My friends and I are considering purchasing an apartment / house for rental income. Have any of you ever gone into business with friends or purchased real estate for such purposes?
Appoint one person leader to avoid infighting.
and make sure you don’t choose the survivorship ownership transfer option. So if you somehow died suspiciously, the ownership won’t simply transfer to your living biz partners.
Don’t go into business with a friend unless you are okay with losing them as a friend.
I kind of feel that one person should be the management partner and the other should be a capital partner. Otherwise, you might end up fighting over little decisions that don’t matter that much, since it is only one apartment at this point.
All the formal structure and legal documents in the world don’t stop fighting, they just make the lawsuit easier for the judge to decide.
+1. My only recommendation to you is to not do it.
probably wouldn’t do it, and if you do, agree to pay each other hourly on market rates…
so if one guy is doing all the work, he gets paid. That gets expensed, and then everybody splits the net income in the agreed upon equity stakes.
also, deciding what happens when a partner dies etc. is very important.
But again, I think the most important part is to have a system in place where people who work more get paid more.
- another 1
+1
You have to be ready to sacrifice him. Hope he doesn’t know too much about you that he can hold against you.
My advice is to take the money you are thinking of investing in the property and put it into a high quality REIT instead. You still get rental income but through a diversified and professionally managed portfolio of properties with no illiquidity issues. And most of all, you won’t lose your friends over it.
If you really want to go down this road, then you must agree an exit strategy on day one. When are you going to sell this thing? In a few years someone is going to want to release their equity. At what price is their stake to be sold? Would you have to sell the entire property? What if it is in negtive equity at that point? What happens if one of your friends loses their job and can no longer keep up their their part of the mortgage or maintenance expense? The chances of this ending badly are high. I just don’t see the attraction.
All solid advice - there would be about 5 of us so that probably makes all the transactions even more difficult. The appeal to me, over a REIT, is some tax advantages along with a sense that I am a land owner (going back to my a wealth of nations notion).
True there are tax advantages, smaller rental properties may often generate tax losses due to depreciation. But what kind of property is this that it takes 5 people’s equity/knowledge to buy in? Is it that sizable of a property? No offense but this sounds like a cluster fck waiting to happen and not worth it unless we’re talking big money. IMO… 3 or 4 would have to be non-operating owners and then the operators get an agreed amount of compensation for dealing with this. So that way you at least have a plan of how it will end badly and its not a complete free for all.
It would be a multi-family unit in a big city so it wouldn’t be affordable with 1-2 people (at least not with our incomes). Essentially we would have 4 investors and one person acting as the management company. Furthermore, 1-2 of the investors may live in the unit.
Yah - def a cluster fck and just in the nascent, brain storming stage. Although my career is focused on the market, i prefer to invest in tangible items like real estate.
make sure you lay out everything up front (before you close the acquisition) in the partnership and management agreements so everyone knows what to expect- financing, hold period, leasing decision authority, etc. Set the business plan annually and give the manager authority to act unilaterally within the business plan. Try to figure out your Cap Ex during the hold period up front and make sure all the partners have the funds to commit those dollars up front (maybe contribute the entire budget into an account at closing). If there are operating shortfalls or unforseen Cap Ex, make sure your partnership agreement has mechanisms for how those funds are sourced. Usually the existing partners have the option of contributing at their % interest, and if some don’t have the money then other partners can either make them a loan or put in equity and squeeze down the non-contributor. also decide on reserves to take out of cash flow up front.
Seems the more is explictly spelled out, the better.
Whats the angle of the live-in investors? Won’t there be a conflict of interest between them and the rest of the co-investors looking for high rental yield. This structure among friends looks messy…
no angle per se - they would be contributing market rates (or probably a bit under) as a mode to build equity. We’ve flipped one house before this (small investment but large % ROI).
I do see all potential conflicts and more than likely this idea will not come to fruition. Im just trying to explore different investment ideas - my compliance at my current job is so strict its not even worth trading. LT investing in stocks kind of bores me at the moment and my 401k / roth are maxed so i figured i could take a shot with some free capital beyond the market.
I do appreciate all the feed back
I’d say, if it does happen, try to focus on renting to super hot college chicks. If possible, make being single a prerequisite.
Of course, it would be in a college town too so imagine the possibilities.