A buddy of mine and me are planning on getting a place to live in the fall. We’d probably be staying there for a year or two, til one of us moves out or whatever. We’re basically just 2 recent college grads who realize it would be a lot cheaper to live with a roomate than to pay all your bills on your own.
At first we were looking at apartments, and planning on splitting the rent pretty much 50/50. We’d maybe take into account if one guys’ room is bigger or someone gets their own bathroom or something, and take that into account as far as rent, but more or less we were planning on splitting the place.
Now, my friend is thinking about buying a condo of apporximately the same size as the apartment would have been, and charging me rent to live there. This would be fine with me, I’d have no problem with it. It would be basically the same to me, I’d be living in a comprable place and everything.
My question is how much rent should I pay? I would think that me paying half of his monthly payment for place may be too much, since he’d be actually getting the place once it was paid off, and I’d not be getting anything to show for my money.
But, he thinks the monthly payment would be in the same ballpark as what a decent apartment would cost. So, if I was to pay him the same rent I’d have paid if we rented an apartment, it could end up being about half the monthly payment.
This is a good friend of mine. I’m sure he’d be cool with breaking up the rent however would be fair. No one is looking to rip off the other guy here, or get a good deal at the other guy’s expense. We’d be just looking a fair deal. We haven’t found a place, or even decided for sure if we’ll go apartment or condo, so this is all kind of hypothetical right now anyway.
Any suggestions here? Has anyone worked out a deal like this in the past?
Generally, the tenant roommate would pay about what he would pay for half of a comparable apartment, adjusted, as you said, for differences in room size, etc.
But that depends on the assumption that the hypothetical condo is comparable to the hypothetical apartment. If you guys are looking at places with rents of about $1000 ($500 apiece), but he decides he wants to buy a condo with payments of $1500, that doesn’t mean you’re obligated to pay $750 a month. But he’s not obligated to let you stay there for only $500 a month. He might accept a 1/3 2/3 split, letting you pay the $500 and paying $1000 himself, however, but that will depend on what he can afford.
The fact that he will own the place in the end doesn’t mean you should pay less. You should pay about as much as you would have in a rental, but at least your money will be going to a friend, not to some slumlord! And since your roommate will be the owner, he will have more incentive to make improvements and keep the place up.
What possible reason would he have for buying the place if not to make money on it? He could put the down payment into a mutual fund instead and make 10% (historically), so if he can’t make at least 10% on his purchase, he would be making a terrible financial decision.
In addition, will you replace the furnace ($2-3K) if it dies? Who will pay for trash disposal, the lawnmower, all the tools needed to fix minor problems?
Unless you are willing to split all costs 50-50 (in which case you should just become partners in the purchase), it would be idiotic for him to agree to a scenario you are describing. Friendship is irrelevant here. You are trying to pull one over on your friend.
Dude, that is rather harsh. The OP was asking for advice on how to do this in a fair way. I can think of many ways that you could have stated your opinion in a kinder way.
Price other condos with similar amenities. Your rent should be pretty much in line with other rents. In my opinion, you should be careful about expecting any sort of consideration because of friendship. As a matter of fact, in my opinion, I would suggest that while finding a place to rent with a 50/50 split could present a problem with a friendship, another set up, where one friend is making money off another, invites hard feelings. If the friend rents to you at a loss, so to speak, and gives you some consideration, over time, the friend may very well, start to have some increased expectations that may not get communicated or satisfied. When these expectations are not met, tension could turn to resentment and what you end up with is a good friendship destroyed or damaged over something silly like who takes the garbage out, or leaves a dish in the sink, etc. If your friend rents to you with no consideration regarding the friendship, you may eventually, or it seems already, begin to disapprove of the fact that he is gaining advantage due to the situation.
Considering all the outcomes, discuss them with your friend, and communicate all expectations before you enter into this agreement.
Good luck.
Assume current market price for a similar rental, split the price as if he were not the landlord.
If he chooses to purchase at an accelerated payoff, you shouldn’t be expected to pay half the payment. Likewise, if he chooses to purchase on a deferred/balloon plan (have him committed, if so), you would be remiss in not paying fair market value, as he’d need to escrow part of your monthly rent to pay on the balloon.
Assume a 100K loan. He wants to pay it in 10 years. Payments would be very high, but you pay fair market, the rest is his problem. OK, he sets up a 30 year adjustable, with a balloon at 3 years. Yes, the payments are much lower, but the balloon will be a killer. You still pay fair market, he has the option to bank or blow your excess rent payment. Either way, the split is equitable, and as the owner, he assumes the responsibility as well as the rights of ownership. You are a renter, nothing more or less.
I have a three-bedroom house and I can rent the two extras out at $400/month. My house payment is $1000/month.
I own my three-bedroom house outright, therefore no mortgage. I can still get $400/month per bedroom.
No difference. The local housing market is such that the rental has a value. That’s not influenced by what I owe on the place. Just because I no longer have a mortgage, that doesn’t mean I have to let someone live with me for free. Friendship or no, there is a fair rental value, and it has nothing to do with who owes what. Figuring your rent has nothing to do with the property owner’s mortgage.
