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Comment by ThrustVectoring | Hacker News Reader

I strongly recommend, if possible, to have a single homeowner and set everyone else up as renters. The only exception is married couples who already have shared finances.

Want to share a house with friends for twenty years and share childcare responsibilities? Great, have them sign an intent-to-lease agreement and take that to the mortgage company to help with qualification. Not having this kind of agreement can lead to all sorts of issues.

This should also extend to being jointly and severally liable for paying rent, not just mortgage. What happens when a tenant stops paying? If you've got joint and several liability, you basically have to pay the full amount while being unable to evict the deadbeat for nonpayment (since they're an owner or on the lease). It's slightly better in the case of the lease since you can negotiate a technical default and deadbeat-only eviction with your landlord, but it's still a mess that you should avoid if possible.

That all said, living in a house with friends is an excellent choice IMO. I think humans are built to have some non-blood relatives at that level of closeness and cooperation, and it seems good to raise a child with more than two adults that they interact with in their typical household setting.

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> I strongly recommend, if possible, to have a single homeowner and set everyone else up as renters.

If everyone is contributing to the downpayment and everyone wants to share in the risk/reward of appreciation, than your proposal doesn't work (and if only the first holds, setting all parties but one up as renters is problematic because then either much the downpayment is gifted to them, or exchanged for a claim against the property (and first right to lease is a claim), or it is lent by the “renters”), all of which have problems, including the fact that some are outright disqualifying for some loan programs.

Your proposal is exactly the right thing to do when one of the people is supplying the initial capital and everyone wants them to take the sole risk/reward of future market moves.

The logistical issues you raise are why you ideally want the group to form a separate legal entity to buy the house, have everyone rent from that entity, and have an appropriate ownership agreement for that entity as well as rental agreements, so that a deadbeat can be both evicted and have their ownership share of the controlling entity bought out; but that's probably an initial and ongoing cost more than you want for the purpose if it's just for a shared home.

I strongly recommend, if possible, to have a single homeowner and set everyone else up as renters. The only exception is married couples who already have shared finances.

Around here, finding the money for a 20% down payment is the biggest impediment to buying a house (it can be hard to scrape up $100K - $200K), so that's easier if you can pool your funds among friends, its easier to do. So that pretty much precludes a rental arrangement. I think it'd be hard to get a loan on a property if the down payment funds are coming from your friends -- and you're treating it as an investment property because you need their rent to afford the mortgage.

This kind of arrangement is typically structured as a Tenancy in Common:

https://www.investopedia.com/terms/t/tenancy_in_common.asp

In the US, most home buyers will qualify for a much lower than 20% down payment for their primary residence.

This likely comes with a monthly PMI payment. Correct?

Yes, in most cases.

Do people know situations where its possible to not have PMI with a bit less than 20% down?

Ideally they wouldn't increase your rate then. I know SoFi has no PMI with 10% down but I believe rates are slightly higher.

You can ask lender to drop PMI once 20% downpayment is reached.

But if you're your counting on rent from your friends to pay the mortgage, you're no longer a residential homebuyer, you're buying an investment property and typically higher standards apply.

So realistically, the only way you could buy a house and rent to your friends is if you can qualify to buy the house on your own.

DTI ratios are usually pretty generous, but if you can't qualify without the rental income, you may need to buy a 2-4 unit building and rent the other units to friends. This can be done with an FHA insured loan. It may be possible to count rental income on a 1 unit property under some programs, I am not fmailiar with all the rules. I don't think you can with an FHA loan, though.

AFAIK the rental amounts count for 75 cents on the dollar against the mortgage total, and you need to either have experience being a landlord or have a signed letter of intent to show the underwriter.

What? That's not how the qualification works. If it's no bigger than a 4-unit building and is going to be your primary residence, you can still qualify for a FHA loan at 3.5% down.

My bank required proof of income sufficient to qualify for the mortgage -- presumably if part of that proof was "4 of my friends promised to pay me $1000/month each to rent a room in the house", that would no longer qualify for a regular homeowner mortgage program.

> In the US, most home buyers will qualify for a much lower than 20% down payment for their primary residence.

Well, that's true in the US in that, so long as you have sufficient income to make the payments, you can probably fine subprime financing for purchases with less than 20% down, but you'll pay more for it than you would for the same size loan with more equity (whether in PMI, interest, fees, or some combination.)

I agree that joint ownership is absolutely something to be avoided. But there's also tenancy-in-common (TIC), which provides liability commensurate with your ownership stake. In most places TIC is an antiquated form of ownership usually only seen as the result of intestacy.

