roommates in living room together

Buying A Shared Investment Property With Roommates + 3 Red Flags

Victoria Araj8-minute read

December 21, 2021

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Picture this: It’s been several years since you graduated from college, but you still reminisce about the memorable times you spent in that small college town as a student. Now, you want to purchase a property in the place that made you who you are today.

You might be thinking about investing in a property with your current roommate or close alumni friends and renting the house out to young college students. Research shows that commercial student housing in the United States is at a slower growth than multifamily investment homes, indicating the preference of fewer commercial accommodations for students living near campus.1

If you’re asking yourself questions like, “Is this the right investment choice for me?” and “What are the benefits of purchasing a shared investment property?”, keep reading to learn the pros and cons of investment properties, what to expect in a real estate partnership and how to buy a shared investment property with a financial contract in place. 

Key Takeaways

  • Choose wisely before deciding on a potential real estate partner, as it’s a large investment that can impact your existing finances. 
  • Both investment partners’ credit reports can be impacted by the investment. 
  • You should have a detailed contract drawn up and agreed upon before purchasing an investment property. 

Table Of Contents: 

What Is A Shared Investment Property? 

Pros And Cons Of Investment Properties

3 Green Flags To Buying A Shared Investment Property

3 Red Flags To Watch For Before Committing 

How To Buy A Shared Investment Property With A Partner

How To Write A Roommate Financial Contract

Communicating In Your Partnership

What Is A Shared Investment Property?

A shared investment property is purchased and shared by multiple investor partners. All parties initially invest in the purchase of the home and receive the benefits of the property, including splitting profits and building joint home equity.

Not only do members in the partnership get to receive the benefits of the property, but both must be equally invested and responsible for the financial implications of the asset.

Pros And Cons Of Investment Properties

Before thinking about joining a partnership to buy into an investment property, it's important to understand the pros and cons beforehand so you know the risks and rewards of this type of investment. The pros and cons below are worth discussing with your existing roommates if you enjoy living together and are interested in investing in something more permanent, rather than renting.  

Pros

  • Stable investment: Buying into a shared investment property allows you to build home equity while protecting against fluctuating inflation, as your property value will increase over time. If you’re able to lock in a mortgage with a low fixed rate, you can avoid paying higher interest rates later during inflationary periods. 
  • Passive income: If you choose to make the investment property a rental, you could gain passive income. Potential buyers should view a property as a modest investment, aiming for 70% of what the property is worth in the current market.  
  • Tax benefits: Owning a property opens the door to yearly tax deductions, including property taxes, mortgage interest and home equity debt. However, keep in mind that you may have to pay more taxes on an investment property since it’s categorized as a source of income. 

Cons

  • Higher mortgage rates: Mortgage rates are higher for investment properties than your primary residence because it’s viewed as an uncertain investment to lenders. But this doesn’t mean it will impact the strength of your investment.
  • Landlord duties: If you choose to rent out your investment property, you and your partner would be taking on the landlord role for potential tenants. Make sure you’re prepared for what this role entails, including working with tenants and collecting rent.
  • Upkeep: Renovations and necessary repairs may arise in your investment property, causing you to pay additional unexpected fees. Keep this in mind when looking at your finances to see if you would have extra funds to allocate toward regular upkeep. 

Now that you’ve taken a look at the pros and cons of buying a shared investment property, it’s important to analyze the green and red flags of potential real estate partners before committing to purchase. You want to be sure your partner is the right fit for you and this large investment.

3 Green Flags To Buying A Shared Investment Property

Buying a shared investment property with a roommate can be a great financial move for both parties in the right situation. If you and your roommate have the positive green flag signals listed below, it may be a sign that buying a shared investment property is right for you. Here are three green flags to look for before committing to the purchase.  

1. You Both Have Reliable Income 

Before buying a shared investment property with a roommate or friend, ensure that you and your partner both have strong financial management skills and can take on this investment. You should be able to rely on one another to be financially available to cover mortgage payments and unforeseen expenses for the property.

If both parties are responsible and take care of personal financial obligations and have a steady stream of income, you can wave a green flag for your potential investment partner.

Before looking for potential properties, determine with your roommate how much you’re willing to invest in a property to gauge the maximum purchase price for your shared investment property.  

2. You’re Both Looking Into The Financial Benefits

Choosing to purchase a shared investment property opens the door to many financial benefits. You’re able to build home equity together, and if you choose to rent out the property to tenants, you can pay off your mortgage quicker than simply relying on your personal income, all while potentially making a profit.

