Buying an investment property can be a smart financial move. As you pay down the debt, you build equity in a property that, ideally, appreciates over time.

Then, there are the tax benefits. You get to deduct your rental expenses from any income you earn, including items such as mortgage interest, property taxes, insurance, repair and maintenance costs, and property management—all of which saves you money at tax time. Ideally, the investment property also provides a steady source of income while you collect rent each month.

Because owning investment property entails significant time, effort, and money, going in with a friend can make sense. But this move does come with some challenges. Here are five common problems of buying an investment property with a friend.

Key Takeaways

  • If you buy a house with a friend, remember both your credit reports are attached to the mortgage.
  • There is no easy way out of the deal, so you should have a comprehensive agreement drawn up with the terms of the deal.
  • If there are issues with the mortgage, you both may have problems getting loans in the future.
  • Your friendship may be tested because of any disagreements that may arise.

A Mortgage Rate Tied to Both Credit Reports

Since you and your friend will both be on the mortgage, the lender will use both of your credit reports. One person’s bad credit can negatively affect the mortgage terms, including the interest rate you pay on the loan. Even a small change in interest rate—say 4.5% versus 4.0%—can make a big difference in the amount due every month on your mortgage and in the total interest you'll pay over the life of the loan.

No “Easy Button” for Moving Out

When you rent an apartment or house with a roommate, it’s fairly easy to walk away if the two of you no longer get along, or if you decide to move. That's not the case with a mortgage.

Since both of your names are on the mortgage, you are both responsible for making the payments, even if one of you wants out of the deal. To get one of the names off the mortgage, you either have to sell the house or refinance the loan under just one name. Both options can be challenging: Selling can take many months, and there’s no guarantee the lender will approve your application to refinance. It’s a good idea to have a written agreement in place that details your agreed-upon exit plan should one of you decide to move on.

The agreement should also cover what happens if either of you dies. Does the survivor become the sole owner, or does he or she need to buy out the heirs of the deceased partner? What percentage of the property does each partner own? Will the property be sold, and if so, how will the proceeds be divided? For financial protection, each partner should purchase life insurance on the other to pay off the mortgage in case of death.

Consider hiring an attorney to write an agreement outlining each person's responsibility, what happens if one of you moves on, and how the property is handled if one of you passes away.

Credit Rating Risks

Since both you and your friend are listed on the mortgage, you are both responsible for making payments—on time and in full each month. If the two of you fall behind for whatever reason, the lender will report both of you to the credit agencies for non-payment or foreclosure—if it comes to that—even if you have diligently paid your share of the mortgage payment every month. Because both names are on the mortgage, your friend’s non-payment could end up costing you big on your credit report.

Challenges Getting Other Loans

Even if you and your friend split the mortgage payment 50-50 each month, each of you alone is responsible for the entire mortgage payment each month in the eyes of other lenders. This can make each partner's debt-to-income ratio appear high and make it difficult to qualify for other loans. While married couples deal with this by applying jointly for loans, chances are you won’t want your friend on your car loan—and he or she won’t want to be there either.

Disagreement Over Responsibilities

A friendship can be quickly tested if there are any disagreements over who is responsible for what, whether that's paying for utilities or maintaining the property. To avoid this, your written agreement should include details regarding the breakdown of expenses, how repairs and maintenance will be handled—who will do the work, and how the costs will be shared—plus how deductions will be claimed. For example, make sure you firmly agree who gets to claim the mortgage interest deduction or whether you split it in some way.

The Bottom Line

Buying a house with a friend has a lot of benefits. It may be easier to qualify for a mortgage, and you get to share all the monthly expenses including utilities, maintenance/repair costs, and mortgage payment. And, unlike renting, you get to build equity as you pay down the loan. But there are challenges that come with something as big as this, and it’s important not to rush the decision.

Do your homework ahead of time, and make sure you and your friend both have the income to meet the monthly expenses of the investment.