Banks typically won't issue a mortgage for a TIC title as they're not interested in becoming a tenant-in-common in the case of default, making such titles relatively unmarketable. TIC owners through inheritance almost always liquidate by selling the property as a whole or, in the case of undeveloped land, through partition.

But in San Francisco TICs have become common alternatives to condominium conversions with real estate developers. The city caps the number of yearly condominium conversions, but has little ability to control private arrangements like TICs. It's so common that many local banks will issue mortgages for TIC shares, provided the proper contractual arrangements are in place to expedite recovery from deadbeat tenants-in-common. Taking ownership of a TIC share typically involves simultaneous execution of both a title transfer from the seller and contracts with each remaining TIC owner. (These contracts also effectively partition the property, as TIC owners otherwise have a right to access the entirety of the property, including your bedroom.)

The contracts tied to TIC arrangements do increase the costs and risks of litigation. If title passes to someone who doesn't enter the shared contract--say by inheritance--then you have a problem. (Presumably TIC contracts attempt to force maintenance of Wills or Trusts to prevent this from occurring.) So while banks here will issue mortgages the property values are discounted. But that means that TIC apartments also typically sell for substantially less than comparable condominiums, which translates to a smaller mortgage, making ownership more affordable. If you see a deal too good to be true in SF, assuming its legitimate it's probably a TIC.

Condominiums are designed to simplify this whole process, but in their absence you can hack together a substantially equivalent form. Interestingly, few property lawyers outside San Francisco would think of doing this. My Property Law professor, who was also the professor for my Land Use seminar, was surprised TICs were being used this way. So if you're outside San Francisco it may pay to inquire with an SF-based real estate developer or property attorney.

In the Bay Area intent to lease is worthless and not taken into account for mortgage qualifications (I tried it).

Your suggestion seems to be to just buy the place and have your friends be roommate tenants? The reason this isn’t viable is the costs are too high.

By buying a place together you can get a better place with an affordable mortgage split and you can share in the upside without getting locked out of the market.

The risk is the standard social risk plus the risk that if everyone does this prices will get even crazier.

> if everyone does this prices will get even crazier

So not viable after all then. The only solution I see is build higher and denser, and do it so much that it can accommodate the demand growth.

Yep that’s the real solution - just build a lot more (not “affordable” housing just lots of any housing).

Unfortunately between existing owners working to kill any new units and renters in SF claiming that building more increases rent (and vying for rent control which makes things worse) I think it’s just hopeless.

...how on earth do you argue that building more increases rent and sound even vaguely plausible?

I’m not sure how, but people do (this was my response in a thread from a while back): https://twitter.com/zachalberico/status/1056645172283420672?...

Higher land prices mean it is only profitable to build luxury apartments and therefore new construction is more expensive than the average. However what people seem to forget is that each unit of housing means more people can live in the area and eventually the luxury apartments will become average apartments in 30 years.

> The risk is the standard social risk plus the risk that if everyone does this prices will get even crazier.

Should be roughly neutral in effect; the money is pulled out of the rental side of the housing market by people who aren't able to afford sole purchase going together to do a joint purchase and going into the owner-occupied housing side that way, but that either drops rental prices (making purchase at high prices less attractive) or gets current rental units sold off into the owner-occupied market because they are unable to make enough to be profitable as rentals, increasing supply on the owner-occupied side and dropping prices.

I've lived with friends a number of times and I would add the qualification that you must ensure you've all got the same desire for cleanliness (or uncleanliness). Resentment will always build if somebody thinks the other is being unreasonable in the level of housework they're willing to take on, and you will end up losing friends.

Another option is to pool some money together and hire a maid to regularly come in and clean. It's not that expensive, depending on the size of the house and how many people are living there. I used to have this mental image of a maid being something that only someone incredibly rich would be able to afford, but after looking at prices I realized it wasn't that expensive.

I absolutely recommend a cleaner for anybody that can afford it, but cleaners only clean around stuff, they don't tidy things for you. At least none that I've ever had. If you've got a housemate who leaves their breakfast dishes on the counter on the day your cleaner comes in, that counter won't get cleaned.

On the other hand, landlords are not friends. You create a situation where the owner is building equity and the friends are building the owner's equity.

