Shared ownership, explained: A path to second home ownership

Published Date: August 21, 2023

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If you’ve ever shared a hotel room with a friend to save money or 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?If you’ve never explored shared ownership before, it might feel complicated. But knowing how it works, the different 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 another home. Here are the most important things to know. 

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 of the property 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.

Making a purchase possible 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 parties 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 on an existing property

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. Each one offers different benefits and drawbacks. The type that’s best for you will depend on your goals, financial situation and desired structure with your co-owners. Always talk through your options with an attorney.

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 without the hassle and cost of probate. One 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. It’s also worth knowing that if your co-owner has unpaid debts, a creditor can force a sale, which will affect your share as well.

2. Tenancy in common

With tenancy in common, multiple owners hold individual deeds for a percentage of the property, and shares do not have to be equally split. As a co-owner, you have the right to transfer your share of the property to anyone you choose through your will. You can also sell your shares without the consent of other tenants. But keep in mind that if another co-owner passes away or chooses to sell, you may be stuck sharing ownership with an unfamiliar new co-owner.

3. Limited liability corporation (LLC)

When you form a multi-member LLC with other co-owners, you essentially create 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 of 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 of shared ownership properties 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 a smart way to put ownership within reach.

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 agreement — 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.

How shared ownership can help you get into your dream second home 

Shared ownership can be especially useful when you’re buying a second home. Since you won’t be using the home every day, assembling a group of co-owners to share time — and share expenses — makes a lot of sense.Pacaso offers a fully managed LLC co-ownership model where individual owners purchase ⅛, ¼ or ½ shares of a luxury vacation home in a dream destination. Then, Pacaso sets up the LLC and handles all of the ongoing management and maintenance. There’s an easy, equitable scheduling tool that ensures all owners have plenty of time to enjoy the home. When you’re ready to move on, you can sell your shares on the open market at a price of your choosing.Browse Pacaso listings today to discover shared ownership properties across the United States and beyond. 

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Kasey Tross

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