It’s also easier to get a mortgage with two streams of income, as you can put a larger sum of money toward a down payment. Plus, if you have healthy credit scores, lenders will typically average your credit score ratings when determining if you meet credit score requirements for a mortgage.

3. You Enjoy Working With Each Other

Whether you decide to live with this person in the home or simply co-own it and rent it out to tenants, it can be beneficial to have a long-standing friendship before investing. If this is your first large investment or home, having a healthy relationship can make the home-owning process more enjoyable and less stressful.

This is the most important green flag to acknowledge before purchasing a home, as problems may arise throughout the process. You should be comfortable with your investment partner and able to communicate through conflicts.

3 Red Flags To Watch For Before Buying A Shared Investment Property

Buying a joint-owned property can have a lot of pros if done with the right person. If you're thinking about buying an investment property with your roommate, make sure they're not waving these red flags before committing. 

1. They Don’t Have A Steady Income

You should be able to rely on your partner when it comes to paying their part of a mortgage and helping with unexpected expenses. If your partner doesn’t have a steady income or tends to overspend on unnecessary purchases, they may not be the best person to invest with.

If you still want to invest with your potential business partner, have a conversation about financial obligations and changes that may need to be made to make the investment work for both parties. 

2. Failure To Come To An Agreement

If your partner is unable to come to any agreement with you and you both constantly clash when delegating tasks and responsibilities, they may not be the best person to invest with.

Unwillingness to compromise is not a trait that you want your potential investment partner to have, as it could strain your relationship down the road when other conflicts arise, such as splitting mortgage payments or renovation expenses.

3. Your Risk Is Greater Than Your Roommate’s 

When investing in a shared property, you’re risking your personal assets. If you choose to invest with someone who isn’t financially reliable, you risk the possibility of not being able to make mortgage payments, which could cause you to be reported to credit agencies and potentially foreclosure. If this happens, your credit score could be negatively impacted.

To avoid this situation, write out a binding agreement that details responsibilities and roles before investing. If there are any issues, this will be the time to resolve them before hitting the “go” button.

There is no easy way to get out of an investment like this once you’re committed, especially if both of your names are on the mortgage. If you choose to invest with your partner and it quickly turns bad and you want to get out, you will either have to agree to sell the property or refinance the mortgage loan under your partner’s name if they choose to keep the property.

How To Buy A Shared Investment Property With A Partner

Let’s jump into the steps on how to buy a shared investment property:

  • Find a potential investment partner: Whether this is a roommate or someone you know that has invested in real estate in the past, finding the right match can affect how the investment rolls out. If you find a potential partner, have a thorough conversation on how you both would delegate responsibilities, analyze past financial reports, current financial standings and what your expectations are moving forward. 
  • Ensure both parties have the financial means to invest: This should be discussed in the previous conversation, but have an explicit discussion about the ability to put a legitimate offer on a property and pay the necessary closing costs. If you’re going to need a mortgage, decide on what type of loan you will use beforehand. 
  • Draft up an agreement: If you don’t want to create the contract yourself but still want to make sure everything is in order before investing, utilize a professional attorney to draft up a contract for you and your partner to agree upon and sign. This is very important, especially if the investment doesn’t pan out as planned and you need to get out, or if your partner isn’t fulfilling their duties.

How To Write A Roommate Contract

If you plan to live in the home with your potential business partner, having a written contract holds both parties accountable for required payments and additional expenses. Creating a written roommate contract is a good first step to understanding if you’ll work well as business partners together, as well as being good housemates.

Use this template to delegate responsibilities and detail monthly payments with your partner after buying a shared investment property. If you’d rather write out your own contract, some aspects you’ll want to include are a division of rent and bills, division of responsibilities, any rules about your shared living spaces and terms of termination in case one of you decides to move out.

roommate agreement

Communicating In Your Partnership

Having good communication skills may seem simple, but it’s essential when it comes to discussions within your real estate partnership and with potential roommates. Use the infographic below to determine the type of communicator your potential business partner is, and if they’re the right person to buy a shared investment property with.

Buying a shared investment property can be a great way to build home equity and gain passive income. Plus, investing with a partner makes it much easier to qualify for a home loan and pay for monthly utility expenses if you choose to live on the property with them.

However, you want to be confident that purchasing a new property will be a smart decision for you. Run through any green and red flags before making a commitment with your real estate partner.

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Victoria Araj

Victoria Araj is a Section Editor for Rocket Mortgage and held roles in mortgage banking, public relations and more in her 15+ years with the company. She holds a bachelor’s degree in journalism with an emphasis in political science from Michigan State University, and a master’s degree in public administration from the University of Michigan.