I co bought a house with my wife and another couple. We spent about 18 months figuring out the legal agreement, including many permutations on failure to pay. Fwiw, our 'failure to pay' arrangement is in two steps. First step is the generation of interest bearing loans, secured against the non paying owner's equity. (Effectively auto sale of part of the non-paying owner's portion of the house.) Stage two is an actual sale process, which might be owner to owner, or might be dissolving entirely and selling the house. All of this is in our TiC contact.

On the flip side, we were able to pay 40% down on an awesome place that we couldn't have done individually, and even the lowest earner is getting significant equity because of the way we've structured our terms.

Rent is theft.

> You create a situation where the owner is building equity and the friends are building the owner's equity.

Conversely, if there's an earthquake/fire/mold problem, then the equity holder is on the hook and the renters can just move on.

> Rent is theft.

Wow that's strong. Do you really believe anyone who offers property for rent at market price is morally equivalent to a conventional thief?

My take on it isn't that strong, but perhaps it will give you an idea where they're coming from.

Part of rent pays for goods and services: construction costs, upkeep costs, administration costs, insurance costs, etc. Insofar as it does that, I believe that it is a healthy net-positive economic exchange.

Rent also partly goes to pay an individual or company for the service of everyone else staying away from that particular chunk of space. That's the problematic part.

See also: banks selling mortgages are financial arms dealers profiting off of exacerbating all of this.

The real trick is figuring out what to do about it and how, of course.

> Rent also partly goes to pay an individual or company for the service of everyone else staying away from that particular chunk of space. That's the problematic part.

That sounds like a general aversion to any property rights or right to privacy at all, if you mean that you're paying for nobody else to come and be in the property at the same time as you. Not sure how it's specific to rent?

It's an aversion to a very specific form of property right. Henry George is the one to look up for details.

It's not an aversion to property rights in general. In particular, it isn't an aversion to allowing private ownership of the means of production (communism) or, on the flip side of the modern acceptability coin, private ownership of people (slavery).

You're right that the phrasing of the argument was general. There are more specific moral arguments on every side of every one of these, but the practical side of it always boils down to: how do you preserve incentives in a market's growth phase while discouraging rents (in the economic sense of the word) in the steady state?

That's a tricky one, and I don't claim to have a general answer, but I'm pretty sure that in the particular case of land it has something to do with society not making unbounded promises in exchange for bounded goods, e.g. of eternal, transferable land exclusivity to a private entity in exchange for building a log cabin on it. From that perspective, the government of past generations stole the exclusivity rights from modern citizens, and the present landowners are in a situation similar to any other possessor of stolen goods.

Tool rental maybe. I once rented a power tool for 30€ that cost 200€ in total. 7 days and I could just buy it outright... However the residential rent market is pretty fair in my opinion. It is viable for an individual to rent for a whole lifetime and not pay significantly more than the property cost in the first place. As a comparison: I could buy that power tool hundreds of times if I rented it for three years.

Rent means having access to liquid capital that you can invest in alternatives that are not property.

It also means: no property taxes, maintenance costs, stamp duty, and it makes it easy to move.

> Rent means having access to liquid capital

No rent means you're spending more on housing, as you need to pay for someone's mortgage, costs and their profit, so it means you save less and so have less liquid capital, and also don't have any non-liquid capital in your equity.

> It also means: no property taxes, maintenance costs, stamp duty

No you're paying for all that, via your rent.

> > Rent means having access to liquid capital

> Rent means you're spending more on housing

That's not a contradiction; liquidity has a cost. Yes, by tieing up capital in property purchase, you can, on average, trade liquidity for lower total cost if you are using the property forever. (Whether the actual total cost ends up being lower if you ever decide to move depends on market conditions and timing and transaction costs; transaction costs on both ends of a home purchase or sale are a lot higher than entering or exiting a residential lease.)

I still don't understand what you mean.

If I pay $2000 a month rent I'm always going to have less liquid capital than if I pay $1000 a month mortgage, aren't I? The mortgage payer ties up their money in the equity so it's not liquid, but the rent payer's money is just gone, so it's infinitely not liquid, and on top of that more of their money is gone.

When you've paid off the mortgage the mortgage payer has more liquid capital, and a property.

You’re forgetting about the opportunity cost of locking up all of that capital in an asset that has a high carrying cost (maintenance, taxes). The initial downpayment could have been used for other investments, so you have to compare how much you could have earned if you’d invested and rented instead of bought the house.

https://youtu.be/NZR_vMTLfIk

> an asset that has a high carrying cost (maintenance, taxes)

I don't know who you think ends up paying for maintenance and taxes in a rented property - it's the renter, through their rent.

