Buying a home is part of the American dream. While housing affordability has been an issue for decades, 3 in 4 Americans believe homeownership is a good financial decision. But for non-homeowners, buying a home is increasingly further out of financial reach for many.
Home prices increased by 16.2 percent from 2020 to 2021. The median home price increased by 416 percent from 1980 to 2020. Gen Zers are already reporting concerns they won’t have enough for a down payment when it’s time to buy a home – nor will they have good enough credit.
But now there’s a new trend popping up: Buying your first home with your besties. Would you ever buy a house with friends or a roommate?
It’s a personal finance question you may not have ever considered, but it’s increasingly become the reality for many younger Americans, including millennials and Gen Zers, as the cost of both housing and renting increases pretty much everywhere.
“There’s a lot of people who are looking at homes today and saying: I can’t afford this by myself. I’m [on a] single income. … How can I get into a house?” says Jessica Lautz, vice president of research at NAR. “Finding someone who’s renting currently and matches your ideal [co-buyer profile] sounds like a great idea. Why not have a stable home and gain equity at the same time?”
Would You Buy a House with Friends?
Amid fast-rising home prices, living costs, and burdensome student debt loads, many millennials and other cash-strapped homebuyers have found they’re not able to buy a home on their own. So many have started buying homes with friends, roommates, other community members to get their foot in the door when it comes to rising property values, and to give themselves protection from rising rent costs and unruly landlords.
Take Kelsey Perkins for example. A single mother of two, living in a suburb of Denver, Colo., which was one of the priciest housing markets in the country. Buying a house on her own wasn’t a financial possibility for Ms. Perkins – she didn’t have the high-paying corporate job, thousands tucked away in a savings account, and she didn’t have parents she could turn to and ask for help with a down payment on a $470,000 home. But she did have friends.
So together with another single mom and a male musician, Perkins bought a house! All three friends signed on the dotted line and now all three live together in the home they own and share with one another. Each individual is responsible for contributing roughly $900 monthly toward the mortgage, while other expenses like utilities are split separately.
“I could have perhaps afforded a one- or two-bedroom condo in the neighborhood or just outside it, but it would have been tight,” said Perkins, 34, who works from home as a customer service representative for a sticker company. “What we could do collectively was much more than we could do individually.”
“It really made sense to us that if we were able to find a place that met everyone’s needs, we would be able to support each other,” says Perkins. “And it would be much more doable from a financial standpoint.”
Perkins has a point. With the median home prices hovering above $300,000 nationally, buying a house with friends means you can qualify for larger mortgages to cover bigger homes in more desirable areas, while also sharing ongoing expenses such as property taxes and repairs.
According to the National Association of Realtors, about 4 percent of first-time buyers purchased homes with housemates between July 2018 through June 2019, which is double the percentage the NAR saw in the previous 12-month period, the NAR reported.
In 2018, Jack Teter, 29, and Kyle Huelsman, 30, purchased their 8-bedroom, 3.5 bath, 3-living room rental home, complete with a finished attic and garden-level apartment with private entrance, from their landlord for $860,000. At this point in time, Teter and Huelsman had been running a co-operative out of the home, which is located in downtown Denver, for two years and wanted to continue living in a community environment while investing in a property of their own.
Now three years later, Huelsman and his wife, Kathleen, who is a co-owner, live in two rooms, while Teter and his partner live in another two rooms. The couples share a bathroom and live with three other housemates – men and women who range in age from 22 to 34 and have month-to-month leases.
“We talk about this as a long-term, permanent thing,” says Teter. “I very much anticipate and would like to raise kids in a house with Kyle and his wife and kids.”
“During the pandemic, people have been renting and they may have wanted more space, and so they looked at, perhaps, their roommate and decided, ‘Let’s go buy a home together,'” said Jessica Lautz, vice president of demographics and behavioral insights for NAR.
Data from real estate analytics firm Attom Data Solution shows that the number of co-buyers with different last names increased by 771 percent between 2014 and 2021, reports The Wall Street Journal.
Between April and June 2020, 11 percent of buyers of all ages groups purchased as an unmarried couple and 3 percent as “other” or roommates, according to the National Association of Realtors and as reported by the WSJ. These numbers increased from 9 percent and 2 percent, respectively, from the previous year.