Also, take into consideration that “typically” a mortgage will cost considerably less than most rentals unless you rent a dive. So depending upon your current market, with mortgage rates so low…you may end up coming out on the better side of it if he decides to buy rather than co-sign a lease with you.
In either case, I think, if that’s what he’s up for, half is fine. He is responsible for you as a “renter,” to maintain the property, home owners dues, ensuring that insurance is maintained (although you would want to get your own renter’s insurance), making sure that property taxes are paid in addition, your tax preparation becomes more complicated when owning a home.
In short, he has a lot of responsibilities that you as a renter wont have and you know at some point you will be moving along anyway.
As mentioned above, are you going to pay half all the maintenace charges? Also if the real estate market fell & the condo was worth $10,000 less, would you give him $5000? So, as you can see, what he can charge you should be based on his own costs.
Personally, I don’t like the idea of renting with friends.
At the end of the day, your friend is your landlord and it’s up to him to decide what your rent will be, and then up to you to decide if you’ll pay it. IMO, you might pay a slightly higher rent for living in a condo than an apartment (assuming the condo is a little nicer), but I agree with FCM that the rent you pay should reflect the value you get, without regard to whether the place is owned by him outright, owned by him but he owes a lot of money on it, or owned by someone else.
More importantly, IMO, I woudl make clear to him that you’re just a tenant, and that you’re not willing to undertake any responsibilities or expenses you wouldn’t incur if he wasn’t the landlord. In other words: You don’t pay for major repairs or improvements; you are responsible for extraordinary maintenance; and you have no obligation to stay if your life changes or things don’t work out – not even if he needs your rent to make his mortgage payment. The flipside of gaining the equity that comes from owning a house is shouldering the risk, financial and otherwise, of owing a house. And he would be the owner, not you.
But his mortgage payment will undoubtedly be higher than just rent would be, so if I were you I would (with him) price out rent for comparable places (say, 2 BR condos) and agree that your rent should be half of that.
I’m in the rental business, and I can’t say it loud enough: Get a written lease! The forms should be available at a stationery or business store, or a nice rental business might give you one. Put everything in writing: security, rent, lease term, who pays for maintenance, repairs, etc. Both you and him sign it, and have it notarized.
I’d go with your paying market rent for a shared apartment.
Friends is friends and business is business. Be very careful when combining the two.
The most you’d be willing to pay is the amount you’d have to pay to share with another, which would be the amount you’d pay if he didn’t own it. When you rent from others, not thought is put into the fact that you are then investing in someone elses equity, so honestly who holds the mortgage is irrelevant in this decision. The minimum amount your friend should charge is equal to:
Any additional variable cost(VC) caused by having you there+and missed opportunity cost. Which means if he can rent it to someone for $X, then you should pay $X dollars. Now if he has to rent another parking spot for you (VC), you should pay $X+additional parking spot.
You seem to be stuck on the fact that since he owns it, you are helping him, as opposed to helping some complete stranger who is not your friend. When it’s all said and done, you are in no better or worse situation, so if it’s a nice place, why not enjoy it?
Another thought to bear in mind - I don’t know if the same is true in the US, but over here in the UK if your home is mortgaged you have to get the permission of the mortgage lender to rent out any part of your home.
Well, it kind of depends on how the mortgage is set up. Ours is set up so that a portion of our mortgage automatically goes into escrow to pay property taxes and to pay for our homeowner’s insurance. It’s nice to not have to worry about the taxes at the end of the year, but it does jack up the mortgage a little.
If the mortgage in and of itself (excluding taxes and insurance) is about what the rent on a comparable apartment would cost, then that should be split 50/50. (A lot of times the rent on a place is enough to cover mortgage, taxes, and insurance anyway, so you might even save money). Yes, he gets the tax break and the condo in however many years, but he also has to pay the taxes and insurance, and the upkeep, and that can add up to a fair bit of money.
If the mortgage is going to be crazy expensive, but it’s a much nicer place than you would have picked to rent together, the cost should still be 50/50. You, however, are quite free to decline to live there.
Tenant’s Rights, a book from nolo.com or your bookstore or library, has forms & easy to read law on these things too…about $22, an excellent investment…Mostly California law, but I don’t know about the other states.
In simple economic terms, i agree with those who say that the amount paid by Blunt should be 50% of the market rate for a similar apartment/condo on your area.
Let’s make the numbers easy. If the mortgage is $1,000 a month, but the going rental rate for a similar place is $800, then Blunt should still pay no more than $400 a month. If, on the other hand, the mortgage is $1,000 but the going rental rate for a similar place is $1,200 a month, then Blunt should pay $600. The monthly mortgage rate is essentially irrelevant to this argument.
Of course, given that two of you are friends, not all things are economic, and it’s possible to modify this arrangement a little to suit your friendship. But if either of you ends up feeling resentful over the deal you make–either you because you’re paying to much, or him because you’re not paying enough–it could be the end of your friendship. If you think there’s a chance of this happening, maybe it would be better just to live somewhere else.