What do you need to co-own property with friends and family?

Good question! You aren’t alone. While co-owning is becoming more topical, few people actually know where to start. (which is why we created Nestment)

Here’s a high-level list of essentials you need in order to get serious about taking the next step in cobuying.

1. Joint financial profile to get a mortgage
2. An operating agreement to determine responsibilities and liabilities
3. A financial roadmap to plan ahead

1. Joint financial profile

This is the easiest and most straight forward of the 3 key documents you need to start co-buying and is essential for banks and lenders to give you a mortgage. Since multiple people are purchasing property together, a lender will decide the loan amount and interest rate depending on your group’s cumulative financial profile. Beside lenders needing this documentation, it’s also critical you understand your partners’ financial status as well. This is the time to establish transparency, trust, and have difficult conversations… after all, you are entering a financial relationship together.

To start, you’ll want to collect and organize each person’s:

• Credit scores
• Income
• Debt
• Savings
• Monthly expenses

Yes, this can be a come to Jesus moment, but again, you’ll want to be transparent sooner rather than later. If you aren’t comfortable enough to share this info at this first stage, you should reconsider the group you are co-buying with or wait until you have your finances in order.

2. Operating agreement

Curious how you protect yourself in the case something goes sideways or one party wants to sell the property? An operating agreement spells out exactly how to handle possible scenarios that could arise and who is responsible for what. Think of an operating agreement as a set of rules that governs your group’s property and how you manage it.

Common things included in a co-buy operating agreement:

• Financial responsibilities for fixes, maintenance, and upgrades.
• How the property will be occupied (rented, Airbnb, vacation).
• Selling criteria and stipulations (usually a first right of refusal).
• How taxes will be calculated.
• How the property will be managed.

An operating agreement is the blueprint for how your property will live and survive. This is easily the single most important document your group will create, but you don’t need to get bogged down in the minutia initially. You’ll want to start a rough draft with key components and start conversations with your group early on. You can start to formalize your operating agreement with a property attorney when your group decides it’s ready to go to the next step in the co-buy process. A property attorney will not only help create a legitimate document, but also shed light on scenarios your group has not considered. This is your chance to role-play any scenario you still have questions or doubts about.

3. Financial roadmap

A financial roadmap is more than a forecast… a roadmap should be a projection of your property’s finances over the short and long-term. Your group might have the immediate finances to purchase property together, but do you know what will be required after you purchase? You need to plan for the future and start factoring in things like taxes, interest, and maintenance. The more detail you add to this roadmap, the more accurate picture you have of your group’s realistic ability to purchase together.

What should you include in a preliminary roadmap?

Down payment

Fees

Renovation budget

Rainy day safety net fund

Monthly revenue

• Rental income

Monthly expenses

• Mortgage payment
• Property insurance
• Maintenance

Yearly appreciation

• How much has your property value appreciated

Yearly expenses

• Property tax
• Projected income tax from capital gains

Other deductible expenses  

• Depreciation - which is typically the value of your home (not land), which your property taxes will tell you and any major renovations to your rental property - typically divided by 27.5 the years these assets depreciate.  There are other depreciations schedules that are sooner e.g. appliances - for more see here.

Nestment, Inc. does not guarantee and is in no way responsible for the accuracy of information provided in this blog post. All information is provided “AS IS” and with all faults. Data presented here may not reflect all real estate activity in the market.  While the information on this site is about legal and tax issues, it is not intended as legal or tax advice or as a substitute for the particularized advice of your own attorney and tax professional.