looking to buy a mixed use property w/ friends for primary residence. good idea?

[Angry_Retail_Banker]

Hello all, I've got a question for you all:

As paying rent to some landlord isn't exactly my cup of tea, my friends and I (very good friends. Trustworthy. Known them for almost 15 years) are looking to purchase a mixed use property in order to use as our primary residence. Primarily, we are looking for a 2 unit property (1 commercial storefront, 1 apartment on top in which we will live). We want to collect rent from the commercial tenant and live in the apartment.

Our primary purpose for doing this is not actually real estate investment, but free/affordable housing. I've always said that even if we have a shortfall of a couple hundred dollars per month that we have to pay out of pocket, that's still cheaper than paying rent or owning a "regular" house (which would cost us $1,200-$3,500 per month). And the reason we're looking to have commercial tenants rather than residential is due to the former supposedly having less work and liabilities involved to the landlords (one of my would-be roommates once owned a small business in which he rented the storefront from a commercial landlord who couldn't answer a question with anything other than "I'll have to ask my lawyer". Said landlord was practically able to get away with murder due to everything being the tenant's responsibility).

Now, the thing is that we don't really have any landlording experience. Actually, between the three of us, we have none at all. We also live in an expensive city and can't really afford multimillion dollar properties simply due to the high price of the down payment/closing cost combination. We all have jobs (one person makes about $90,000/year with the city) and we all have perfect/near-perfect credit, but none of us have $100,000 we can each throw at a property (I have a little over $30,000 saved for this property, I know my friends each have "a little bit more").

So now, knowing the situation, I have some very broad and vague questions for you guys. Namely, should this be something we even attempt to do? Should we avoid this like the plague? Should we opt for a commercial mortgage or a residential mortgage? Should the property be in a C Corp, S Corp, or LLC? Are there any programs to assist people who can't afford down payments, but would have no problem paying the mortgage? How do we evaluate a potential tenant? How do we analyze their business and ability to pay, or do we even have the right to do that? Any major do's or don'ts that I'm not even considering?

Just wanna know what the badass mustachian community thinks.

Sincerely,
ARB--Angry Retail Banker

[bluewater]

Check out a blogger named tynan. He's done some real estate purchases with groups of friends that he's written a bit about.

[FrugalFisherman10]

There's definitely programs to 'help with a down payment, but would have no problem paying the mortgage'. Whether you qualify for those programs is the question. Check out downpaymentresource.com for a listing of programs in your area.

Ultimately, I think this sounds nuts. Why 2 questions:
1. Have you ever lived with any of the people before?

2. Do you like living with others?

   Personally, I love it (I currently share a big house with 4 other guys that I'm pretty close with) - but I'm not in your situation. I lived with 7 guys at a time in college in a big 100 year old house and it was awesome.

I would say take a moment to pause and really answer those two questions. Take a week if you have to on the second one.

Other things to consider:
How do you split up the sale proceeds on the property when (not if) one or all of you wants out? I'm a CPA, and don't really even know the answer to my own question here, at least not for tax purposes. (I don't do personal taxes on a day to day basis though)

How are you going to find a commmercial property with an apartment above it for (assuming) $500k, when you can't buy a house for under a million? For goodness sake where do you live? ( Going against MMM most recent article, isn't that what suburbs were invented for?   ;)

Have you read this?: http://www.mrmoneymustache.com/2015/07/27/rent-vs-buy/

[Angry_Retail_Banker]

Thanks for your replies, guys. I'll definitely take a look at some of those resources.

FrugalFisherman10, to answer some of your questions:

I've never LIVED with any of them, but we're at each other's places often enough. One of them, I own a [very] small business with. As for living with others, I don't hate it or anything. I actually dormed at college and thought it was awesome (except for the communal hallway bathrooms and lack of a kitchen, but obviously those are issues we wouldn't have here).

As for splitting the sale if someone wants out, we had come up with a rough plan (not finalized or anything, obviously):

--Each person is a 1/3 owner of the property, which is a business. We are each responsible for 1/3 the down payment, 1/3 the mortgage, and entitled to 1/3 the rent. Of course, we all agree that the tenant will be paying the rent and said rent will go right to the mortgage.
--As long as you are living in the property, you are responsible for your share of the mortgage. Hopefully the rent fully covers it. So there's literally no reason for someone to take the rent for themselves.
--If someone wants to move out but remain a 1/3 owner of the property, they are no longer responsible for their third of the mortgage and can take their third of the rent in cash. But they don't get back their down payment plus equivalent appreciation (hopefully there's appreciation); said person still owns the property and has paid money into it and that stays right where it is.
--If someone wants to actually SELL us their third of the property, we would pay them back their down payment plus equivalent appreciation. Obviously they are no longer responsible for their third of the mortgage (that just comes from not living there), but they also forfeit their entitlement to a third of the rent.

Like I said, that's more conceptual at this point. Right now, we're still saving and looking.

[accolay]

I've not done commercial property, but as I understand you need to make sure you have enough funds to cover the mortgage if/when your rental unit is empty since vacancies can be longer. Even if you show a loss on the business at the end of the year, you're still going to need to pay the mortgage during the year. I also understand that property tax for commercial real estate is higher than housing- just something to consider. Someone please chime in if I'm way off.

Don't forget to add maintenance costs, enough funds to flip the unit between tenants.

--As long as you are living in the property, you are responsible for your share of the mortgage. Hopefully the rent fully covers it. So there's literally no reason for someone to take the rent for themselves.
--If someone wants to move out but remain a 1/3 owner of the property, they are no longer responsible for their third of the mortgage and can take their third of the rent in cash. But they don't get back their down payment plus equivalent appreciation (hopefully there's appreciation); said person still owns the property and has paid money into it and that stays right where it is.

This part I don't understand. How can one remain a 1/3 owner if they move out while not paying into the mortgage and still receive 1/3 rent from the place? If it were me, I'd say you're either an owner or not. Doesn't matter if you live there or not. But if you're going to have a stake, you have to still share that 1/3 cost of mortgage/maintenance etc.

Whatever you come up with, make sure it's an official contract with your lawyer.

Why not a 4 or 6 plex instead of commercial real estate? You could rent all those out and probably live for free too.

[waltworks]

As anyone who has ever had a roommate knows, living with people you haven't lived with before is potentially problematic.

Adding a large amount of financial stress (and confusion - what happens if someone wants to sell their share but the other 2 can't afford to buy them out?) and you've got a recipe for disaster.

Do not do this.

-W