New York City real estate can be expensive for average city dwellers. As such, many of the city’s residents put off homeownership and resort to having roommates and/or renting expensive apartments while saving to purchase property. However, in an effort to build a real estate portfolio sooner, some home buyers look to co-buying as a way to accelerate homeownership.
Below we will discuss the various advantages and disadvantages of co-ownership in NYC and how this may be a viable option for you to build your own real estate portfolio.
Co-buying is when two or more individuals or legal entities jointly purchase property together. Each co-owner owns a certain percentage of the property.
Generally speaking, a co-owned property can be legally owned in three different ways; joint tenancy, tenancy in common, or through an LLC entity. An experienced NYC real estate attorney can help you figure out which form of ownership is most appropriate for your situation to avoid any future legal disputes amongst co-owners.
Joint tenancy is when two or more owners obtain title to the property at the same time, and they own equal shares in the property. Holding property as joint tenants means that each owner has the right of survivorship. Legally, this means that if one owner dies, their ownership share will be distributed and divided between the surviving owners. There are very strict legal criteria that must be met for individuals to own property as joint tenants, which is why an attorney’s guidance is often required.
While joint tenants can’t pass on their ownership interest to their heirs, they may transfer or sell their interest to another individual or entity at any time while they are alive. If one co-owner transfers their interest to another person, the ownership structure is no longer joint tenancy ownership. Instead, the addition of a new owner who take title at a later date than the rest of the owners, automatically convert title to the property to a tenants in common ownership structure.
Tenants in Common
Tenants in common ownership is when two or more owners each hold a legal interest in a property. The shares do not have to be equal and can be split unequally as well. For example, in the case where three owners jointly purchase a property, one owner can hold a 10% share, and the other two owners can hold a 45% share of the property. Alternatively, each owner can take a 33.333% share.
When ownership is held as Tenants in Common, owners do not need permission from the other owners to sell their ownership share in the property. When a co-owner dies, their ownership interest passes to their heirs via their will or intestate laws.
Co-owners may decide to form a legal entity to hold title to the co-owned property. The most common option is creating a Limited Liability Company (LLC), which would then be the legal owner of the property. The members of the LLC can have equal or unequal ownership shares in the LLC depending on their investment and membership role in the entity.
Overall, no matter which form of ownership co-owners decide upon, it’s critical to get an experienced real estate attorney involved early in the process to avoid any legal pitfalls and property disputes amongst co-owners.
Advantages of Co-Buying
Easier Time Qualifying For a Mortgage
Obtaining and getting approved for a mortgage is one of the most dreaded aspects of purchasing property. Lenders typically review a borrower’s credit score, income, debt, and other factors when qualifying them for a mortgage. Fortunately, when multiple owners apply for a mortgage, the odds of approval are dramatically increased. This is especially true as it pertains to higher-priced property.
Specifically, when applying for joint credit, you and the other co-borrowers will combine your income and debt, which in most cases improves your debt-to-income ratio (DTI), which is a huge lending criterion when purchasing a property.
Split the Down Payment Between Co-Owners
When you purchase property with other owners, you could split the down payment amongst each other. The down payment for a property can range from 3 ½% up to 40% of the purchase price, depending on the type of loan product you qualify for. Not having to come up with a full down payment on your own is one of the biggest advantages to Co-owning property.
Start Building a Real Estate Portfolio Sooner
By choosing to purchase property with other co-owners, you have the opportunity To get into real estate investment a lot sooner. If this is going to be your primary residence, you gain security by not having to deal with a landlord and unexpected rent increases and different owners if the property is sold. If the property becomes an investment property, you get to generate passive income from your real estate investment. You probably even have the opportunity to rent the property short-term or long-term to generate substantial side income for you and your family. Regardless of whether the property is an investment property or your primary residence, by co-owning property, you get to start generating equity in real estate earlier in life.
Disadvantages of Co-buying
Potentially Higher Interest Rate
When multiple borrowers purchase a property, the bank will look at each borrower’s credit score to ascertain what interest rate they offer the borrowers. Generally speaking, the person with the lowest credit score will drive up the interest rate, or in some cases, the lender will determine the interest rate based solely upon the lowest credit score. This won’t matter so much, if all borrowers have similar credit scores.
Jointly and Severally Liable for Paying the Mortgage
Co-owners must be prepared when one co-owner can no longer afford his or her share as co-owners are jointly and severally liable for paying the mortgage. In other words, when you co-buy property you must be prepared to continue making the mortgage payments even if one of the co-owners cannot pay their share for whatever reason. This is especially true if you apply for joint credit and each owner’s name is on the mortgage. To avoid tanking your own credit and the credit of the other co-owners, you need to have a reserve or contingency plan in place.
This is also something to keep in mind if the property is an investment property. Specifically, having a healthy reserve allows you to continue paying the mortgage when the property is vacant or otherwise not generating income.
The advantage of being the sole owner of a property is that you have complete control and ownership of your property, which is not the case when you co-buy a property. The reality is that if co-owners are not clear about their expectations and their goals as it pertains to the property, disputes will surely arise. Some of the common reasons that property disputes arise pertain to the payment of carrying costs for the property, renovations, improvements, and deciding when to sell the property. Some property disputes may be avoided if a co-ownership agreement is executed by all of the owners.
Co-Owners Can Sell Their Ownership Share
One of the downsides to owning property is that another owner may sell his or her share to a third party and someone you do not know or care to own property with. The only way to prevent this occurrence is to draft an ironclad co-ownership agreement or put provisions in your LLC agreement that prevent the owner from selling his or her share without the approval of the other and/or including a right of first refusal.
Overall, co-buying is a great way to start building your real estate portfolio and is quite beneficial. Specifically, co-ownership minimizes costs both prior to and during the ownership of a property. Co-owners can split their down payment and divide the carrying cost for a property, maintenance, and utility costs.
However, Co-ownership does not come without risk. Specifically, owners must be prepared for property disputes and situations where other owners cannot afford to maintain the property. Also, owners must be prepared for situations where one owner wants to sell their share to a third party. While these types of disputes can be avoided to a certain extent, it is important to get an experienced real estate attorney involved early on in the process.
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Authored by: Stanley Montfort
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