In other words, the pandemic only accelerated this trend of co-buying homes.
“A lot of them want to live in a communal setting, but they have enough money and they’re looking around at the increase in real-estate prices, and they want to get a foothold in this appreciating market,” Andy Sirkin, a real-estate attorney specializing in co-ownership, told the Wall Street Journal.
And as the pandemic taught us, sometimes having a house all to yourself or living single can feel lonely. So for some co-buyers, it’s not just about being able to afford a home and build equity in higher cost of living parts of the country – it’s about community and companionship too.
“There’s a financial need to innovate in the housing sector, and we’re starting to see more and more cases of the loneliness epidemic,” says Sarah Wells, who runs Queen City Cooperative, a Denver-based housing co-op and leads classes in co-buying.
Where are the millennial homeowners?
When it comes to homeownership, millennials have long been chastised for not buying homes sooner like their predecessors (Baby Boomers, Gen Xers). Because at the age of 30, which is considered prime homebuying years, 42 percent of millennials reported they owned homes, compared to 48 percent of Gen Xers and 51 percent of baby boomers, according to Apartment List’s 2021 Millennial Homeownership Report.
But the decline in millennial homeownership wasn’t necessarily by choice of the millennial generation.
“Life events such as getting married or having children are typical triggers to buying a home,” Bank of America said in a report about millennial home buying trends. But for 3 in 4 millennials, it’s more significant for them to be able to buy a home than to get married and have children.
This emphasis on homeownership may partly explain why more millennial couples are buying houses together before tying the knot.
But the decrease in millennial homeownership compared to previous generations isn’t just because Americans are getting married older and having babies at an older age, money is a huge factor in millennials’ decisions to delay homeownership.
In truth, even before the pandemic dramatically increased demand for residential housing, affording a home was financially challenging for many millennials, as many were financially affected by the Great Recession, student loan debt, soaring living costs, and the increased expense of being single.
“Remember that the bulk of the current 25- to 34-year-old cohort started their careers during the financial crisis and early stages of the recovery, when the economy and labor market were fragile,” Bank of America noted.
While mortgage affordability programs may offer loans with less than 20 percent down payments, lenders often charge higher interest rates on these loans to offset the greater default risk. Additionally, most of these mortgages will require that Millennials take out private mortgage insurance (PMI), making monthly payments even higher.
And for millennials, many of them have been trying to afford a house for years.
Apartment List estimated in 2018 that while college grads without student loan debt were able to save a 20 percent down payment in about 7.5 years, those with student loan debt were able to save that amount in 12.5 years, or roughly four years longer.
How to Get Started Co-Buying a Home
So how does one even get started buying a home with their besties? What kinds of financial considerations should you keep in mind?
Michael Soon Lee is a real estate broker associate with Realty One Group in the San Francisco Bay Area suburb of San Ramon, Calif. Soon Lee says he tells prospective co-buyers that before they look at properties, they should closely examine one another’s finances, from credit scores and tax payments to bank accounts.
One person who has a tax lien can negatively affect others’ ability to get a loan, for instance.
It’s just as important that co-buyers have a comprehensive legal agreement that stipulates each person’s responsibilities—and clear exit strategies, Soon Lee said. This way, no one’s locked in if people aren’t getting along. A co-owner may want to move in with a romantic partner or move away for a new job. Alternatively, someone may default on the payments.
“[Co-buying] is a business transaction, even if it is done among friends,” he says. “Compromise is the ultimate word. You’re looking for people who are flexible and have the greater good in mind. Those are the people who make this work the best.”
And it’s not a decision—or process—to take lightly.
Other Items to Consider Before Buying a Home with a Non-Spouse include:
- Whose name(s) goes on the title?
- Who’s responsible for collecting and making the mortgage payments?
- Who will oversee maintenance and repairs?
- What are the rules for pets, houseguests, and other visitors?
- How will decorating and furniture-buying decisions be made?
Have you bought a house with friends or a non-spouse? Would you buy your first house with your besties? Share your thoughts with us in the comments below!