Buying a House With a Friend as an Investment: 5 Common Issues

Buying and owning an investment property requires significant time, effort, and money, so going in with a friend can make sense. But the move does come with five common challenges, from financial to personal.

On the bright side, you'll build equity in a property as it hopefully appreciates over time and as you pay down the mortgage debt. The investment property will ideally provide a steady source of income as you collect rent each month and it can offer tax benefits as well. You can deduct expenses including mortgage interest, property taxes, insurance, repair and maintenance costs from any income you earn. All this can save you money at tax time.

But buying an investment property with a friend is a little like getting married. There may be challenges along the way regardless of how strong your relationship is.

1. A Mortgage Rate Is Tied to Both Credit Reports

You and your friend will both be on the mortgage so the lender will access both your credit reports to determine if you qualify. One person's bad credit can negatively affect the mortgage terms, including the interest rate you'll pay on the loan. Even a small change in the interest rate can make a big difference in the amount due every month on your mortgage and in the total interest you'll pay over the life of the loan.

2. There's No "Easy Button" for Moving On

It’s fairly easy to walk away because the two of you no longer get along if you rent an apartment or house with a roommate, but that's not the case with a mortgage.

• Both of your names are on the mortgage and you're both responsible for making the payments even if one of you wants out of the deal. You'll either have to sell the house or refinance the loan under just one name to get one of the names off the mortgage. Both options can be challenging. Selling can take many months, and there’s no guarantee that a lender will approve your application to refinance.

3. Credit Rating Risks

Both you and your friend are on the mortgage so the lender will report both of you to the credit agencies for non-payment if either of you fall behind for any reason. The lender could even foreclose regardless of whether you've personally paid your share and it was your friend who lapsed.

4. Challenges Getting Other Loans

Each of you is individually responsible for making the entire mortgage payment each month in the eyes of other lenders, even if you and your friend split the mortgage payment 50/50 each month. This can make each partner's debt-to-income ratio appear high and make it difficult for either of you to qualify for other loans.

5. Disagreements Over Responsibilities

A friendship can be tested if there are disagreements over who is responsible for what, whether it's paying for utilities or maintaining the property. Your written agreement should include details regarding the breakdown of expenses to avoid this, as well as how repairs and maintenance will be handled, who will do the work, and how the costs will be shared.

You'll also want to determine how tax deductions will be claimed. Make sure you firmly agree on who gets to claim the mortgage interest deduction or whether you'll split it.

The Bottom Line

Buying a house with a friend has a lot of benefits. It may be easier to qualify for a mortgage with two incomes and you'll get to share all the monthly expenses, including the mortgage payment, utilities, and maintenance or repair costs. You get to build equity as you pay down the loan.

But some challenges come with responsibilities as big and expensive as this. It’s important that you don't rush the decision. Do your homework and make sure you and your friend both have the necessary income to meet the monthly expenses of the investment and that your understandings regarding the property are the same.