Cant Connect to friend using singleplayer/co-op

I just bought this game because of the Humble Bundle for 12$. I don’t know much about the game, but it seems fun and my room mate wanted to play it too so he got as well. Thing is we cant seem to play together. Yes we can play on some server in the multiplayer, but we want to set up our own xp levels, day/night times etc so if someone else is running the server we cant do that. neither of us want to pay for a dedicated server. Is there something we are doing wrong? I am level 27 on my map so im way past tutorial etc.

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