I didn’t say renters dont pay.

What I’m saying is that you don’t (usually) get to buy a house for $0 down. So it’s never a choice of $2000/mo for rent vs $1000/mo for mortgage. It’s more like $20k cash + $2000/mo for rent vs $20k equity + $1000/mo mortgage. Over long enough time horizons the monthly payments don’t matter and it’s a question of which investment appreciates more.

Unless you're already wealthy, it's difficult if not impossible to have access to a large investment that provides 5x (or more!) leverage. A home is a leveraged investment and security rolled into one.

Even if your mortgage interest is greater than property value appreciation you could conditionally still come out ahead as compared to the available alternatives.

Diversity, leverage, better appreciation: if you're not already wealthy you can really only pick 1 (maybe 2) out of the 3.

And this ignores the value of having stable monthly living expenses, something not otherwise possible without rent control. You can of course buy cheap land, but such places are typically remote from employment opportunities and, while possible, that approach is just another form of speculation--people will readily share stories about living in the country and telecommuting to a high paying job (successful speculation), but few would ever discuss how they ended up stuck in a cycle of minimum wage employment (unsuccessful speculation).

>Unless you're already wealthy, it's difficult if not impossible to have access to a large investment that provides 5x (or more!) leverage.

That's wrong - the futures market is easily available if you have $10k, and offers rock-bottom costs for embedded leverage due to arbitrageurs. It varies based on the contract in question, but the two-year treasury futures contract offers roughly 400x leverage. Generally they offer you as much leverage as you can handle before overnight price moves will eventually wipe you out, so you definitely want to use less than they're offering.

Fair enough. That's what I get for trying to make a pithy point.

But what's your exposure? Home mortgages are almost always non-recourse loans, limiting your losses to your initial down payment.

I don't think speculation in the futures market is a very good justification to the argument that home ownership is in general a poor investment--IME the conventional thinking in economic circles. I stand by my larger point that home ownership is a categorically sub-par investment only for those already with substantial wealth.

> I don't know who you think ends up paying for maintenance and taxes in a rented property - it's the renter, through their rent.

Equally correctly, the landlord pays them, and landlords that can't at market rents on top of any purchase financing that they are still paying go out of the landlord business.

Most precisely, where, as is usually the case, neither supply nor demand are either haveperfectly elastic or inelastic, the costs are effectively split between renters and landlords in some ratio; the market rents are higher but the financial profits are lower than they would be if the costs involved were not a factor.

> If I pay $2000 a month rent I'm always going to have less liquid capital than if I pay $1000 a month mortgage

If you pay 20% down plus 4% upfront in closing costs on a $1 million dwelling, and then pay mortgage of $3,800/mo (which is fairly realistic for a conventional loan), it'll be more than 5 years before you break even, in liquid capital and presuming nothing is extracted from equity and ignoring any property maintenance costs that landlords have that would be rolled into rent for most renters, with a renter paying $7,600 for a similar dwelling which would actually represent a quite high rental yield.

Tell that to some investors in Toronto, I think they missed the memo. :P

https://business.financialpost.com/personal-finance/mortgage...

The laws here do not favour the owner at all so it's hard. If you own 10+ condos, you can't move into the condo to evict the renter, so you are at their mercy. Toronto is probably the worst market for being a landlord. The good part is people here move frequently because travel times are ridiculous and people are willing to lose money on rent to reduce the headaches. Some tenants in apartment buildings are paying $1200 for a 2 bedroom, when the market rent is $2900. The landlord can't do anything.

Landlords can move in for personal use, but not as a way to evict a tenant. Seems perfectly fair to me, security of tenure is something that benefits the whole community.

Not really when people feel entitled to live in the downtown area at an extremely low rent. For example, someone new moves in for $2400 for a 2 bedroom whereas a person who has been there 20 years is paying $1300. The new person ends up having to subsidize the tenured renter and the landlord also is not able to maximize their profit. Then a big corporation can come in and buy the property because a landlord cannot maintain it well enough. The big companies have their own renovation teams who they own so it's profit to maintain it whereas the smaller landlords end up having to pay a 3rd party and they lose money. It's a delicate balance. 1.9% yearly increases and up to 4.9% on capital expenditures makes it a challenge.

Huh? If the landlords are willing to rent it to the tenants for $1200, isn't that literally the market rent?

