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Co-Owning Property with Family or Friends: How to Avoid Common Pitfalls

Co-ownership of a property is one great way to cut mortgage costs. If set-up properly with the right partners, it can be a fun and profitable investment. But what if a co-owner starts to do things on the property that you don’t like? How can you make a fair reimbursement request for expenses on maintenance and repairs? Read until the end.

1. Divide responsibilities

Every aspect of the property should be decided in advance and given to the co-owner with the appropriate managing skills. For example, if you’re good with numbers and financial management, collecting rent and paying taxes should be your thing. For maintenance and repairs, the responsibility should be given to the co-owner who is good with logistics.

2. Split expenses relative to shares

When sharing expenses with your co-owner for repairs, upgrades, and maintenance, always refer to your division of shares according to the property document. For example, if the property has 4 owners and a pipe repair is needed, then all repair expenses should be covered with a 25% contribution of the total cost from each owner.

3. Discuss short and long-term goals

Always encourage your co-owners to talk about all your goals for the property. This way, arguments and pitfalls can be avoided. You can also easily make good financial decisions by openly sharing future plans that your co-owners will agree upon. It’s important to be vigilant about a co-owner’s secret desires. This helps you directly confront them when they’re about to do some secret decisions that you’re sure to disagree upon.

4. Choose the right ownership title

There are three ownership titles where you can choose from with your co-owners. The first would be a Tenants in Common Title (TIC). In the TIC title, you are given the “right of first refusal”, meaning you have the first right to buy out your co-owner’s share before they sell it to someone else. The TIC title agreement is very flexible, you can include a clause that allows you to buy out the share of your partner in case they die during the co-ownership period. You can avoid the pitfall of co-owning with strangers this way. 

If you’re married or in a committed relationship, then the Joint Tenants With Right of Survivorship Title (JTWROS) is one good option. It works like the TIC title, the only major difference is that the share of a deceased property co-owner is automatically passed to the living partner.

The third ownership title is the Limited Liability Company (LLC). You and your co-owner are allowed to form a business entity by fusing individual shares and detaching personal assets. This means that the property can only be sold by unanimous voting among the company members. The LLC also requires an operating agreement that spells out the individual rights and responsibilities of each owner. A majority of co-ownership pitfalls are avoided with an LLC agreement.

5. Avoid solo-spending on unnecessary improvements

Let’s say you think that the living room of your co-owned home needs a new carpet. Then you bought one without the other co-owner’s consent. Now, you want to be reimbursed for the expenses on the carpet and your co-owner refuses to pay. There’s nothing you can do. You bought the carpet out of your own volition and the improvement wasn’t necessary. The only expense you can charge your co-owners with are necessary repairs that preserve the property.

6. Draft a separate document for the property rules

This applies only to Limited Liability Company (LLC) entity titles. For sudden changes in property rules, it’s best to keep a flexible set of guidelines and regulations. Make sure to mention this separate document in the LLC operating agreement. When there is a need for change or revision in the property rules, the separate draft is the only document that needs to be revised. The entire operating agreement doesn’t need to be tampered with. 

The best way to avoid pitfalls is to choose the appropriate entity title according to the relationship you have with your co-owners. And always choose the right clauses for the property’s operating agreement. Pick and settle for clauses that are fair to you and your co-owners.

If you’re ready, make Landlord Prep your go-to resource for landlording education. Here, we offer a complete DIY landlording course to get you on the right track. Join our academy today. If you want, you can check out Flavia’s real estate investing webinar first!