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What Is Shared Ownership and How Does It Work?

A shared-ownership property can get you a house below market rates with a low down payment.

Apr 23, 2021
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Shared ownership is a creative financial solution often used by first-time homebuyers as an affordable housing option. While it's more challenging to utilize this strategy as a real estate investor, there are times when shared ownership may be the creative and affordable way to to purchase a home, especially in a rapidly appreciating market. Continue reading to learn what shared ownership is, how it works, and some of the rules and regulations investors may have to follow when seeking a shared-ownership home.

What is shared ownership?

Shared ownership is essentially an equity share in a house that would otherwise be unaffordable. The buyer works with a local housing association, which could be a municipality, government agency, or private trust focused on providing financial assistance for affordable housing, in order to purchase a portion of property. Generally, the buyer purchases between 25% to 75% of the property, sharing ownership for the remainder of the shares with the local entity. This allows the buyer or investor to come up with a smaller deposit, carry a smaller mortgage, and pay for the difference in affordable rent. It creates a housing ladder where the shared owner can slowly build up a bigger share in the property as they are able to over time until they're eventually able to purchase the property outright.

How does shared ownership work?

A shared-ownership scheme is not a mortgage repayment or rent-to-own setup. The buyer legally owns a portion of the property and carries their own mortgage for that portion with a lender of their choice right out the door. The housing provider that the buyer is working with will carry the remaining portion of the mortgage separately. Whatever the buyer does not carry as their personal mortgage will be paid for in subsidized rent to the existing shared owner. In most cases, the buyer is able to purchase more shares until they are the sole owners of the shared- ownership home. This shared-ownership arrangement is generally subsidized by government funding or private land-trust initiatives.

Who is eligible for shared ownership?

Although it will vary slightly depending on the partnering agency you are working with, there are several overarching requirements for a shared-ownership buyer. In general, you must be a first-time homebuyer or a previous homeowner who can no longer afford market- rate property value. Because you will be carrying your own mortgage, you'll need to have good credit, a reliable income and work history to show your mortgage lender, and enough saved for a downpayment of 5% in most cases. If you're currently renting, you'll need to be current on payments and in good standing with your lease.

The goal of the shared ownership scheme is to give a qualified hardworking buyer the opportunity to purchase a house that they otherwise wouldn't be able to afford based on property value, not based on difficult personal financial scenarios. In almost all cases, you will need to live in the shared ownership property for the length of time that the housing association is involved, which makes it a difficult financing strategy for investors seeking an investment property outside of their residence.

How to find shared-ownership properties as an investment

If you're just starting out in real estate investing, this can be a wonderful way to begin climbing the property ladder. Even if you aren't immediately able to flip the property or rent it out, this can still present an opportunity to get started. A shared-equity scheme can give you a very reasonable monthly payment to start your portfolio without having to pay market price for a listing or high private financing fees if it's outside your budget.

You can work to take full ownership as quickly as possible, at which point you can then decide whether you want to then hold it and rent it out or flip it depending on your market conditions. When you're looking for your property, oftentimes there will be a limited selection based on the availability of the housing association you're working with. But if there are choices, try to determine your exit strategy so you can pick the best property for a rental or a sale. Start your search by contacting your local housing authority or searching for local private trusts that specialize in shared ownership in your area.

A shared-ownership property may be an unconventional concept in real estate investing but offers potentially lucrative opportunities to those just starting to build their real estate portfolio. Make sure to do your research to get a full understanding of how long you might be required to live in the property, if there are any limitations as to how quickly you can pay off the leaseholder, and the feasibility of the property as an investment once you're ready to move out. Working on a shared-ownership basis will have some constraints, but the benefits will likely outweigh the restrictions if you meet the eligibility requirements.

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