If everyone is contributing to the downpayment and everyone wants to share in the risk/reward of appreciation, than your proposal doesn't work (and if only the first holds, setting all parties but one up as renters is problematic because then either much the downpayment is gifted to them, or exchanged for a claim against the property (and first right to lease is a claim), or it is lent by the “renters”), all of which have problems, including the fact that some are outright disqualifying for some loan programs.
Your proposal is exactly the right thing to do when one of the people is supplying the initial capital and everyone wants them to take the sole risk/reward of future market moves.
The logistical issues you raise are why you ideally want the group to form a separate legal entity to buy the house, have everyone rent from that entity, and have an appropriate ownership agreement for that entity as well as rental agreements, so that a deadbeat can be both evicted and have their ownership share of the controlling entity bought out; but that's probably an initial and ongoing cost more than you want for the purpose if it's just for a shared home.
Around here, finding the money for a 20% down payment is the biggest impediment to buying a house (it can be hard to scrape up $100K - $200K), so that's easier if you can pool your funds among friends, its easier to do. So that pretty much precludes a rental arrangement. I think it'd be hard to get a loan on a property if the down payment funds are coming from your friends -- and you're treating it as an investment property because you need their rent to afford the mortgage.
This kind of arrangement is typically structured as a Tenancy in Common:
Well, that's true in the US in that, so long as you have sufficient income to make the payments, you can probably fine subprime financing for purchases with less than 20% down, but you'll pay more for it than you would for the same size loan with more equity (whether in PMI, interest, fees, or some combination.)
So realistically, the only way you could buy a house and rent to your friends is if you can qualify to buy the house on your own.
Ideally they wouldn't increase your rate then. I know SoFi has no PMI with 10% down but I believe rates are slightly higher.
Banks typically won't issue a mortgage for a TIC title as they're not interested in becoming a tenant-in-common in the case of default, making such titles relatively unmarketable. TIC owners through inheritance almost always liquidate by selling the property as a whole or, in the case of undeveloped land, through partition.
But in San Francisco TICs have become common alternatives to condominium conversions with real estate developers. The city caps the number of yearly condominium conversions, but has little ability to control private arrangements like TICs. It's so common that many local banks will issue mortgages for TIC shares, provided the proper contractual arrangements are in place to expedite recovery from deadbeat tenants-in-common. Taking ownership of a TIC share typically involves simultaneous execution of both a title transfer from the seller and contracts with each remaining TIC owner. (These contracts also effectively partition the property, as TIC owners otherwise have a right to access the entirety of the property, including your bedroom.)
The contracts tied to TIC arrangements do increase the costs and risks of litigation. If title passes to someone who doesn't enter the shared contract--say by inheritance--then you have a problem. (Presumably TIC contracts attempt to force maintenance of Wills or Trusts to prevent this from occurring.) So while banks here will issue mortgages the property values are discounted. But that means that TIC apartments also typically sell for substantially less than comparable condominiums, which translates to a smaller mortgage, making ownership more affordable. If you see a deal too good to be true in SF, assuming its legitimate it's probably a TIC.
Condominiums are designed to simplify this whole process, but in their absence you can hack together a substantially equivalent form. Interestingly, few property lawyers outside San Francisco would think of doing this. My Property Law professor, who was also the professor for my Land Use seminar, was surprised TICs were being used this way. So if you're outside San Francisco it may pay to inquire with an SF-based real estate developer or property attorney.
Your suggestion seems to be to just buy the place and have your friends be roommate tenants? The reason this isn’t viable is the costs are too high.
By buying a place together you can get a better place with an affordable mortgage split and you can share in the upside without getting locked out of the market.
The risk is the standard social risk plus the risk that if everyone does this prices will get even crazier.
Should be roughly neutral in effect; the money is pulled out of the rental side of the housing market by people who aren't able to afford sole purchase going together to do a joint purchase and going into the owner-occupied housing side that way, but that either drops rental prices (making purchase at high prices less attractive) or gets current rental units sold off into the owner-occupied market because they are unable to make enough to be profitable as rentals, increasing supply on the owner-occupied side and dropping prices.
So not viable after all then. The only solution I see is build higher and denser, and do it so much that it can accommodate the demand growth.
Unfortunately between existing owners working to kill any new units and renters in SF claiming that building more increases rent (and vying for rent control which makes things worse) I think it’s just hopeless.