Rents are set by supply (number of units available) and demand (number and pay of nearby jobs). An exogenous change in maintenance costs affects neither supply nor demand. A landlord is not going to drop rent merely because they can maintain your apartment cheaper, nor are they able to increase rent beyond what people are willing to pay. If they sell the unit, it is generally to either another landlord (who charges market rent) or to an owner-occupant whose previous residence faces the same situation.

Fundamentally, landlords capture any and all surplus value.

Depends. In Toronto, you can rent and the landlord can't kick you out. They can only raise your rent 2.9% max here per year, or whatever inflation is. It's really cheaper to rent here. Property taxes can go up at a rapid rate. Also, if you sell the property it has to be to someone who moves in otherwise the renter has the right to stay. It really depends on the market. Also, the market pays much better than the appreciation of the unit subtract property taxes, maintenance, and other upkeep fees.

To add to this, if you own, you are stuck in one area. Selling and buying has closing costs. I might be biased because I prefer the markets more than anything but index fund investing on its own can give you better returns than owning. IMO, owning and renting out a portion is the best return, or rental properties run by a property management company, especially if you own property in a LCOL area.

For most people's financial situation, home equity is less desirable than its dollar value. Housing prices are based off prevailing rents, which are based off prevailing wages. These prevailing wages are a large factor into your wages, too, and your future wages are one of the biggest factors going into your overall financial health.

Owning your own house is thus exposed to significant downside risks that can hit both your income and your assets simultaneously. Imagine being a Ford employee who bought a house in Detroit in 2007. The auto employers ran into severe issues and many cut employee pay in 2008, right when Detroit's housing prices basically fell by half. The only way to make matters worse would be to own significant amounts of Ford stock, too.

>First step is the generation of interest bearing loans, secured against the non paying owner's equity. (Effectively auto sale of part of the non-paying owner's portion of the house.)

Yeah, that's actually a great point that I should have thought more about. Co-owners have home equity, which means that you have an asset right there that the other owners can lay claim to in case of non-performance. This works better with significant down payment to ensure positive equity, too.

>Stage two is an actual sale process, which might be owner to owner, or might be dissolving entirely and selling the house. All of this is in our TiC contact.

Suppose a co-owner got a job offer halfway across the country that pays significantly more than their current salary. Would they be able to unwind their position here without significant loss of equity? Or does an entering agreement like this effectively limit your labor mobility?

For the distant job offer case: There are a number of ways out can play out, depending on circumstances. Can do an owner to owner sale, if possible. Or we can fail over to taking a renter, which (given my position stated above) is less than ideal, but a fine resolution for the short term. Or can always fail over to sale and a move if all else fails.

(Which, fwiw, is equivalent to what any home owner taking a distant job offer would face, though more people are impacted. The fall back to renting, though, leaves other owners in the house, to ensure things are well taken care of, at least; much better than the absence landlord situation...)

and paying interest to bank is executive theft :)

In the US 2 single people who jointly own a home can EACH deduct the interest on up to $1m loan. So consider having a legal agreement for joint ownership instead. I’ve done this and deduct an extra $20k.

What is the basis for saying that two single people can deduct the same interest paid? How could this possibly not be fraud? You are double claiming the interest.

No. My home loan is well over $2m. If we were married we could only deduct $1m (half the interest). As 2 single people we can deduct the interest up to $2m. It’s a wrinkle in the tax code.

> What is the basis for saying that two single people can deduct the same interest paid?

They can't, but the maximum limit on both mortgage interest ($100K) and the indebtedness on which you can deduct interest paid ($1.1 million) apply per-taxpayer for unmarried co-owners. You still can only each deduct what you actually pay. This is a result of a 9th Circuit City decision IRS decided not to appeal that almost certainly want the intent of the law, and was not the way the law was applied prior to the decision.

I'm surprised Republicans haven't framed it as a new marriage penalty and jammed a “fix” that would increase the limit for married taxpayers to double the single-taxpayer limit into one of their tax bills, since it would let them champion marriage, rail against the perfidy of the Ninth Circuit, and cut taxes on the rich all at the same time.

The tradeoff there is that you can no longer depreciate the portion of the house that person lives in. Not sure which is bigger, but being able to effectively push current income into the unrealized capital gains on your home is fairly attractive.

On the other hand, you need to be charging market rents with the intent to try to make a profit in order to do this on your taxes, and that means keeping track of rent payments and reporting them. And any profit here could mean that what would otherwise be an untaxed sharing of expenses is now a taxed profit-seeking transaction.

If you're buying a $2,000,000 home, you're probably not splitting it with friends to save money.

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