In Toronto’s steadily growing and increasingly unaffordable real estate market, buying a condo may not always be an option for an individual resident or investor with a single income. One solution that is gaining traction among young, first-time purchasers is to co-buy a property, whether for personal occupation or for investment. Roommates, coworkers, friends, or family members can purchase property together to minimize up-front costs and overall risks. Still, if this is a property ownership arrangement you’re considering, it’s important to cover all your bases and make sure you do it right.
Here are some tips on how to be smart about it so you and your co-buying partner can minimize risk and maximize return:
- Put together a clear and solid partnership agreement in writing.
Will you both occupy the space, or does either party intend to rent to a tenant? What if you both occupy the space and one person wishes to vacate? How will you address repairs, renovations, or incidental damage? How will the property be divided if partners decide to separate or if one person dies? What if one party wants to sell and the other doesn’t? What mediation plans do you have in case of conflict or disagreement? A neutral third party, like a lawyer or other mediator, can assist in contentious situations. Perhaps most importantly, you must have clear and open lines of communication with your co-buying partner; you must be able to talk openly and candidly about that most awkward of topics: money.
- Finance it responsibly with a “mixer mortgage”.
These types of mortgages can be split into multiple parts (for example, they can be made up of one variable part and one fixed part). In many situations, mortgage payments can be made separately and can be split to reflect the specific percentage of the mortgage that each party owns. Some mortgage lenders will even accept two separate applications from each co-buying party, so that one person’s financial details or sensitive personal information will not be disclosed to the co-buyer.
- Share, examine, and monitor your (and your partner’s) credit ratings.
The terms of your mortgage will most likely be calculated based on both co-buyers’ credit ratings. Your credit report is a very important indicator of your financial health; it contains a full history of how you’ve paid your bills, how much outstanding credit you have, and how responsible you are with holding and managing loans. After your condo purchase, if your co-buyer makes late payments or has less-than-stellar credit behaviour, it’ll affect your credit standing too, which will in turn have negative consequences on your future investments and loan applications. Want to know more about your credit report? Here’s a handy introduction to credit reports from the Financial Consumer Agency of Canada. Want to see a copy of your credit report? Credit bureaus would like to sell you instant online access to your credit report and credit score, but you can request a free copy of your credit file by mail.
- Research the rental market (if you won’t be occupying the condo yourselves).
If you and your co-buying partner intend to rent out your condo to tenants in order to cover the costs of ownership, make sure you familiarize yourself with the rental market: popular locations, vacancy rates, in-demand property types, and average rent prices are all important pieces of information to have when you’re deciding how, what, when, and where to co-buy an investment condo. The Canada Mortgage and Housing Corporation publishes annual rental market reports for regions throughout Canada, and you can download the 2015 Greater Toronto Area (GTA) report here, so do your homework if you plan on becoming a landlord.
- Talk about your goals.
What are your and your co-buying partners’ individual and collective goals, both short- and long-term? Does one of you foresee owning the property longer than the other? How and when will one party buy out the other? Is the goal to collect rental income, or to occupy the property yourselves temporarily or permanently? It’s a good idea to research the projected returns on investment on the type, size, and location of the property you’re thinking of buying. Both parties should be aware of how much equity they expect to gain, and in what period of time returns are predicted.
If you follow these guidelines and best practices, you’ll minimize risk and headaches while maximizing returns on your co-buying investment in a red-hot real estate market that is only set to grow as the GTA expands in population, density, and value.