Today we will understand how co-buying works in real estate. There are situations where unrelated individuals team up to purchase real estate assets. Let's dive deep and enhance our understanding of this topic.

The property market in the Greater Toronto Area has appreciated significantly, especially in the last 12–15 years. With the continuous influx of immigrants and new permanent residents, real estate is likely to become more valuable and continue to hold interest and become prime. With these rising prices, you might wonder what it takes for friends, or non-spousal family members, to come together to purchase a property. This is essentially co-buying, where a single individual's income is not sufficient to afford ownership, and they resort to combining forces to co-buy.

Co-buying is where two or more individuals pool their resources to purchase a property. When looking at such ownership, it predominantly falls into two types:

Joint Tenancy

Joint tenancy is a type of ownership where all owners on the title have equal rights and obligations regarding the property. It includes the right of survivorship, meaning if one owner passes away, their interest in the property is directly passed to the surviving members of the title, bypassing the probate process. This arrangement can include married or unmarried couples, friends, relatives, or business partners, etc. They are equally responsible for any revenues generated through the property, like rental income, and also liable for mortgage payments, property taxes, maintenance, etc.

It's important to note that all co-owners in a joint tenancy arrangement have a similar percentage of entitlement. So, if there are two joint tenants, both will have a 50% share. A 50-40 arrangement is not possible. And if a joint tenancy involves four individuals, each will have a 25% share. I hope this is clear. All of them have equal rights to possess and use the entire property.

Tenants in Common

Tenancy in Common is a property-sharing arrangement where each party can potentially control a different percentage of the asset. For example,  a father and son can buy real estate property with a 70-30 share between them, with 70% belonging to the father and 30% to the son. Tenancy in common offers flexibility in deciding the percentage share between various parties involved. These agreements can be created at any time, even for the addition of a new member. Conversely, one member of the tenancy in common can potentially buy out the other party, if they agree to do so. The ownership applies to the whole property, similar to joint tenancy, meaning no partner can claim exclusive rights to any portion of the property.

In tenancy in common, the tenants can designate their heir in their will. In the event a person passes away, the other partners will have to deal with the heirs. This might result in a situation where they might need to sell or divide the property.

Now that we have discussed how co-ownership can be materialized via Tenants in Common legal arrangement, let's discuss the benefits of co-buying:

Mortgage Qualification

Co-buying ensures that financial institutions are now able to qualify for higher lending due to the combined income of the purchasers. The credit score of the purchasers plays a pivotal role in earning this qualification.

Holding Capacity

It helps to carry the costs like property tax, mortgage payments, regular maintenance, major repairs, etc., with the co-owners. This shields them well from carrying the property. In real estate, the time horizon for which a property is kept has a direct relation to how much your equity will grow. In the case of a co-buying arrangement, since the pressure of liabilities is less on each party involved, they are more likely to sustain it for a longer duration.

Better Asset

Multiple buyers joining forces directly impacts their budget and the quality of the asset. Since they are joining hands, they can opt for a better location for the asset. This will directly help in more equity build-up and future growth opportunities, as the asset was bought in a more promising location, with a better property type.

Natural Market Hedge

Since the mortgage commitments and liabilities are shared between the co-buyers, it becomes an organic hedge against market downturns. An individual who is a single owner is more likely to feel distress if the market takes a downturn. A group of like-minded people jointly sharing would have an edge and are more likely to survive the downturn. Since real estate markets are cyclical, they would be able to brave time, and when the market is back up again, they would be able to dispense and avoid any losses.

Let's discuss a couple of challenges as well as when you want to team up for co-buying and how you can make it a smooth experience:

Complete Trust & Ownership

When you want to get into co-buying, the most important thing you want to ensure is that all partners involved confide completely in each other and share common goals and aspirations. There should not be any difference in their approach and mindset towards the asset. As long as they are similar in their vision and clear about their goals, it will be a mutually beneficial undertaking. They should have a common vision for the exit strategy and the time horizon they are looking for in the investment.

Constant Communication

During co-ownership, they should have constant communication and dialogue with each other for any decision-making, new lease takeovers, and maintenance work. They should be responsible and equally proactive in coming forward and doing what it takes to maintain the asset.

Borrowing Challenges

In the case of co-ownership, when you are shopping for a good borrowing rate, it generally depends on the credit scores of the applicant and their liabilities. In the case of co-ownership, if one of the partners doesn't have a great credit score, it affects the other partners negatively as the financial institution generally would try to average the credit score of all applicants. So, if two have good scores and the third one is below average, it will be blended. 

I hope this was helpful, and do share with your friends and colleagues who might benefit from this. Our team here at Elixir is available to answer any of your questions about real estate. For the best real estate experiences in the Greater Toronto Area, reach out, and we will be happy to assist.

Wish you all the very best! Reach out to our dedicated team at Elixir for any queries you have in Real Estate, and we will do our best to help.

Mudit Mehta 

Broker of Record

ELIXIR REAL ESTATE INC.

Off: 416-816-6001 | [email protected]