Any reason NOT to invest with a friend for first-time investment purchase of STR?

Question

It has gotten increasingly hard to find the kind of property I want on my budget. But my friend is interested in investing and she has about the same amount to put down on a property.  Together, we can double what we can afford on our own and get something people would actually want to rent.

Neither of us has experience with rental property yet.

Can someone convince me that it is a bad idea for a first-time investors to partner up? Is it better to buy a boring, "uninteresting" property that I can afford and get my feet wet first? Or, is it worth the risk of partnering with another newbie to purchase an amazing mountain property with stunning views?

Joe Villeneuve · Answer

The list of reasons not to do this is long, but I'll summarize it by posing a question to you:  How good a friend is this friend, and how long do you want to keep this person as a friend?

Friendship is NOT a reason to partner.  It could be the worst reason,...OK, maybe being a relative is worse.

Leo R. · Answer

@April L. I can think of a BUNCH of reasons to NOT partner.

Partnerships make RE investing exponentially more complex. With a partnership, you have a whole array of moving pieces that you don't have when you're flying solo (e.g.; cost responsibilities, profit sharing, decision making authorities, work responsibilities, contracts & corporate agreements, etc., etc.) Every single one of these moving pieces will cause more work for you, and every single one is a potential point of failure in your venture. Although partnerships can be useful for some investors, for inexperienced investors, they often cause more problems than they solve. Often, the only party benefitting from a partnership is the attorney raking in the legal fees to broker and create the agreements, contracts, etc.

Moreover, inexperienced investors often want a "partner" because they're (rightfully) intimidated by RE investing, and--because misery loves company--they feel more comfortable with a partner. Granted, it is more comfortable to take on a challenge with someone else at your side, but this instinct can lead an inexperienced investor to form an ill-advised partnership with another inexperienced investor (who is also intimidated, and who also wants the "support" or a partner). When that happens, now you have two people who have no clue what they're doing, tied at the hip--the blind leading the blind. As a real estate newbie, the only type of partnership that makes much sense is a partnership with someone who has all the real estate experience you currently lack (but need)--and this brings up a second question:

If you're 100% sure you need and want a partner, you'll need to answer this question: "What value am I bringing to the partnership?"  ...if you're not 100% clear on this, then a partnership will never materialize, and if it does materialize, it will likely fail. The value you bring might be in the form of capital, experience, access to deals, the ability to put in a lot of work, etc., etc., but you have to bring SOMETHING to the table.  ...regardless of what type of value you bring, it has to be sufficiently valuable for the partner to benefit (and if the partner is a highly experienced and successful RE investor, they ain't gonna come cheap).

Now, does this mean you should never partner with anyone, or you should give up on the idea of a partnership? No. It simply means that, if you want a partnership, you'll have to figure out answers to these types of questions, and you'll want to thoroughly educate yourself on business partnerships before forming one.

Good luck out there!

Jared Hottle · Answer

Partnering up on a rental property can be a good idea, but also comes with added risks and responsibilities. Here are some factors to consider:

• Shared decision making: both parties must be on the same page regarding the property search, financing, management and exit strategy.
• Increased risk: two inexperienced investors may make mistakes that can impact their finances and the success of the investment.
• Increased responsibilities: both parties are responsible for the success of the investment and must divide tasks such as property management and maintenance.
• Possible differences in long-term goals: it's important to ensure that both parties have similar goals and expectations for the investment.

In conclusion, buying a simple and affordable property may be a safer option for a first-time investor, but partnering with another newbie to purchase a more expensive and attractive property can also be worth the risk if both parties are well-prepared and have aligned expectations.

Nathan Harden · Answer

I'll keep it simple. Don't do it.

Since it's both of your first times, it is not a good idea. Just because she is your friend, doesn't mean she will be a good partner. If you're finding your first deal, I'm assuming it will be a SF or small MF property. Your first deal is not going to be a huge home run from day one probably so that means that you are not going to cash flow a ton, if you only have one door and are splitting the profits in half, is the deal worth possibly losing a friend over? Unless this first deal is just too good to pass up, I would not partner with someone for both your first times unless for some reason you both are collecting like $500 in cash flow.

Lawrence Potts · Answer

Depends on the relationship! If both of you are okay with losing money on this without destroying yourselves financial or your relationship, then that’s fine. I’d highly encourage you two to spend some time and money with an attorney and have them write out an operating agreement between you two in case something happens. They’ll go over any and all hypothetical situations and put in writing what you two agree to do in those situations so that expectations are set ahead of time. It is well worth the time and money. No matter how good a deal, play it safe with relationships and respect the other person’s money.

Hope that helps!

April L. · Answer

Thank you for your replies. I'm becoming more convinced that I need to go it alone.

Travis Timmons · Answer

Do it alone. It's harder now but easier and more profitable in the long run.

Nicholas L. · Answer

@April L.

here's an alternate plan.

you both save up enough to house hack separately.

you both house hack.

you form a househacking mastermind.

Drew Sygit · Answer

@April L. what happens in a nightmare scenario of one of you dying?

How the the surviving partner deal with the other's family?

Partnerships are often only as good as the partnership agreement.

Any reason NOT to invest with a friend for first-time investment purchase of STR?

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