Here’s why buying a home with a friend makes more sense than renting

Home prices have grown past the point of affordability for most urban-dwelling millennials in Canada, but that doesn’t mean the dream of homeownership has to die.

More young people are open to buying a home with friends or family members to increase their buying power. Here’s why that might be a good thing.

In major Canadian cities, where the thriving arts, culture, and employment opportunities are attracting the bulk of the millennial population, house prices are often well beyond the average income of most workers. On top of this, many of them are in the process of paying down student loans that they won’t be rid of until their 30s. So the challenge faced by this generation is how they can pay off debt and save for long-term goals such as retirement and homeownership.

For previous generations, buying a home was not only a given, but an important part of the overall retirement picture, as a home’s value could be relied upon to appreciate in value and net a nice return down the road. But now people are looking at homeownership differently. While the case can still be made for real estate as a smart investment, many fear they’ll be stuck renting for years before they have enough for a down payment.

In larger cities like Toronto, even renting is becoming unaffordable for many young workers. Fewer people are able to afford the luxury of a single-income household, so what solutions are there? Sure you could find cheaper real estate out of the city, but that comes with the inconvenience of a long commute or compromising on the lifestyle perks of being in a big city.

So instead of accepting long-term renting as the only urban option — which isn’t the end of the world, but is concerning given the ever-increasing rent — it might be worth considering buying in a hot housing market with friends or family.

Here are a few reasons why co-ownership is an idea worth taking seriously.

You’ll have an asset with a very high guarantee of return

Talk of a major housing bubble in Toronto hasn’t done much to dissuade people from wanting to buy homes. The demand has reached a fever pitch, with every week bringing stories of modest homes selling for mind-boggling amounts of money. In fact, average sales price in many cities have grown at an absolutely ridiculous pace. A RE/MAX report from December predicted that price growth will thankfully slow down somewhat in 2017, but outlook is still very positive for housing to post consistent gains over time. Steady growth is what home buyers should be counting on as opposed to having a property’s price jump 62% in a matter of years.

The great thing about this growth is that you and your co-owner(s) can look forward to strong returns if someone decides to sell their stake in the property (more on that later).

You can afford a bigger, better house more easily

Saving up a down payment is one of the first major hurdles to buying a home. It takes most people years to save up the money to buy even a cheap house or condo. But if you’re buying with another person who can match your contribution, you’ve instantly got twice the buying power.

When you’ve got more money coming in, mortgage lenders are going to be a lot more willing to approve your application. It’s also a simple fact that it costs more money to own more square footage. Buying with two or three friends could help get you into a nice, big house, which means it’ll appreciate at an even better rate than a small condo or starter home. Plus, who doesn’t enjoy a little more space?

If you decide you don’t want to live in the house anymore, you’ve got options that actually benefit you

When it comes to the age-old rent vs buy debate, one of the main arguments for renting is that it allows for greater flexibility in determining where you live and how much you pay. If your rent is getting too high, you could pack up and move somewhere else if you really needed to. With a house you’ll have to go through the time and effort of staging and selling the place, then all of the paperwork involved with closing your mortgage.

When you’re co-owning however, you must factor flexibility into the agreement between the titleholders. People’s lives can change considerably during the typical 5-year mortgage term. There’s a chance that one of the owners decides to sell their share of the house. If you were renting, you’d terminate your lease and that would be that. But with co-ownership you can decide between whether you want to sell or rent out your space.

Depending on your agreement, the other title holders would either be responsible for buying you out or you would be required to find someone to buy your share. Alternatively, you could rent out your space and increase your monthly income. Either way, you’re walking away with money in your pocket instead of just looking for another place to live. Selling even a partial stake of a home in a hot market like Toronto after a few years could net you a tidy little profit to feed your retirement fund, go traveling, or maybe even help get you into a home of your own.

Potential complications to consider when buying a home with a friend

Of course, living with people is never simple or easy. And it only gets more complicated when you’re tied together financially. Not only do you need to be sure you and your housemates have compatible lifestyles and goals, you need to be sure that everyone is ready to share in the responsibility of maintaining a home. For some, the risk for ruining close relationships might be too high, but by laying out a sound strategy in advance, you should be able to make sure nobody gets burned, even if things don’t go to plan.

The majority of complications should be addressed before you even start shopping for mortgages. Work with a professional mortgage advisor as well as a legal professional to create a comprehensive agreement between titleholders that will define how conflicts will be addressed. Here are a few items it should include:

• What percentage of the property will each titleholder own and why?

• How long does the group plan to own the property?

• What will happen when if one member of the group wants to leave the venture early?

• What will the rules be regarding renting?

• What happens if someone doesn’t pay their share of the mortgage, maintenance, or carrying costs?

• How will emergency repairs and other unforeseen costs be handled?

• What spaces belong to each titleholder as well as rules about usage of shared space?

Once you have your terms set out, make sure the agreement is signed and witnessed by a notary public, and that all parties involved have copies.

The housing market is tough right now, but with a little help from your friends, you might actually be able to get your foot in the door.