6 Ways to Avoid the Hidden Dangers of Co-Owning Property

Written on March 17, 2015 by , updated on September 6, 2017

co-owning propertyCo-owning a rental property with family or friends can be an incredible experience and very profitable, if it’s set up correctly.

Co-ownership is appealing because it reduces risk and increases buying power. It takes part of the financial and managerial burden off your shoulders.

Many times, friends and family buy property together because it sounds like fun. Other times, siblings jointly inherit a property and never really have a say in the matter.

Whatever the arrangement, its success depends on the people who own it. Co-ownership works great for some people, but for many the dream can become a complete nightmare.

The devil is in the details, so the key is to plan well.

Let’s discuss some of the best ways to ensure that your co-ownership is a blessing and not a curse.

1. Divide the Responsibilities

Simply put, decide ahead of time who will be responsible for what.

For example, if you’re good with logistics, you might prefer to handle the maintenance and repairs. If your co-owner is good with numbers, perhaps he or she might want to be in charge of the rent, accounting, and taxes.

To make it work, you both should communicate with each other regularly and establish some simple processes for who is supposed to do what and when. You would tell your co-owner when a repair needs to be made and the costs, and your co-owner would send you a monthly financial statement.

Basic responsibilities include:

At the very least, it’s important to discuss these main duties with your co-owner before you find your first tenants.

2. Split Expenses Relative to Ownership

You’ll probably want to share expenses with your co-owner. The easiest arrangement is to split expenses proportionally according to each co-owners’ percentage share in the property. If you both own half the rental property, for example, then you’d share expenses, such as putting on a new roof, 50/50.

3. Talk About Goals

Discuss the reason you want this rental property and what your short- and long-term goals are.

Maybe you both want to be landlords together for the next 20 or 30 years. Maybe you want to buy out your partner in a few years to live in the rental property yourself. Perhaps one or both of you want to use the property sometimes and rent it occasionally, Airbnb style.

Whatever your goals, it’s important to discuss them now to avoid arguments later.

4. Choose How You’ll Take Title

You have two options on how to take title (three if you’re a married couple or in a committed relationship). Taking title refers to how you legally own the property together.

How you take title affects your rights to the property, so it’s wise to discuss your options with an attorney before deciding.

Tenants in Common (TIC)

You and your partner both own shares of the property. Either of you can sell ownership of your share at any time. Under a TIC agreement, if one of you dies, the deceased person’s share passes on to whomever that person named in his or her will.

Since you might not want to be stuck being a co-owner with a stranger, you can include a “right of first refusal” in your TIC agreement. That gives you first rights to buy out your partner before he or she sells to someone else. You can also include a clause in your TIC agreement so that if one of you dies during the co-ownership period, the other has the right to buy the deceased’s share.

Learn More:

Joint Tenants with Right of Survivorship (JTWROS)

This is similar to a TIC, however the big difference is that if one of you dies, that person’s share automatically passes to the co-owner. This option is typically only for married couples or couples in a committed relationship.

Learn More:

A Limited Liability Company (LLC)

This option allows you to form a business entity, and the title would be in the business’s name. You and your co-owner wouldn’t own the property — the LLC would. An LLC separates your personal assets from those of the business, and it protects your personal assets from any business debts.

Intuit created a great little infographic to help people understand the complexities of an LLC.

Learn More:

5. Make a Tenant Criteria Checklist

Whether you want to jointly screen and interview tenants or delegate the job to one person, you still need to agree on tenant criteria.

There is a lot to consider, such as whether applicants need to have a certain credit score or a certain income level to qualify to rent your property. Also, discuss how long you want the lease term to be and any other matters that are important to you (as long as your policies don’t illegally discriminate).

When reviewing applications, check out our screening checklist in The Landlord’s Guide to Tenant Screening.

6. Decide When You’ll Make Improvements

All homes need to be maintained, but when you own a home with someone else, you both need to be on the same page regarding what needs to be done and when.

For example, you can’t just decide to do a kitchen remodel, even if it’s obvious to you that the house needs a new kitchen, and expect your co-owner to pay half if you made all the decisions yourself. You can get around this problem by making a maintenance schedule that includes items such as how often to paint, power-wash and clean gutters. Any major projects, such as remodels, would need to be discussed and terms agreed on by both of you.

Many issues can arise from a co-owner arrangement, so it’s imperative that you get the paperwork right the first time. If you’ve never done this before or have never been a landlord, consider hiring a lawyer to help you write a co-landlord agreement.

If you want to write one yourself, you can always hire a lawyer to look it over to ensure you covered everything.

Infographic

If you’re considering using an LLC to hold the title, consider the pros and cons as described in this infographic.

Source: Intuit

llc-infographic

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