What Are the Disadvantages of Having a Co-Owner?

The main disadvantages of having a co-owner are shared control over major decisions, splitting the rent and the sale profit, being personally liable for the entire mortgage, and a co-owner's right to ask a court to force a sale. In exchange, you pool the down payment, the borrowing power, and the work. Choosing how you hold title and signing a co-ownership agreement with buyout terms before you buy limits the control, exit, and inheritance problems; the mortgage liability stays either way.

What are the main disadvantages of co-owning a rental?

• Shared control. Whether rent increases, major repairs, tenant approvals, refinancing, or selling require your co-owner's agreement depends on state law, how you hold title, and your co-ownership agreement. A 50/50 split with no tie-breaking rule can leave a decision stuck.
• Split income and sale proceeds. Each owner receives a share of the rent and the profit at sale, usually in proportion to ownership. You also need agreement on when to sell and at what price.
• Liability for the whole loan. If you both sign the mortgage note, each of you is liable for the full debt, not half. The standard note says that if more than one person signs, each is "fully and personally obligated" and any one signer "may be required to pay all of the amounts owed." If your co-owner stops paying, you cover the full payment or the loan goes into default for both of you.
• The weakest credit score sets the price. On a conventional loan sold to Fannie Mae, the lender uses the lowest score among the borrowers to price the loan, so a co-owner with a 660 score can cost you a higher rate or fee than your own 780 would.
• A forced sale. A co-owner who wants out can file a partition lawsuit. A court divides the land if it can be split fairly. If it cannot, as with a single house or small building, the court orders it sold and divides the proceeds.
• A co-owner you did not choose. In a tenancy in common, either owner can sell or leave a share to someone else, so you can end up sharing a rental with a stranger or your partner's heirs.

What are the benefits you weigh against them?

• A larger down payment. If a property needs $120,000 down plus closing costs, two equal co-owners each bring $60,000. That can put a duplex or fourplex within reach when neither of you could buy it alone.
• More borrowing power. On a conventional loan, the lender measures your debt-to-income ratio (DTI), your monthly debts divided by gross monthly income, using the combined qualifying income of all borrowers. A second income can qualify you for a larger loan, though the second owner's debts count too.
• Shared work. One owner can handle tenant calls and repairs while the other keeps the books, which matters if both of you have full-time jobs.
• Coverage when one owner is away. When one owner travels or is sick, the other can show a unit, sign a lease, or meet a contractor.

Before you buy, exchange credit reports, savings balances, and how many months of mortgage and repair costs each of you could cover alone. For what to check in the property itself, see what to look for in a rental property.

How does the way you hold title change the risks?

Tenancy in common fits owners who put in different amounts or want their share to go to their own families. Joint tenancy fits spouses or partners who want the survivor to own the whole property automatically, but share requirements vary by state; Colorado permits unequal shares. A limited liability company (LLC) holds the property itself, and the owners hold membership interests. The operating agreement can set voting rules and buyouts, and the LLC may limit your personal exposure to claims against the rental. Transferring a property that already has a mortgage into an LLC can let the lender call the loan due; see whether you can move a mortgaged property into an LLC and whether a separate legal entity makes sense.

What should a co-ownership agreement cover?

Have a real estate attorney in your state draft the agreement before closing and sign it at the same time you take title. It should cover:

1. Ownership shares and contributions. Who put in how much at purchase, and how shares change if one owner later puts in more.
2. Decision rules. Which decisions need both owners (selling, refinancing, a new loan) and which one owner can make alone, such as repairs under a set dollar amount.
3. Cash calls. What happens when the property needs money and one owner does not pay. Common answers are a loan from the other owner at a stated interest rate or a reduction in the nonpaying owner's share.
4. Management duties. Who collects rent, handles tenants, and keeps records, and whether that owner is paid for it.
5. Buyout terms. A right of first refusal, so an owner who wants out must offer the share to the other owner before an outsider. Also the valuation method (such as an independent appraisal) and how long the buyer has to pay.
6. Partition limits. An agreement to waive or delay partition, or to try a buyout first. In California, partition is available as of right unless barred by a valid waiver. For California property held in tenancy in common with no written partition agreement binding all owners, co-owners who did not request a court-ordered sale can elect to buy out those who did at the court-determined value. They must notify the court within 45 days after it sends the buyout notice.
7. Death, divorce, and bankruptcy. Whether the surviving owner can buy the share from the estate and at what price.

How do co-owners report rental income and expenses?

If you hold title directly, as tenants in common or joint tenants, IRS Publication 527 says each owner reports their own part of the rental income and deducts expenses they paid according to their percentage of ownership. Each owner reports on their own Schedule E. For example, if you own 50% and pay a $2,400 roof repair yourself, you deduct $1,200 and collect the other $1,200 from your co-owner. Run rent and expenses through one shared account so both owners have the same records; see why you need to record rental expenses.

An LLC with two or more members is classified as a partnership for federal income tax purposes unless it files Form 8832 to elect corporate treatment. Partnership tax rules then apply, which means a separate partnership return each year in addition to each member's own return.