I co bought a house with my wife and another couple. We spent about 18 months figuring out the legal agreement, including many permutations on failure to pay. Fwiw, our 'failure to pay' arrangement is in two steps. First step is the generation of interest bearing loans, secured against the non paying owner's equity. (Effectively auto sale of part of the non-paying owner's portion of the house.) Stage two is an actual sale process, which might be owner to owner, or might be dissolving entirely and selling the house. All of this is in our TiC contact.
On the flip side, we were able to pay 40% down on an awesome place that we couldn't have done individually, and even the lowest earner is getting significant equity because of the way we've structured our terms.
Rent is theft.
Owning your own house is thus exposed to significant downside risks that can hit both your income and your assets simultaneously. Imagine being a Ford employee who bought a house in Detroit in 2007. The auto employers ran into severe issues and many cut employee pay in 2008, right when Detroit's housing prices basically fell by half. The only way to make matters worse would be to own significant amounts of Ford stock, too.
>First step is the generation of interest bearing loans, secured against the non paying owner's equity. (Effectively auto sale of part of the non-paying owner's portion of the house.)
Yeah, that's actually a great point that I should have thought more about. Co-owners have home equity, which means that you have an asset right there that the other owners can lay claim to in case of non-performance. This works better with significant down payment to ensure positive equity, too.
>Stage two is an actual sale process, which might be owner to owner, or might be dissolving entirely and selling the house. All of this is in our TiC contact.
Suppose a co-owner got a job offer halfway across the country that pays significantly more than their current salary. Would they be able to unwind their position here without significant loss of equity? Or does an entering agreement like this effectively limit your labor mobility?
(Which, fwiw, is equivalent to what any home owner taking a distant job offer would face, though more people are impacted. The fall back to renting, though, leaves other owners in the house, to ensure things are well taken care of, at least; much better than the absence landlord situation...)
Wow that's strong. Do you really believe anyone who offers property for rent at market price is morally equivalent to a conventional thief?
Part of rent pays for goods and services: construction costs, upkeep costs, administration costs, insurance costs, etc. Insofar as it does that, I believe that it is a healthy net-positive economic exchange.
Rent also partly goes to pay an individual or company for the service of everyone else staying away from that particular chunk of space. That's the problematic part.
See also: banks selling mortgages are financial arms dealers profiting off of exacerbating all of this.
The real trick is figuring out what to do about it and how, of course.
That sounds like a general aversion to any property rights or right to privacy at all, if you mean that you're paying for nobody else to come and be in the property at the same time as you. Not sure how it's specific to rent?
It's not an aversion to property rights in general. In particular, it isn't an aversion to allowing private ownership of the means of production (communism) or, on the flip side of the modern acceptability coin, private ownership of people (slavery).
You're right that the phrasing of the argument was general. There are more specific moral arguments on every side of every one of these, but the practical side of it always boils down to: how do you preserve incentives in a market's growth phase while discouraging rents (in the economic sense of the word) in the steady state?
That's a tricky one, and I don't claim to have a general answer, but I'm pretty sure that in the particular case of land it has something to do with society not making unbounded promises in exchange for bounded goods, e.g. of eternal, transferable land exclusivity to a private entity in exchange for building a log cabin on it. From that perspective, the government of past generations stole the exclusivity rights from modern citizens, and the present landowners are in a situation similar to any other possessor of stolen goods.
Conversely, if there's an earthquake/fire/mold problem, then the equity holder is on the hook and the renters can just move on.
It also means: no property taxes, maintenance costs, stamp duty, and it makes it easy to move.
No rent means you're spending more on housing, as you need to pay for someone's mortgage, costs and their profit, so it means you save less and so have less liquid capital, and also don't have any non-liquid capital in your equity.
> It also means: no property taxes, maintenance costs, stamp duty
No you're paying for all that, via your rent.
> Rent means you're spending more on housing
That's not a contradiction; liquidity has a cost. Yes, by tieing up capital in property purchase, you can, on average, trade liquidity for lower total cost if you are using the property forever. (Whether the actual total cost ends up being lower if you ever decide to move depends on market conditions and timing and transaction costs; transaction costs on both ends of a home purchase or sale are a lot higher than entering or exiting a residential lease.)
If I pay $2000 a month rent I'm always going to have less liquid capital than if I pay $1000 a month mortgage, aren't I? The mortgage payer ties up their money in the equity so it's not liquid, but the rent payer's money is just gone, so it's infinitely not liquid, and on top of that more of their money is gone.
When you've paid off the mortgage the mortgage payer has more liquid capital, and a property.
I don't know who you think ends up paying for maintenance and taxes in a rented property - it's the renter, through their rent.
