Investing with friends?

Question

Hello Bp, I’m inquiring some helpful knowledge from you knowledgeable folks.I am 22 and live in Woonsocket Rhode Island, I have been reading different topics on bp, watching video,reading articles and listening to podcasts. I expressed my interest in Real estate investing to my friends who are around my age and well long story short we are all interested in investing in rental properties in our area of Rhode Island (Woonsocket,Cumberland,Lincoln,Smithfield etc.)

I personally don’t have the greatest credit score but my friends do have better scores we want to invest in rental properties and split everything evenly (there are 4 of us total)Id like to know what you may think is the best course of action for us 4? Anyone in the Rhode Island area can shade some light? We like to move on a 4plex before the end of 2020

Anthony Thompson · Answer

@Emmanuel Cedeno welcome to Bigger Pockets!

My general advice with 4 potential partners would be to be careful and take it slow, to make sure that you know who you'd be getting into business with.

A partnership is like a marriage, and I think the old saying applies, "it's much easier to get into than get out of".

I have several real estate partnerships and in my experience, the more people, the more potential issues. It's not to say bigger partnerships can't work, but they require a lot more constant communication and I think have a lot more potential for issues.

I do strongly recommend consulting an attorney to have them draw up an operating agreement for the LLC or partnership, which spells out each person's rights and responsibilities and - very importantly - how someone could leave, or be made to leave by the other people, the business.

You'll need to consider questions such as, what if one person dies or becomes disabled? What if they lose their employment or decide to move out of state? What if they decide they don't like real estate after all and want out? What if they decide that, and instead of saying they want out, just stop doing anything, leaving the other people to pick up the slack?

These questions aren't meant to scare you, just to give you some talking points for the attorney you choose who would draft the operating agreement.

Otherwise, generally speaking, there are fewer 4-units out there than 3-units, but you'll probably get a slightly better deal on a per-unit basis, so I think it's great that you've narrowed your focus so much! Just make sure any 4-unit you get is already fire coded or, if not, that you are conservative in estimating how much it will cost to bring it up to code (i.e., round up :)

Ronan Donnelly · Answer

Hi @Emmanuel Cedeno, it might be helpful to take a step back to look at why you need the partnership in the first place. I would suggest writing down your constraints e.g. time, experience, skillset, money, access to deals, etc.). Once you have that list write down several ideas on how you can best remove that constraint e.g. for money you could save up, wholesale, use hard money etc.

What you will see is that partnerships work best when there is a clear need and until you have established that clear need you are potentially just making your life more complicated. It's fund to do things with friends but it isn't always the best approach from a business perspective. If you do decide to go ahead make sure that you have got formal legal docs that define the partnership. Good luck!

Jacob Sampson · Answer

I agree with @Anthony Thompson.  Good long-term partnerships are rare when only two people are involved.  Further, a couple years into this you guys will realize that to make any difference in your lives you will have to purchase a TON of real estate because you are splitting it 4 ways.  Lastly, I think you need to define why each partner is necessary, what do they bring that you can't get elsewhere?  Everyone being interested in real estate is not sufficient to partner up with them.

Anthony Wick · Answer

@Emmanuel Cedeno  I formed an LLC with two friends to purchase multifamily buy and hold properties. We hired an attorney to write up the LLC, to include a Buy/Sell Agreement. Leave nothing to chance. Put it all in writing, with an Attorney that has done this before. One of you could be the Managing Partner, but make sure it is spelled out how decisions are made. With 4 partners, I recommend a majority of votes for decisions, and also a business plan for 1, 5, 10 years, to include when and how profits/losses will be distributed.

We each put in a certain amount of seed money (deposited into the LLC bank account). All loans are in the name of the LLC, but the three of us signed personal guarantees with the bank to cover the loans should the LLC not be able to.

Brandon Ingegneri · Answer

If you do go into business with several friends, at the very least meet with an attorney and create an operating agreement.  Do this early on, because if things should go sideways, if one partner doesn't hold up their end of the deal, or simply loses interest, you want to to have a legal document that everyone agreed on when everyone was on the same page before any number of circumstances changed.

Odie Ayaga · Answer

Many great ideas above. Figure out what each of you want to get out of this partnership. Maybe 2 just want to invest and not be hands on and can for an investment LLC of sorts that lends to the other 2. Maybe one wants to actually do repairs and is qualified. With 4 people you should absolutely hammer those down and try to minimize the notion of splitting 4 ways equally and figure out the most logically split based on interest and input.

Investing with friends?

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