Buying a $2 million rental property with 2 friends?

[tomatops]

Hey all,

Still stashing as always and got into a conversation last night with friends about a rental property available on the market in Toronto where renters are getting pushed out continuously due to rising costs. It's on the market for $2 million which is still up 29 days later (place looks in good shape, but I assume the place will need some work. That full out assessment hasn't been completely done)

The considerations discussed were:

1) 15% down needed ($300K between all three of us)
2) Ballpark $8000/month mortgage for 25 years (ew.)
3) At capacity, the building could generate $12,500 per month (yay?)

I'm 27 and chugging along quite nicely with a high savings rate, good stable income and am a renter presently. This definitely something I could do. But I'm wondering - should I?

Does anyone have experience co-owning rental properties?

These are trustworthy professionals I used to study with and entering the rental property market is something I've always wanted to do longer-term. Something like this none of us would ever be able to do alone to begin with... Then again, I get befuddled by the idea of entering the real estate market at all-time highs.

[lostamonkey]

I am not a real estate investor but I would not do this for a few reasons:

1. 1% rule dictates that the building should generate atleast $20K/month
2. Owning such a large property with partners is not ideal. You will not have control of the property and be able to make decisions freely. Some people are okay with this but I'm not.
3. Many people think the Toronto market is a bubble. The Vancouver market has already come down a bunch from the peak based on average and median prices. Toronto might follow suit.

I am also wondering what rate you got on the mortgage? I am surprised that they are letting you only put 15% down on a $2M rental property.

[Zamboni]

Nope . . . this is a pass if it were me.

[2Birds1Stone]

Pass

[cincystache]

I vote no. Too much downside, very little upside.

[waltworks]

Multifamily/apartment buildings are always more hassle and expense, so the typical rule of thumb is actually that they need to generate *2%* of their total cost per month in rent.

For a very high end property I would relax that down as far as even 1%, but this doesn't even come close. You'll be paying property taxes, maintenance, some portion of utilities, vacancies, management, repairs, etc. How much all that will eat up will depend on the property but it will probably eat most/all of your cash flow here. And that's before considering the opportunity cost of the DP money AND the many downsides of doing big money deals involving friends.

-W

[chasesfish]

I think its priced about $800,000 over what you should pay.   The world is trying to find yield, so real estate prices relative to the income they generate have been skyrocketing.   Not a great idea to borrow $1,700,000 for something that could be worth $1.2mil in a normal interest rate environment.

[cchrissyy]

if buying rental property with your friends is a good investment idea, then still, why do it in Toronto?
Don't you have any friends in a city without an overheated market?

[BlueHouse]

I don't have input on the specific rental property, but if you plan to make an investment like this with friends, I strongly suggest you create a business entity (LLC or similar) and invest your money into the business, which then makes the investment. 

You just need to make it easy for any of you to get in and out without hard feelings.  If anyone wants out, selling their shares is either easy/difficult; priced right/priced wrong.  It just makes for fewer arguments. 

[Josiecat]

NO! Read MMM's story about how his real estate partnership with a friend turned out.

[FrugalFan]

Yikes, that sounds all kinds of awful! 1) The rental income is not high enough. There are a lot of costs to consider in addition to mortgage, including property taxes, insurance, vacancies (10% of rents), repairs (10% of rents), property management, snow removal, lawn care. Also possibly utilities (unless all separately metered) and possibly hot water heater rentals (unless owned). 2) Even if the income was high enough, you should start out small if you have not tried real estate investing before. If you decide you don't like it or it's not for you, the costs to get out of this deal are too high (especially considering currently inflated prices). 3) Similar to above, don't go into this with another bunch of newbies. There is no guarantee any of you will like it/be comfortable with it. Save the partnerships for later, once you have started small and established that this is something you are interested in growing, and even then you should probably avoid partnering with friends. 4) There are other places in Ontario where the numbers are much better. Don't start in a red-hot real estate market, the second highest in the country. 

[icemodeled]

Wow this sounds scary to me and my husband and we owned 10 rental properties.. this sounds so risky though with the numbers. Also, I would never ever consider going in on this type of investment with friends or anyone really but that's just me personally. I think buying a rental if the expense vs income can be a great idea (it was for us!) but are there other options to find a smaller property for less money and not go in with friends on it?