Equally correctly, the landlord pays them, and landlords that can't at market rents on top of any purchase financing that they are still paying go out of the landlord business.
Most precisely, where, as is usually the case, neither supply nor demand are either haveperfectly elastic or inelastic, the costs are effectively split between renters and landlords in some ratio; the market rents are higher but the financial profits are lower than they would be if the costs involved were not a factor.
What I’m saying is that you don’t (usually) get to buy a house for $0 down. So it’s never a choice of $2000/mo for rent vs $1000/mo for mortgage. It’s more like $20k cash + $2000/mo for rent vs $20k equity + $1000/mo mortgage. Over long enough time horizons the monthly payments don’t matter and it’s a question of which investment appreciates more.
Even if your mortgage interest is greater than property value appreciation you could conditionally still come out ahead as compared to the available alternatives.
Diversity, leverage, better appreciation: if you're not already wealthy you can really only pick 1 (maybe 2) out of the 3.
And this ignores the value of having stable monthly living expenses, something not otherwise possible without rent control. You can of course buy cheap land, but such places are typically remote from employment opportunities and, while possible, that approach is just another form of speculation--people will readily share stories about living in the country and telecommuting to a high paying job (successful speculation), but few would ever discuss how they ended up stuck in a cycle of minimum wage employment (unsuccessful speculation).
That's wrong - the futures market is easily available if you have $10k, and offers rock-bottom costs for embedded leverage due to arbitrageurs. It varies based on the contract in question, but the two-year treasury futures contract offers roughly 400x leverage. Generally they offer you as much leverage as you can handle before overnight price moves will eventually wipe you out, so you definitely want to use less than they're offering.
But what's your exposure? Home mortgages are almost always non-recourse loans, limiting your losses to your initial down payment.
I don't think speculation in the futures market is a very good justification to the argument that home ownership is in general a poor investment--IME the conventional thinking in economic circles. I stand by my larger point that home ownership is a categorically sub-par investment only for those already with substantial wealth.
If you pay 20% down plus 4% upfront in closing costs on a $1 million dwelling, and then pay mortgage of $3,800/mo (which is fairly realistic for a conventional loan), it'll be more than 5 years before you break even, in liquid capital and presuming nothing is extracted from equity and ignoring any property maintenance costs that landlords have that would be rolled into rent for most renters, with a renter paying $7,600 for a similar dwelling which would actually represent a quite high rental yield.
To add to this, if you own, you are stuck in one area. Selling and buying has closing costs. I might be biased because I prefer the markets more than anything but index fund investing on its own can give you better returns than owning. IMO, owning and renting out a portion is the best return, or rental properties run by a property management company, especially if you own property in a LCOL area.
Fundamentally, landlords capture any and all surplus value.
https://business.financialpost.com/personal-finance/mortgage...
They can't, but the maximum limit on both mortgage interest ($100K) and the indebtedness on which you can deduct interest paid ($1.1 million) apply per-taxpayer for unmarried co-owners. You still can only each deduct what you actually pay. This is a result of a 9th Circuit City decision IRS decided not to appeal that almost certainly want the intent of the law, and was not the way the law was applied prior to the decision.
I'm surprised Republicans haven't framed it as a new marriage penalty and jammed a “fix” that would increase the limit for married taxpayers to double the single-taxpayer limit into one of their tax bills, since it would let them champion marriage, rail against the perfidy of the Ninth Circuit, and cut taxes on the rich all at the same time.
On the other hand, you need to be charging market rents with the intent to try to make a profit in order to do this on your taxes, and that means keeping track of rent payments and reporting them. And any profit here could mean that what would otherwise be an untaxed sharing of expenses is now a taxed profit-seeking transaction.
Want to share a house with friends for twenty years and share childcare responsibilities? Great, have them sign an intent-to-lease agreement and take that to the mortgage company to help with qualification. Not having this kind of agreement can lead to all sorts of issues.
This should also extend to being jointly and severally liable for paying rent, not just mortgage. What happens when a tenant stops paying? If you've got joint and several liability, you basically have to pay the full amount while being unable to evict the deadbeat for nonpayment (since they're an owner or on the lease). It's slightly better in the case of the lease since you can negotiate a technical default and deadbeat-only eviction with your landlord, but it's still a mess that you should avoid if possible.
That all said, living in a house with friends is an excellent choice IMO. I think humans are built to have some non-blood relatives at that level of closeness and cooperation, and it seems good to raise a child with more than two adults that they interact with in their typical household setting.