Pooling Money With Trusted Friends to Buy Real Estate?

Question

Hi all,

I'm new to the real estate space and currently live in Boston, MA. Those familiar with the area probably already know that it's not the best spot for cash flow returns, but carries pretty significant opportunity for appreciation. The barrier to entry I'm currently facing is buying a multifamily in Boston is not cheap.

I have some money saved roughly ~$70k to invest into real estate, but even that isn't enough really, for the greater Boston area, without taking on a considerable project that I'm not sure I'd be ready for as my first purchase.

I'm curious if anyone has experience pooling money with 1 or 2 trusted friends to buy a multifamily property. What are some of the pro's/con's of something like this? Anything to watch for?

The way I see it, if these friends are viable and trusted business partners it could make Real Estate in Boston more affordable with shared responsibilities to reduce the workload of managing the property. However, if the home has little cash flow return would it really be a good idea to share an asset with friends with no short term returns?

I'm still super new to the space, so I'd love to hear your thoughts!

Katlynn Teague · Answer

Mixing business and friendships can end a lot of friendships and businesses.

Before moving forward, make sure you and your two friends have a signed agreement. Purchase properties in your group LLC and have your titles written out in your operating agreement.

If you guys cannot seem to make sense holding a property that produces little to no cash flow, try doing some flips!

James Likis · Answer

As mentioned, an operating agreement is key. I’d also recommend spelling out explicitly the timeline or benchmark the team wants to hit before deciding if or how to exit the investment. Ex: once the value of the property increases by $200k according to X estimate or set of comps, we will sell the property. Your agreement should spell out how profits are split, but adding a timeline or benchmark can help align everyone further and set expectations.

Alan F. · Answer

Friends are great, not always for business though. Without well drafted agreements when things go wrong (which they will) you wont be friends anymore. I'd suggest you understand the differences between lending and equity positions and follow the tried and true methods of partnerships, joint ventures etc. Knowledge is power and keeps friends as friends.

Basit Siddiqi · Answer

A successful partnership has the following three components - Experience, Money, Time.Will the other one or two partners bring experience?If everyone has no experience, it is the blind leading the blind and likely a disaster waiting to happen.Either take the $70,000 and invest in a different market or save up more money if you want to invest in Boston.

Alan Asriants · Answer

Make sure you and your friends are on the same page about everything. Its not 100% possible, but try to make sure you have many important factors covered - repairs, maintenance, management, etc.

You'll quickly lose close friends over some dumb argument

I talked about this to someone recently and mentioned something along the line of this:

I have a best friend who also invests in RE, but I couldn't work with them. They do everything bare bones, buy cheapest supplies, and cut corners. but hey, it works for them. I'm the kind of the guy to maybe do "overkill". I have my contractors out there, and if I see something that might need to be repaired soon, I just get it done, while others will wait until an issue comes up.

There are 3 different kinds of people in this world:

They all walk into a property:

Person 1: "wow this is perfect for rent, there's nothing here you have to do!"

Person 2: "This place looks ok, maybe paint some walls, change a few fixtures and take care of the electric issue, and this place is great"

Person 3: "Wow, this is a full gut..."

Figure out who you are and who your buddies are, and as someone pointed out, see if splitting $100-200/m is really worth it 3 ways. $70k down should be enough for a starter duplex with 5% in most area. Good luck!

Dennis Powers · Answer

Get agreements in place, everyone can’t say it enough. Pooling money might be your best bet but probably better off outside of Boston for the first deal. Get something that cash flows, you know u can get 4.5% return on your cash sitting on your couch so u gotta do better. Good luck, its a lot of fun when it gets going!

Clara Arroyave · Answer

Besides the already stated partnership and operating agreements, I've learned that when you build something with friends, the hardest part is not to agree but to disagree, meaning how the conflicts will be solved in difficult times. If that is written from the beginning you will be ahead of more than 50% of the other partners and friends doing business together (speaking from experience).

Decide also when and how to sell and what happens if one of you guys wants to walk out but the others do not.

You can try and go for a Multifamily in Worcester, those go for the 600"ish range. Given the new low down payment for Multis starting at 5%, you might be able to get one. I would advise on "house hacking" or rental by the room to increase revenues and get going quickly, so focus on location nearby one of the hospitals/colleges in the area so you can maximize your investment and minimize risk. Let me know if you have more questions on that particular strategy. Happy to drill down on it anytime.

Lien Vuong · Answer

Welcome to BP - this is a well explored topic here and understandable in a HCOL area as Boston. If you've identified some friends that you feel would be good partners in this venture its fine to do but I would ask myself if apart from their financial contribution in this investment are they able to add any other values or skills into the deal? Contracting experience for example or real estate leasing, etc. It would also be important be able to understand what the collective goals are and if they are going to be aligned in future investments. Going from investment to investment with different partners is going to be a challenge both in achieving all expectations and dealing with multiple people.

Tim Ryan · Answer

Hey Griffin,

I live in LA so I get it about the lack of cash flow. That's why I don't invest here with rentals. What I learned long ago is that real estate investments can offer the following: positive cash flow, appreciation, and tax benefits.  And I must have ALL of those.  Buying just for appreciation for me is too risky.  So, I'd say gather those same friends and invest where you can get all of those, and you can. Whether is a drive, or a flight, doesn't matter. Here's my motto: Live Where Ever You Want to Live, Invest Only Where It Makes Sense.

One more thing:  of the group, including you, who has the experience in real estate investing. Or is this the blind leading the blind, but together with money.  Money is not enough, get someone experienced on that team for sure! Maybe that team member doesn't put any money in but brings the experience. That'll be the smartest move.

Griffin Sisk · Answer

Thank you all for your responses! This is all really helpful!

Pooling Money With Trusted Friends to Buy Real Estate?

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