Friends pooling money together to purchase property (Thoughts?)

[David I.]

Hello:

I have some friends that want to pool some money together to purchase a rental property.

I am leaning against it because a) they are friends from work, not business partners and I do not want to mix the 2. 

b), they only have $5k - $10k to invest each. 

There are other reasons, but you get the picture.

It does bring up some interesting questions that I am sure have been answered before, but I'll ask anyway.

1) If they only have $5 - 10K to invest, should they pool their money together or where should they put it??

2) What would be a realistic return on that for them? I'm sure it depends on the property, etc....

3) Does anyone have success stories and nightmares of pooling money together buying a property?

I want to be able to intelligently and nicely tell them NO.... :)

Thanks,

David

[Linda Weygant]

I have pooled my money and had nothing but success so far.

That doesn't mean every property has been successful (I have one property that's a bit of a dog, to be honest), but the partnerships so far are all successful.  Here's how I made it work:

1. Have a legal, written Operating Agreement for your LLC. Make sure everybody has had enough time to review it and understand it before agreeing to it. If anybody has any issues with any provision, see what can be done to rewrite the agreement or allay their fears.

2.  Recognize that not everybody has the same wants/needs.  If you can't write the Operating Agreement so that it works for everybody, then don't be afraid to cut out folks who have vastly different needs.

3.  Understand how the voting works.  Does everybody vote their percentage of ownership or is it one person/one vote.  

4.  Whatever you're doing (landlording, flipping, whatever) there should be ONE person who is the front of the project or property.  Having a tenant or contractors with multiple points of contact makes communication break down fast.  Make sure the front person is a good communicator with the rest of the group.  Too many cooks really can spoil the broth.

5.  If/when you are the front person for a property or project, and you make a mistake - own it, communicate it, work to fix it.  Don't try to hide stuff from your partners.  Trust is key in these relationships.

6.  Understand how the taxation works and get professionals involved for all areas where nobody in your group has expertise whether that's law, taxes, etc.  If you have a CPA or a lawyer in the group, and they choose to be on the hook for those services, make sure they know what's expected.

I think that's about it.  I'm invested with friends, my romantic partner, family and some folks who are one step short of being a stranger.  All in different configurations.  I would not shy away from investing with co-workers, I would just make sure that everything is spelled out and communicated.  Also, make sure you invest with people who can afford to lose it all.  Investing, even in real estate, can be a calculated gamble.  If you're investing with people who are gambling with their baby's next meal, things can go south much quicker than if you're investing with people who have disposable assets and income. 

Good luck!