If you’re thinking about getting your feet wet in property investing, but don’t know where to begin, or if you want to split the responsibilities with someone else, you might consider the options of co-owning (and by extension, co-managing) a property. While there are some advantages to this arrangement, you’ll need to think carefully about the dynamics of the partnership and the potential consequences of going this route.
Co-Owning in a Nutshell
Basically, co-ownership is exactly what it sounds like. You and another party (or multiple parties) will agree to have joint ownership of an asset, splitting the costs of the asset accordingly. If you’re buying the property outright, you’ll agree to a specific percentage split, and if you’re getting a mortgage, you’ll co-sign so that you’re both responsible for its regular payment.
Accordingly, if you plan on collecting rent, you’ll likely split that with your partner according to the percentage of your ownership split. If you sell the property, you’ll split the net proceeds of the sale along those same percentage lines.
The Potential Benefits
So why would anyone do this? Well, there are a number of potential benefits:
- Split responsibilities. Being a landlord takes much more work than most people realize. You’ll be responsible for finding tenants, collecting rent, taking care of the property, and eventually selling the property. If you already have a full-time job, those responsibilities can be overwhelming. Splitting the ownership of the property with another person can instantly cut those responsibilities in half, making it easier to manage a property while still working full-time.
- Reduced risk. If you aren’t in a steady financial situation, but you still want to invest in property, investing with a partner is a good way to reduce your financial risk. You’ll only be responsible for half the costs—including the down payment, the mortgage payments, as well as any unexpected emergency costs that might arise. Risk mitigation is important, especially for new investors.
- Many people choose to co-own a property with a friend or family member. While this presents its own series of unique challenges, it could also be a valuable team building and bonding exercise. Working on a house together gives you a chance to connect, and reap the rewards together as well.
Things to Keep in Mind
However, if you want to be successful, you’ll need to keep these considerations in mind:
- Mortgage liability. If you both co-sign the mortgage, you’re both going to be responsible for the mortgage. If, for any reason, your partner is suddenly unable to make their half of the mortgage payments, you’re still going to be responsible for coming up with the other half. If you can’t cover the payments, the bank may repossess the property, or go after your personal assets to repay the debt. If the person you’re partnering with has a long history of making payments on time, and you trust them on a fundamental level, this isn’t a major cause for concern. But you might want to check their credit history before you decide to stake your personal assets on their ability to pay.
- Responsibility division. At the start of the partnership agreement, everything will likely seem simple; you’ll split the responsibilities for the property right down the middle, 50-50. Unfortunately, responsibilities rarely split evenly. If one partner feels they’re spending more time managing the property than the other, a dispute may unfold; similarly, if your partner ends up failing to put their share of effort in, you could end up doing double duty. The best way to mitigate your risk here is to draft a partnership agreement, in writing, which outlines responsibilities clearly, and imposes consequences if either party is unable to fulfill those responsibilities.
- LLC and company formation. If you plan on buying a property with multiple different people, or if you and your partners are planning on buying multiple properties in the future, it may be in your best interest to form an LLC or another corporate entity. There are advantages and disadvantages to LLCs, but the most notable benefit is that they’ll shield you from some degree of personal liability. Make sure you consider this option carefully before proceeding.
- Transitions in ownership. Though it’s not pleasant to think about, you’ll need to consider what happens to the property if one of the partners dies prematurely. Will the other partner gain full ownership, or will that partner’s partial ownership be bequeathed to a living relative? If that happens, will the division of responsibilities and income remain in place? It’s important to have a contingency plan here.
- Goals and philosophies. Perhaps most importantly, before starting a property ownership partnership, you need to meet with your partner to discuss your goals and philosophies to see if they match up. For example, you may be interested in securing a stable additional line of income while your partner is more interested in selling the property for a long-term profit. You may be cautious and discerning when it comes to finding new tenants, while your partner wants to fill vacancies as quickly as possible. Discuss these matters openly, and come to a compromise before you get started.
Is It Right for You?
Overall, splitting the ownership of a property is a potentially valuable strategy, which can spare you some risk and mitigate the amount of time necessary to manage a unit. However, if you aren’t careful, you could end up financially liable for a massive debt, or damage your relationship with the person you’re co-owning the property with. As long as you’ve weighed the pros and cons carefully, including the worst-case scenario, co-ownership can be a beneficial strategy—but don’t jump in without thinking.
If you’re concerned about taking on the responsibilities of managing a property by yourself, co-ownership isn’t your only option. You can also choose to hire a property manager to take care of things like rent collection, ongoing maintenance, and tenant needs. If you’re interested in hiring a property management service, contact Green Residential for more information today!