Author Topic: What's the Process for Buying an Investment Property with a Friend?  (Read 5455 times)

newguy88

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Hi all,

My spouse and I would like to buy a house as a rental property with another couple. Neither couple would live there.  I've done some reading and it appears that some people recommend forming an LLC and buying it with that, while others say that an LLC isn't necessary.  I've also found that it seems many lenders won't lend to an LLC and that transferring it to an LLC afterwards is not allowed.  We're able to finance 25% but we definitely need a mortgage. 

Any suggestions?

briandougherty

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Re: What's the Process for Buying an Investment Property with a Friend?
« Reply #1 on: December 22, 2014, 05:53:10 PM »
I guess my first suggestion would be, "don't", but that's not too helpful.

It's not the form of that ownership that matters as much as the terms.  You need to lay out specific terms for everything.

Who are the owners?  Is owner 1: newguy88 and newguyorgirl88? or is owner 1 newguy88, owner 2 is newguyorgirl88? This might be important in case of a divorce--does the couple together have to agree to make decision or can one of them?

How do you deal with one of the owners not paying? Can you dissolve the partnership there? Can the other owner pick up payments and get more ownership in doing it? Etc.

How do you deal with dissolution? Can you force a sale right away irrespective of the market? What if it's underwater?

And then there's the more mundane but equally important issue of how do you make decisions on what insurance to buy and what deductibles you want?  How do you choose renters? These are probably noncontroversial... at least until you get a horrible renter who ransacks the place and you disagree on how to screen them in the future since you're losing money now that it's not rented.

I'd choose an LLC, but I believe you can get riders on your personal insurance or property's insurance that will cover you from much of the liability.

Good luck!

MillenialMustache

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Re: What's the Process for Buying an Investment Property with a Friend?
« Reply #2 on: December 23, 2014, 07:22:39 AM »
I would second the "do not do that" club. Who pays for repairs? Who gets any income? How do you decide which house to buy? How do you decide to buy another? MMM himself claims this to be one of the biggest mistakes he ever made.

Save up the money until you can afford one yourself.

Nate R

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Re: What's the Process for Buying an Investment Property with a Friend?
« Reply #3 on: December 23, 2014, 07:36:43 AM »
Do Not. 95+% chance one couple will be unhappy with how something in the arrangement goes.

GoldenStache

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Re: What's the Process for Buying an Investment Property with a Friend?
« Reply #4 on: December 23, 2014, 08:00:14 AM »
First step... Turn around and walk away.

If you want to start a rental business, get your own properties and help each other out to start with.  Someone will end up doing more work, get upset about it, and want more of the profits (if there are any). 

DoubleDown

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Re: What's the Process for Buying an Investment Property with a Friend?
« Reply #5 on: December 23, 2014, 10:19:03 AM »
+6 on "Don't." Is this enough votes yet?!

If you decide to go through with it, lay out everything in an operating agreement and consider the friendship disposable. I mean, it might work out, but it's a good way to destroy the friendship too. To me, investing with another couple has "red alert" written all over it.

Disclaimer: I've actually invested in rental property (short term) with guy friends, and it worked out just fine. But not another couple.

clarkfan1979

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Re: What's the Process for Buying an Investment Property with a Friend?
« Reply #6 on: December 23, 2014, 03:03:29 PM »
Multiple couples is a little different and I second the concerns about this. However, a well written contract could work.

I can share success stories of two guys buying a house together, but not multiple couples. I had two sets of single guy friends from two different peer groups do this in their early 20's and it worked out great for both sets. In both cases the men were single, young and not did make enough on their own to buy a house buy themselves. So they paired up with a buddy to combine incomes for a house purchase.

After about 7-8 years (age 30) one of them found their significant other and wanted to resolve the contract. In both cases one person bought out the other person and still lived in the house. I think the person who stayed got the better deal because they can now take advantage of being deeper in the loan and have payments with a higher percentage of principle.

This_Is_My_Username

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« Reply #7 on: December 23, 2014, 03:48:27 PM »
Quote
Any suggestions?

do not.  friends and money dont mix.

You will very probably lose both. 

Bobberth

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Re: What's the Process for Buying an Investment Property with a Friend?
« Reply #8 on: December 23, 2014, 03:58:47 PM »
Another vote for Don't.  What happens if something changes and one of you needs to sell?  What if the other person doesn't want to sell?  What if the other person can't come up with money for a new roof?  What if it goes bad and the other couple walks away?  What if they want to replace the roof and you think it has a few more years left?  What if they are "Busy" every time they are supposed to do something for the property?  What if you want to rent for market rents but they want to go Section 8 for higher rent?  Lots of bad possibilities. 

I've had family and friends ask about investing together.  The only way I will do it is if: 1. They are a lender to me or 2. I am a lender to them.  That's it.  Keep the relationship simple and prevent issues before they arise. 

MikeBear

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Re: What's the Process for Buying an Investment Property with a Friend?
« Reply #9 on: December 23, 2014, 06:49:11 PM »
One more DON'T!

It's the same as lending them money, only now it's worse because it's tied up 4 ways. What happens in the case of a divorce, or bankruptcy of one couple? The property is now in danger of being attached, and auctioned.

Real, real messy, which in RE means "expensive".

