House Hack with a twist?

Question

Hi! I have a few questions regarding a HOUSE HACK idea... Sorry this might be a little long but i want to give as much detail as i can to get better feedback. Thanks!

The property of interest is in LA (near USC). It is a 4plex with two 2/1 and two 1/1. I currently live within 30 mins of the area and am pretty familiar with the properties around it as I've been interested in that area for a while. I have been analyzing this specific property for about a month now and the numbers look good but I've just been hesitant to jump into it myself because its slightly over my comfort zone in regards to price (i know i may be being too conservative but I'm trying my best to make my first LA property a good experience). My plan was to do a traditional house hack... live in the 1/1 unit and rent out the other 3 units.

Anyways, in comes my friend. He's been looking for a SFR to buy as a primary for a few months now. He isn't on this site and doesn't know much about investing but recently I talked to him about the idea of a duplex instead of a single family and he seemed intrigued. Long story short, an idea popped into my head this morning as I was driving into work listening to a BP podcast. Why not go into the 4plex together?!

I was thinking my friend and I can go into it together. Split the DP and basically treat the 4 plex as 2 connected duplexes. I'd be responsible for one 2/1 and one 1/1 and he's be responsible for the other half. When i say responsible i mean regards to management. So he can choose to live in either one and rent the other. We'd also split Mortgage, Ins, and Taxes and vacancy (resv) down the middle. Other expenses such maint, and capex would go into a pot and used as needed. Each unit is separately metered.

Does anyone have any ideas, advice or experience on this? If this sounds like a dumb/bad idea, please feel free to say so but please provide a reason. Any advice would be greatly appreciated! Also, what types of exit strategies would work well in this situation? I've been reading on BP about partnerships and I'm wondering if anyone has done anything similar to this and the type of exits you had? Thank you again!

Christian Carson · Answer

If you seek conventional residential financing, the bank will require your personal name on title. As far as I recall, if you both are occupants, you can appear on title together. This will create difficulties in the event of a bad breakup, as one of you will be able to block the sale requiring a partition action in court.

One idea that popped into my mind is to divide the property into condominiums. I have seen this done often in old duplexes in Cleveland, although of course I am not familiar with the requirements or cost of this in California. Here, one can effect the division at closing (of course, buyer pays for paperwork)  or afterward. This has an added advantage of the two of you being able to dispose of your interests independently, and probably a higher combined resale value.

Will Barnard · Answer

Assuming you have an iron clad operating agreement between you both and both are on title at COE (close of escrow), I think it is an excellent idea to get into the rental market, secure a property to live in and do so with help (your friend) and vice versa.

I will only reiterate that you must have a solid in writing agreement as to who gets what, who is responsible for what, etc. lastly, make sure you get a good price!!!! It is ONLy a good deal if the numbers work not just because you may have found a partner.

Kalo (Kyle) Atanasoff · Answer

Make sure you know your friend not only as "fun" friend but also as a "business" friend....then make a good operating agreement (advise with lawyer) and you should be ok.

You are both in the same situation and the investment is relatively low so it should not be much of an issue.

If it was a bigger deal than much higher risk and much more "IFs"

Danny Luu · Answer

Thank you all for your comments. Looks like the consensus is... DON'T do this? I understand partnering with a friend/family can become a sticky situation quickly, but I'm trying to find avenues that can make it work, as i feel that this could be a good opportunity. But like i said, i won't jump into anything unless I'm prepared and all the information you guys are giving me are great. Thanks.

Please continue the input if you have any ideas that could help. I really appreciate it. Thanks!

Bryan O. · Answer

I don't think it is a very good idea. As everyone has mentioned, you will need to have a very specific and detailed operating agreement. You also need to be very clear on direction with both of you prior to trying to document it.

The big problem I see is trying to treat it as 2 separate units. You are saying you want both of you to do the same job (with your different styles). Will one unit in your place have a different lease than the other? Will that manager accept late rent with no penalty? Will he screen to your standards? What about maintenance?

If you are making 2 different businesses, you might as well make 2 different businesses. Otherwise, someone needs to be the manager, and someone else needs to carry their weight in a different area.

Danny Luu · Answer

My understanding is on conventional financing, both of our names will appear on title. I understand that agreements must be very clear and on paper prior to jumping into a deal together. This is very important to me and I believe this is is important no matter who you're doing a deal with. On that note, are there things specifically that i SHOULD address? This would be my first "partnership" type deal. Of course I'm doing more research myself but those that have had experience in this, could you provide some direction and advice? Thank you!

Gavin Welch · Answer

Partnerships with friends nearly always gets sticky.  You need a really good operating agreement in place.  I'd seriously consider going it alone and keeping the friend.

House Hack with a twist?

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