Newbie in Need of Advice - Co-borrow with Partner?

Question

Hi All,

First time poster and rookie in the real estate investing game. My friend and I are partnering up to start building a real estate portfolio in the Massachusetts area. Our strategy is to start out by buying several strong cash flowing multi family residential buildings (4 units or less) and then eventually take the cash flow from these properties and get into commercial apartment buildings (5+ units). We just had a multi property offer accepted on two properties (4 unit and a 3 unit) and now the question is should we both be co-borrowers on the loans or should we split them up and take out one loan a piece? The mortgage company we are working with said the Fannie and Freddie guidelines are that an individual can only have 6 mortgages at a time, meaning if we co-borrow on all of our properties we could only purchase 6 with conventional financing.

As for our individual financial situations, I have a bit higher income and credit score, but have a large amount of student loan debt (80K). He has no student loan debt.

I wanted to throw this situation out to the BP community to see what your thoughts are on the best strategy here?

Thanks!Brandon

Michaela G. · Answer

I would suggest to do it individually and not together.

Mixing business and private often doesn't work out so well, so, make sure that you each have your own roles defined in this partnership.

With friends you have a much more easy-going relationship than with a business partner. Your friend may feel like sleeping in, instead of going to the site. And since you're his friend, he expects you to be ok with it. Friends often expect you to be non-businesslike and get away with things, because you're friends. Things that you wouldn't accept from a business partner. And if you put your foot down, they'll get all offended 'man, what happened to you?'.

I've learned the hard way and will not mix business and friendship. For some it works, but for many it hasn't.  So, keep that in mind.

Michael Morton · Answer

I agree with having a good exit strategy when you enter a partnership.  Just make sure to clearly define the partnership.

That said, I've had wonderful partnerships with my friends so I'll be a bit more positive about that end.  If you have a very strong friendship - it can be an absolute blast to work closely with a good friend for many years.  My best friend is still my business partner although we live across the coast from each other.  I'm always looking for opportunities to continue working together.

At the same time, it's the struggles that allow you to grow as business partners and friends and if you keep that in sight, it's really fun.

Ann Bellamy · Answer

Partnerships are challenging at best.  Not only can you have all the issues that Michaela mentioned, but life happens.  Why if your friend gets married (or divorced, or inherits money, or gets hit by a bus, or comes down with a debilitating illness or any other major life event?) Or you do?   My suggestion would be to plan for an exit at the beginning of the partnership.  Lay out the method by which you would divide up the assets and the income.  By planning for the exit, you help insure that you define the roles in the partnership and what happens if one of you doesn't perform, either from lack of interest or ability or whatever.  Defining the end game helps insure that you are both clear on expectations.

Then, if things don't work out as planned, you have a plan for the plan not working.  I like the idea of buying individually, to facilitate this.  You can create partnership agreements for each property.  If the plan does work, then owning individually will ease the breakup.

If you buy each property in one person's name, you qualify for conventional residential financing.  But you have no liability protection other than insurance.

You have not taken liability into account in your question above.  I know any asset protection attorney would recommend something other than owning in your individual names.  You can own in entities without joint ownership, or can then easily change the ownership percentages if you wish.

If you want referrals to an asset protection attorney, I can give you two, if you want to PM me.

Douglas Snook · Answer

What kind of partnership agreement do you or will you have? Will it be 50/50? What about the down payment? is that going to be equally put up?

Also, the mortgage company may only allow the person who applied be on the deed so how would you own it as a partnership?

Might be better to try one as a partnership just to see how you get along in business.

Just some thoughts.

John Tower · Answer

Hi Brandon,Your post begs so many questions. 1) What type of partnership aggreement do you have.2.) What goals have you established mutually regarding profit.3.) Have you established a buy-sell aggreement and its funding? 4.) 5  units and above are commercial not residential financing this has different criteria and so the number of mortgages through conventional financing is probably different.  Perhaps someone here in the lending business can better answer that.I started with a partner buying 6 family buildings so I can relate to your situation pretty well. We ended up not co-borrowing but that doesn't mean that's the right direction for you. Best wishes on your endeavor.

Mark Nolan · Answer

@Brandon Franchitto

BP is full of useful resources such as forums and blogs. Welcome to the Bigger Pockets community-be sure to check out all the awesome BP blogs under “Learn.”

Newbie in Need of Advice - Co-borrow with Partner?

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