Read MMM's story of his building company business, and how his partner left him holding the bag to the tune of over $400k.

tracylayton

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Re: What's the Process for Buying an Investment Property with a Friend?
« Reply #10 on: December 23, 2014, 07:08:00 PM »
Dave Ramsey always says, "The only ship that won't sail is a partnership".

Overseas Stache

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Re: What's the Process for Buying an Investment Property with a Friend?
« Reply #11 on: December 24, 2014, 01:32:42 AM »
As many people pointed out this could lead to disaster, but if you do decide to do it make sure you treat it as a business arrangement.

For 1 or 2 properties a LLC is probably not necessary or worth the cost. Both couples can apply for the loan together and be on the title as well.

The important part is to have every part of the agreement in a written contract for you guys to follow. The contract should detail every little thing that you can think of that could happen, and especially how the money will be divided up for repairs, vacancies etc.

I currently do invest in rental properties with my dad and so far it has worked out really well. We have everything written out and signed, and we have made some adjustments to the contract along the way but so far we haven't had any problems. 

money_bunny

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Re: What's the Process for Buying an Investment Property with a Friend?
« Reply #12 on: December 25, 2014, 06:30:03 AM »
+1 on Don't.

Someone ALWAYS ends up doing more work on the place, or in the case of a vacation rental gets more use out of it.

If it gets ugly the whole sales process gets stopped by one person who just answers "Nope" to anything or just drags their feet.

Skyhigh

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Re: What's the Process for Buying an Investment Property with a Friend?
« Reply #13 on: December 25, 2014, 10:56:28 AM »


I will add to the position of strongly avoid a partnership.

GrayGhost

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Re: What's the Process for Buying an Investment Property with a Friend?
« Reply #14 on: December 26, 2014, 10:06:02 PM »
If you really want to do it, why not structure the arrangement such that one of you is the owner, and the other is a lender who is entitled to x% of profits? Of course you need to lay out responsibilities and such in a contractual manner and provide terms for dissolution.

Frankly, this is probably much more trouble than it's worth for a single family home. It would be different if you were looking into buying a larger chunk of real estate, but in that case, you'd also have what you don't seem to have just now--and that's experience.

I understand you're excited about real estate, but I'd recommend patience for the moment. Wait just a little bit more and get your first investment solo, run it by yourself, learn from your mistakes, and then, if you still want a joint operation, go for it.

TXBruiser

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Re: What's the Process for Buying an Investment Property with a Friend?
« Reply #15 on: January 08, 2015, 10:59:49 AM »
* First post on MMM.

I recommend DONT.  A very close friend of 9 years and I wanted to go partners on a investment house, and we barely made it 3 hours of hashing out the terms before we admitted that it was best that we each buy our own properties and we would be friends in helping each other out when needed.  Sure it took us a few months more of saving up (Ill be closing on mine in a few weeks) but in the end our friendship was more valuable than a few extra months of profits and equity.

ShoulderThingThatGoesUp

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Re: What's the Process for Buying an Investment Property with a Friend?
« Reply #16 on: January 08, 2015, 12:00:00 PM »
1. Punch yourself in the face.
2. Built up enough money to buy one yourself, and suggest that your friend do the same.
3. Help each other out.

trailrated

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Re: What's the Process for Buying an Investment Property with a Friend?
« Reply #17 on: January 08, 2015, 12:44:43 PM »
+1 NO NO NO NO NO NO NO NO NO

SantaFeSteve

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Re: What's the Process for Buying an Investment Property with a Friend?
« Reply #18 on: January 08, 2015, 01:15:20 PM »
Am I just piling on at this point? 

+1 for Do NOT do this.  You may be able to spell everything out in a contract but when things get tough, and it is an almost certainty that there will be some rough parts, a contract doesn't make people do as they agreed.  A contract only gives you recourse for the other persons failure to perform, it doesn't make that person pay their portion of the bill, take their share of the phone calls, do their share of the repairs, etc. So then the lawyers get involved and everyone loses (except the lawyers of course).

I think working together with your friends so that you can both buy your own property is a MUCH better solution. 

FWIW: I am a long-time landlord who has learned several lessons the hard way.  I succeeded, in part, because of the support and assistance of many great friends.  And I would NOT consider a partnership like this, with any of them, to be a good decision. 


TrulyStashin

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Re: What's the Process for Buying an Investment Property with a Friend?
« Reply #19 on: January 13, 2015, 08:05:49 AM »
FYI, if you do this without a LLC then you are personally liable for the actions of the other three people because they can act as your "agents."

That means that if Friend A signs a contract to replace the roof without even telling you, guess what, you just bought a roof.  Even if Friend A skips town and disappears, you're on the hook.

If Friend B discriminates against a prospective tenant in a manner that is illegal and prospective tenant sues, guess what, you're a party to the lawsuit too.  Doesn't matter if you never knew the conversation happened.

If you choose to do this, be ready to end up as a case study in a law school text book. 

James

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Re: What's the Process for Buying an Investment Property with a Friend?
« Reply #20 on: January 13, 2015, 08:12:20 AM »
Another vote to avoid it.  If it is financially sound save up and do it yourself. Challenge each other and help each other live frugally so you can both afford it soon. But if you have to ask if this is a good idea, it most definitely isn't.