Michelle from St. Paul called into the show…
“My aunt is a widow and just retired. And for the last several years she and her best friend have planned to live together in retirement and grow old together.
This friend was set to move in with my Aunt who owns her house outright, but for several reasons, they decided against this and my aunt’s house is now up for sale.
Instead, they plan to purchase a house or condo together. My family is a little concerned. We’ve known the friend for many years and believe she is a trustworthy person. However, this is a platonic friendship where they each have their own children, their own finances, and so on.
My Mom came to me because I tend to be the more financially savvy in the family. But I’m a little stumped. My main concern is what happens when one person dies… Assuming they’re both invested equally, normally I would expect the house to be inherited by the other owner. But in this case they both have kids that they would want their half of the house to go to.
And then how would that work? If my aunt dies first, then my cousins both own half a house with the friend? Then I’m assuming they would be expected to pay insurance and property taxes and maintenance and so forth.
But then if it goes the other way, and the house then goes to the surviving friend, what happens when the second person dies, would the entire house only go to their own kids? And not all of them like the original plan?
So this is a little over my head and any advice you can give would be helpful.”
Matt & Joel’s response: Hey Michelle! There’s a lot to cover here, we’ll try our best…
Buying a house with a friend:
Good news – what your aunt is trying to do is becoming far more common! (Although it’s more common for young folks who are typically first-time home buyers).
Stats from Opendoor show that 11% of first-time homebuyers bought a home with a friend in 2023. And unmarried millennials are 10x more likely to buy a home with a friend than boomers were.
This trend of co-buying houses with non-romantic partners isn’t going away anytime soon. Demographic changes (like average married age being later in life) are part of the reason why.
There are risks your aunt (and her family) are assuming if they attempt to go this route. But there’s risk involved if she doesn’t. Actually there are risks in essentially everything we do! So, I guess the real question here is, does the risk outweigh the potential benefits?
Joint Tenancy
Let’s talk about the ownership side of things, your biggest question. Because this is a joint investment/purchase, the legal ownership status is crucial.
(Btw, we’re not lawyers so our suggestion is to hire a real estate attorney if she opts to continue down this path!) Basically, your aunt should get the real estate version of a prenup – no matter how much she trusts her friend.
They could purchase this house as a joint tenancy, which gives your aunt and her friend equal ownership & right of survivorship. That means if one of them passes away, it’s not the family that inherits the ownership stake, it’s the other co-owner.
So if your aunt were to die first in this scenario, her friend would be the sole beneficiary of the ownership stake. Her kids might not be happy with that arrangement.
Tenants in Common
Another common approach when buying a house with a friend is tenancy in common. This allows each individual to decide how they want their ownership stake divvied up if they were to pass away.
In this scenario, your cousins could own half the house if your Aunt were to pass away and they were listed as the beneficiaries. They would also be responsible for their half of the property.
Your Aunt and friend could also choose to go in 75/25 instead of 50/50 if they’d prefer. It allows for more flexibility & the ability to leave a customized inheritance. But, that flexibility also means one or the other might be able to sell their share to a stranger, which might be a deal breaker.
All in all, a lot of honest conversations need to happen. And again we recommend talking with a lawyer to nail down the legalities and make sure it’s all in writing.
Another Option – Renting!
What about renting instead!? Your aunt could keep the proceeds from her home sale in that scenario.
The fallout from this not working well is far less financially consequential. It’s worth discussing because splitting the costs and keeping finances separate would be far easier for both individuals and for their families.
Not only that, it could be cheaper! Or, they could pool their money to afford a more luxurious place. As it’s been widely documented, renting is cheaper than buying right now in most cities across the US.
That might not be the case if your aunt was house hacking, renting out a room in the home she already owns. But buying a new home in today’s housing environment is a different conundrum.
Opting for the cheaper monthly cost of rent and avoiding home ownership while investing the difference could ultimately be the best financial choice. But that’s also hard to predict because we don’t know the future of the housing market OR the stock market!
The Bottom Line:
There are a handful of ownership options, including joint tenancy and tenancy in common. It’s probably best for all involved parties to discuss the pros and cons of each, and decide which best fits their situation with estate planning. Communication is key when it comes to co-owning valuable assets and investments!
Also, outlining an exit strategy if the platonic purchase isn’t all they thought it would be is a smart move. Make sure each party has a plan for what that could or might look like if things turned south.
Lastly, I’d encourage them to decide why purchasing together makes the most sense. Renting is likely a better scenario – even for just a few years to see how things go before taking the plunge of joint ownership.
That’s a lot of info coming at ya. We hope it helps. In all cases, we truly think it’s worth the time and money to hire a professional to double-check all legal agreements.
For the full version of this discussion, check out Podcast Episode #862 (it’s the first question in the episode)
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