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If you’ve ever shared a hotel room with a friend to save money, or you’ve carpooled to spend less on gas, you know that sharing expenses often just makes more financial sense than shouldering the burden alone. So why shouldn’t it be the same with owning a second home?
Knowing how shared ownership works, the types of shared ownership and the pros and cons of each type can help you better understand how shared ownership might get you closer to your dream of owning your own second home.
How does shared ownership in a house work?
In shared ownership, interested parties – usually friends or relatives – divide the value of a home into shares, with each share worth a certain percentage or fraction of the home. The co-owners can determine these percentages based on any number of factors, including but not limited to:
- The square footage each co-owner will utilize (for primary residences)
- The amount of time each co-owner will spend in the home (for second homes)
- The amount of money each co-owner is willing to invest (for investment properties)
What are some reasons people consider shared ownership?
Here are a few reasons why people choose shared ownership in a home:
Reducing the purchase price
The most common reason to share ownership in a home is to reduce the financial burden on the owners. Two or more individuals can apply for a joint mortgage, and share the debt burden equally or unequally between them. The lender will take into account every applicant’s income, credit score, and debt-to-income ratio. This can benefit all parties involved if some of the applicants are stronger financially in areas where others are weaker.
When one party has poor credit
If one person’s credit could negatively impact a mortgage application, they might not want to pursue a joint mortgage. In this case, they might supply the down payment on the home and let the other party with better credit hold the mortgage in their name. Depending on their agreement, they may leave it at that, or the person with poor credit may continue to pay a portion of the mortgage payment each month to increase their share in the home over time.
Relieving a financial burden
If an individual is faced with financial hardship but has owned their first or second home for a while, they may invite someone else to purchase a share in the home in exchange for the right to live there full- or part-time. The co-owner can give the owner a lump sum, or they can take over all or some of the mortgage payments – or any combination of these.
No matter how or why you choose to share ownership in a home, it’s always a good idea to have a lawyer draw up a contract so that the property co-owners can understand and agree to their financial responsibilities in the shared ownership agreement.
What are the different types of shared ownership?
There are three different kinds of legal shared ownership to consider:
1. Joint tenancy
Joint tenancy is when all property co-owners hold the title to the property, and if one dies, the “rights of survivorship” dictate that their share in the property will automatically transfer to their surviving co-owners. The downside to joint tenancy is that you can’t choose anyone outside of your co-owners to inherit your share in the property after your passing.
2. Tenancy in common
With tenancy in common, as a co-owner, you have the right to transfer your share of the property to anyone you choose through your will. But keep in mind that if another co-owner passes away, you may be stuck sharing ownership with a new co-owner you don’t even know.
3. Limited liability corporation (LLC)
Forming an LLC with co-owners essentially creates a separate entity that can enter into contracts and purchase property much like an individual can. It limits the financial liability of the co-owners within the LLC by separating the finances of the LLC from the finances of the LLC owners. LLCs have been used primarily for investment purposes in the past, but companies like Pacaso are now using co-ownership LLCs to make purchasing second homes easier. The only downsides to an LLC are that you can’t deduct your property taxes or mortgage interest on your personal taxes, and you won’t qualify for the capital gains tax exclusion if you sell your home.
What are the drawbacks of shared ownership in a home?
The biggest drawback to shared ownership is having to rely on other people’s financial responsibility, not only to pay for the home, but also for maintenance, taxes, and other expenses associated with the property. Any shared ownership model other than an LLC co-ownership can make you liable for someone else’s financial failings. You may also have to divide– or forgo– potential tax benefits when you have shared ownership.
What are the benefits of shared ownership in a home?
Shared ownership can help lower the utility, maintenance, and tax expenses for your first or second home, and you may also have a lower down payment and a smaller mortgage than you would with traditional home ownership. With the right preparation – like finding trustworthy co-owners and/or entering into an LLC co-ownership – shared ownership can be the perfect vehicle to get you from dreamer to dream home owner. Learn more about Pacaso’s fully managed LLC co-ownership approach.