With the high price of real estate in Toronto, homebuyers are becoming more and more creative as they seek ways to achieve their dreams of home ownership. One homeownership strategy that is becoming more and more popular is co-ownership.
While co-ownership is a homeownership model that has actually been around for many years, this concept has seen a surge in the last little while. The Provincial Government has even suggested this model as a strategy to work around limited stock and affordability issues in Toronto, releasing a guidebook on co-ownership late last year.
The co-ownership model has many potential participants and properties (including living in a single home together), but one that is particularly interesting in Toronto is when you purchase a triplex or duplex with friends or another couple.
As with all real estate strategies, it is prudent to consider all of the pros and cons before proceeding. Given that there are potential legal and financial complexities to this type of ownership model, it’s wise to know exactly what you are getting into and understanding how this ownership model aligns with your housing and investment goals.
One of the big advantages to joining forces with others to buy a home is that you increase your purchasing power. While securing financing might potentially be trickier (we’ll get into financing a little more below), combining multiple incomes means that you’ll be able to open doors (literally) that you might not have been able to purchasing on your own. In a pricey city like Toronto, that could mean having greater choice for location or even housing type.
It’s also a viable way to get access into the housing market and build equity in order to move up the property ladder in the future.
Finding the Right Home
If you and your co-owners are able to find an existing dwelling that is a duplex or triplex in your price point and desired location, wonderful!
However, the reality is that with limited stock in Toronto, there is a good chance that you may have to consider looking for properties that have the potential to be converted to a duplex or triplex to suit your co-ownership arrangement.
This means having a very specific wish list in mind. In addition to features and desired location, you need to ensure that a potential property has the possibility for renovations. In addition to having the physical space required, be sure that zoning and bylaws permit for things like additions, changing housing footprints, rules around exteriors, creating additional living spaces, creating kitchens and/or bathrooms etc.
Additionally, you’ll need to ensure that your lender is on board with the potential renovations as well and is able to provide you the requisite financial.
Set up Ownership Structure
In order to ensure that your co-ownership experience is profitable and harmonious, it is essential that you set up guidelines around your co-ownership structure and lay them out in writing before you jump in.
For example, decide how home maintenance is going to be divided, both in terms of time and in terms of expense. It is a good idea to incorporate a shared maintenance fund, into which all parties make regular contributions.
You also need to decide on what will happen in the event of the death of your co-owner. Different types of ownership mean different things in that scenario. For example, if the home is held in joint ownership, in the event of the death of one owner, the other owners would inherit the deceased owner’s share.
With a tenants-in-common ownership arrangement and a co-owner dies, their share goes to their estate, rather than being inherited by the other co-owners.
You should also discuss possible exit strategies, should one or more owners decide that they want to leave the ownership arrangement.
It is advisable to get a lawyer involved to help protect everyone’s interests and reduce the potential for conflict.
Ins and Outs of Financing
While technically you might be able to increase your square footage or be able to buy in a more desirable neighbourhood when you combine your efforts for financing, there are a number of other things to take into account.
For starters, even though you are co-owners, should your ownership partner(s) default on the mortgage loan, you are on the hook 100 per cent, regardless. Furthermore, depending on your lender, you might be required to put down a greater down payment, as this potentially could be seen as a higher risk loan (although with multiple buyers, you also likely have the chance to amass a greater sum for a down payment).
Don’t forget that a lender will consider not only income for all applicants, but also credit rating and history, which could not only impact whether or not you qualify for a mortgage loan, but could also influence what sort of interest rate you secure- which could add to costs and erode the return on your investment over time.
The good news is that, with the rise of popularity in this ownership model and more people demonstrating the potential success of this type of ownership, more lenders are coming on board with this type of mortgage. In fact, several traditional lenders and credit unions have started offering credit products specifically marketed for co-owners.
Check out this article, “Full House” from Toronto Life Magazine that explores the stories of five different groups of co-owners, their living arrangements and how they achieved their goals of home ownership through co-ownership strategy. This story “The Do’s and Don’ts of Buying Property With Friends” has some good tips as well.
No doubt, with the cost of Toronto real estate, creative strategy and long-term planning are more crucial than ever. I’m pleased to offer my expertise to guide you through the process!