co-buyer makes more per month than the other, but the other has a healthier savings account, the latter might put down more for the down payment while the former takes on more of the monthly mortgage contributions.” In other words, consider whether equitable or proportional contributions might be possible up front or accrued as part of ongoing payments.

And as any homeowner knows, maintenance is a near-ongoing expense. “While each type of co-ownership operates differently, most allow co-owners to split costs that would otherwise fall on a single homeowner,” Gore says. That’s both a benefit of co-ownership and yet another cost that should be factored into everyone’s budget.

Put everything in writing

“As a litigation lawyer specializing in real estate disputes, I have seen firsthand how verbal agreements or vague understandings can devolve into costly disagreements,” says Malloy, who also warns that disputes among friends can turn into a “legal and psychological nightmare.”

So how do you avoid such nightmares? “It’s essential to draft a ‘Co-Ownership Agreement’ — a notarized contract that specifies ownership percentages, financial responsibilities (mortgage, taxes, repairs), scheduled use of the property and a mutually agreed-upon exit strategy,” Malloy advises. Yes, even as you’re considering the prospect of getting into a real estate deal with your friends, you should also consider how you plan to get out of the deal should you want to or need to. Malloy says a good real estate lawyer can assist with drafting such an agreement, with all of its caveats and clauses, up front. “Not only does it keep the ambiguity away, but acts as a conflict-prevention tool protecting [co-owners’] investments and their friendships.”

Are you friends or business partners?

“This is the type of thing that can break up friendships or families,” Teusink explains. “People think they are buying a vacation home together, but if they are planning on renting the property, what they are really buying is a small business. And going into business with your friends is an incredibly dangerous game. (This from the guy who is law partners with a friend he has known since he was 15.)”

Aside from making investment in real estate more feasible, co-buying can add risks. “Banks may require all co-owners to co-sign the mortgage, which could leave everyone on the hook if one person defaults,” Malloy explains. That means not only will the entire cohort of buyers be considered when it comes to calculating debt-to-income ratio and other loan approval considerations, once you’ve taken out a loan together, everyone’s financial standing is affected. “If one or more buyers fall behind on payments, it’s the responsibility of the others to pick up the slack,” Gore warns. “If they can’t, delinquency could have a negative effect on the credit scores of every co-owner, not just the offender in question.”

That’s why Malloy offers this summation for any prospective friends looking to buy a home together: “If you approach this as a business partnership first, you're more likely to keep the friendship that inspired the idea.”