How to Invest in Real Estate with Friends
Investing in real estate with friends can be a fruitful journey. However, there are things that you should know to avoid getting into deep water, especially with a large, long-term investment. Here are some crucial REI tips.
Investments of any type can be daunting and stressful, and so often doing something with someone that you trust and get along with can make it easier. Real estate investment is no different. This is why many people will look into investing in real estate with friends. There are some things that are great to do with friends, and some things where friendships should be left separate. So, is it a good idea to invest in real estate with friends, and what is the best way to go about it?
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Considerations when investing with friends
One of the biggest obstacles when it comes with home ownership or any type of real estate investment is money. And it is no surprise that two or more people purchasing a house together will cut the initial costs. After all, a property that requires $40,000 down payment is a lot easier to meet when there are two people paying $20,000 each. But there are other considerations to think about when investing with friends.
The biggest consideration is definitely who you decide to invest with. Investments are usually long-term contracts, and so you need to choose very carefully with whom you invest with. Money and stress are a big cause of fallout between friends. And there is no denying that real estate investments are expensive and stressful. It is not always easy to simply terminate an investment agreement if you and your friends decide to part ways or change your mind about your investment. Wealth fit explain that investing with friends can be highly successful and beneficial as long as you make sure that you do not do it impulsively. It requires planning and a clear understanding of the risks and benefits.
Benefits of investing with friends
The main benefit of purchasing a property or investment with friends is that the more people that are involved and contributing money, the bigger your purchasing power will be. The more down payment you can offer means that you may be able to purchase a better house in a better location. And sharing the expenses means that you may be able to raise the value of any property easier through renovations or add-ons.
Another major benefit is that while investments are stressful, if you invest with the right people, you can share the workload and minimize the stress level. Two heads are better than one and having friends in the investment can mean that problems can be solved quicker and easier. You also get to share in the costs such as unexpected maintenance or fees. A large repair bill hurts a lot less if you are able to split it with your fellow investors.
Downsides of investing with friends
It is no secret that investing with other people whether they are your friends or not comes with extra challenges. The number one challenge or downside with investing with friends is mentioned by Pax Real Estate as being that it can put a serious strain on your friendship. You would be risking more than just the investment; you will be risking losing friends. Not much puts a bigger strain on a friendship than an investment gone bad. Another downside is that if there are issues with the mortgage, it will affect both of you. Even if the issues are not directly your fault. Suddenly you are held accountable for the other person in the investment.
Tips for investing with friends
Investments of any type with friends can be tricky to navigate. If not managed properly, it can end up being an expensive disaster. There is more at stake here than your friendship. So Bigger Pockets has some useful tips for when you decide to invest in real estate with friends. They will ensure that the risks are mitigated and help to make the investment more likely to be a success.
1. Have a legal written agreement
Everything that you agree on has to be written down and understood by everyone. That way there will be no confusion, and nothing can be blamed on lack of communication or misunderstanding. Have it checked over by an expert or a lawyer to again avoid any disputes.
2. Be careful with who you partner with
Just because you are friends does not mean that you are automatically going to work well together. You need to ensure that everyone that is investing together has the same wants and expectations. If you have a bad feeling or are having issues before you even start properly, then this could be a sign that it is not a good idea.
3. Have a single point of contact – one person who is the front of the investment.
Having multiple points of contact is the quickest way for communication to break. This way you know whose contact details to provide, and this one person can track all of the communication. This does not mean that they are a leader or in charge. Just knowing who manages the information can make things run a lot smoother.
There is no set method for investing with friends. Every group of friends is different just as every investment is different. The number one thing to take away from this is that if you do decide to invest with friends, ensure that there is understanding and mutual respect. Investments are hard enough on their own without mixing in different relationships. Of course, if care is taken then there is definitely a high chance of success. There is no reason why you cannot have a long-term investment with people you are friends with.
Whether the decision to invest in real estate with friends is a good one depends on many factors. Investment properties involve time and money and while it may seem great to share this with someone you are friends with, it can also bring about additional challenges. There is no reason why a group investment cannot be a success, it just may take a little bit of extra care and management.
Charles is the founder of infoSpike.com. He enjoys real estate investing, marketing, and personal finance. Read more about Charles here.