Partnering On a First Deal with a Friend

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Partnering On a First Deal with a Friend

Connor Ong
New to Real Estate · Phoenix, AZ · Member since 2020 · 9 posts · 2 votes

Hi BP! I'm a newbie to the RE world, but have been listening to Real Estate Rookie and the BP Real Estate Podcasts religiously over the past 4 months. My best friend from grad school has been listening to both podcasts as well, and brought up the idea of partnering on a house-hack that I would live in (as him and his GF bought a townhome earlier this year). We are both located in the Phoenix area. Right now we're starting to build our "team," as he has a RE lawyer, I have a banker, and we both know multiple RE agents who do RE Investments.

Our goals:

We both agree on looking for a turn-key 3bed/2bath (minimum) single family home or townhome/condo at least 1500sqft. Gameplan would be to do a conventional loan with 5% down (2.5% each) for the house. Our target price for a house is We both want to build up equity, but I've been more keen about getting some cashflow that I can put towards my student loans. Long term plan would be to continue to rent the house, and eventually take out a HELOC to get another property either individually or together again depending on how this first one goes.

We've been spit-balling ideas and just getting the ball rolling, but we're not too sure on how to work out the logistics of the partnership. Some ideas we've had include: A) Splitting the equity and cashflow evenly; B) He gets more equity, and I take the cashflow.

Do you all have experience in doing deals with friends? How have they gone?
What other types of ways would you split our partnership?
Any other suggestions or tips would be greatly appreciated! Thanks in advance!

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Forrest Faulconer
Real Estate Agent · Oklahoma City, OK · Member since 2020 · 471 posts · 462 votes
5y

Hi @Connor Ong, no offense to your friend, but if you are looking at only needing 5% down (3.5% down if you do an FHA), then why not just save up a little more and own the whole thing outright? I don't know your financial situation but just partner up when you need to, right?

Forrest Faulconer

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  • Forrest Faulconer
    Real Estate Agent · Oklahoma City, OK · Member since 2020 · 471 posts · 462 votes
    5y

    Hi @Connor Ong, no offense to your friend, but if you are looking at only needing 5% down (3.5% down if you do an FHA), then why not just save up a little more and own the whole thing outright? I don't know your financial situation but just partner up when you need to, right?

    Forrest Faulconer

    2Reply
  • Jason Hirko
    Lender · San Antonio, TX · Member since 2016 · 1k+ posts · 1k+ votes
    5y

    @Connor Ong What interest rates are you student loans? I would expect them to be pretty low rates, so taking out a low rate mortgage to pay down low rate student loans doesn't make a ton of sense. If you really want to get into investing, use the cash flow to buy more properties. 

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  • Connor Ong
    OP
    New to Real Estate · Phoenix, AZ · Member since 2020 · 9 posts · 2 votes
    5y

    Hi @Forrest Faulconer! Thanks for the reply!

    Sorry for not explaining more in the original post about both of our financial outlooks. Right now we both have a considerable amount of student debt (I have more than him), and we are both finishing up our first year working out of grad school. So because of that we don't have a ton of money saved up to go in on a property--him because he bought a place with his girlfriend this year, and me because I just recently paid off my car. 

    @Jason Hirko I have differing rates from college and grad school from a range of 3.76% - 7.6% (but a majority of them are around 6% or higher). Both him and I work full time W2 jobs that are stable as well. 

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  • Christopher Hill
    Investor · Palmdale, CA · Member since 2020 · 46 posts · 29 votes
    5y

    Hey Connor, congrats on getting started! You may have explained it, but just to piggyback off what Forrest said, if you already have or plan on saving 2.5% to split the down payment, I would push to save that extra 1% to make 3.5% and get an FHA loan and own the property yourself with no partner and rent out the 2 extra rooms. Not sure how difficult it would be to get an FHA in your financial situation but I'd definitely explore that option.

    Best of luck to you guys!

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  • Antonio CuccinielloPro Member
    Investor · Austin, TX · Member since 2016 · 531 posts · 310 votes
    5y

    @Connor Ong I have done my first 3 deals with family members (my dad and brother). Its the best way to get started if you don't have the cash to be honest. 

    I would say it comes down to finding the win-win for both of you.

    It seems like you care about cash flow and your friend cares about equity.

    Then you can structure it that way. 

    The easiest route would be a 50/50 split on equity and cash flow. 

    The key is to make sure whatever you decide you get in writing in your operating agreement.

    732-402-6988
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  • Jason Hirko
    Lender · San Antonio, TX · Member since 2016 · 1k+ posts · 1k+ votes
    5y

    @Connor Ong Even though your student loans will be 2-3% higher than the mortgage payment, that is not all to consider. Those loans are guaranteed rates that are locked in and basically unsecured (other than your Guaranty). Consider using that cashflow to buy more income producing properties to increase your assets

    1Reply
  • Doug Pintarch
    Rental Property Investor · Harrisburg, PA · Member since 2018 · 369 posts · 406 votes
    5y

    The key is to make sure whatever you decide you get in writing in your operating agreement.

    Antonio Cucciniello

    This, first and foremost. you and your friend need to sit down and have very frank discussions on what each of you make now and have saved now, including all emergency reserves ("Couch cushion money").   Then get a partnership agreement in writing.  These things always start off great and sometimes friends end up not being friends over big things like splitting equity and small things like what color should the sofa be. True good friends and partners are hard as hell to find.  Houses are everywhere.

    1Reply
  • Connor Ong
    OP
    New to Real Estate · Phoenix, AZ · Member since 2020 · 9 posts · 2 votes
    5y

    @Antonio Cucciniello thanks for the feedback! I'm glad to hear that it definitely can be done and that you've done it multiple times with family members! We definitely plan on getting it in writing and having defined roles/tasks once we get to that stage! 

    @Doug Pintarch that is 100% true. We will definitely be sitting down and going over each other's finances to make sure that we're comfortable going in with the other based off of how each other's finances look. And your quote there couldn't ring more true-- "True good friends and partners are hard as hell to find. Houses are everywhere." 

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