Should I invest in my first multi family property with a friend?

Question

Hello,

I recently graduated college and I am interested in investing in a multifamily property. All properties in the markets I am looking at are very expensive, and I am considering house-hacking a property with a friend and living in it together. He has been one of my best friends for a long time and I have no doubt we will both carry our fair share of the weight of the work. Has anyone done this before? If so, is there anything you wish you were told ahead of time? Are there any implications when financing your second property? Any input is highly appreciated. Thank you!

Patricia Steiner · Answer

Congrats on becoming a college graduate!  Major accomplishment.  As far as investing with a friend, I know a lot of great relationships that crashed and burned as a result of having gone into business together.  Having shared that, my extended family acquired its 'empire' (as I like to refer to it) by forming partnerships with friends and family; it is an alliance that has been maintained and valued for decades.  Call it 'winning with friends.'  The difference between the two outcomes comes down to just a few factors:

1.  Roles. You can't both be 'in charge' - nor can/should you both have the same focus and function.  By defining who is responsible for what, staying accountable for that function, and staying in one's lane is critical to valuing the contribution of each partner.  And, you probably have heard of 'the silent partner'...it's amazing how audible those silent folks can be - downright obnoxiously so.  I have come to believe that unless you want someone just to sit as judge and jury, it's best to define and set specific roles.

2.  Monetary Contribution.  Having skin in the game makes the game real - and equal contribution makes for good partners.  If you comp someone or one contributes more than the other, it sets a hierarchy whether intended or not.

3.  Formal Meetings.  You may speak every day, you may see each other every day but it's not the same as having a formal meeting with defined objectives and devoting the time to the management of the investment/business - and nothing more.

Please know that despite how investing is pitched often times on BP and other forums - real estate is a tough and complex business.  The worst thing you can do is leap in before you really know it.  I encourage you to build your resource network first (an investor focused/knowledgeable realtor, contractors/trades, lenders, attorney/CPA) and have a business plan.  Again, it's a business - that just happens to involve an investment in real estate as well.

Hope this helps.  And, congrats again.

Best.

Rick Albert · Answer

I have a fourplex with my brother in law.

We set clear expectations. We discussed how we run the business, who is responsible for what, and what our long term goals are.

What we also did was even though we are 50/50 financial partners, one of us is 51% for decision making. I was fine with him being in that position because he has more landlord experience than I do, and is conservative like myself.

Where I have seen things go south is when one person ends up doing more work than the other and when one person does work the same way. For example, one person was in charge of maintenance and was slow to respond to tenants, was very cheap in the repairs and process, etc. Needless to say after they split the business, it took years before they would speak again.

Michael Vazza · Answer

Kyle, this isn't unusual but at the end of the day this is a financial/business decision. I would make sure you are both on the same page with your goals from an investment standpoint, as well as understanding where each other are at financially. Down the road there could be conflict if these aren't in sync. What happens if one of you has a major life event (gets married, has kids, job loss, moves out of state, etc.) and the circumstances change?

I would write-up a partnership agreement just to formalize everything.

Connor Morrow · Answer

Hey! I’m also an aspiring investor in the Boston area!   I haven’t bought any property yet, but I feel like buying with friends would require communication above all.

Romney Salanoa · Answer

Hey Kyle,

Even if you full heartedly trust your friend I would still make sure you sign on an agreement, for extra per caution and just so everyone knows specifically what they are responsible for. There are plenty of times where I've been in a contract based on trust where it would fall apart because there was no exact outline of what we were responsible for and nothing holding them to it.

Hope this helps,

Romney

Randall Alan · Answer

@Kyle Marsh

My first suggestion is to understand what your exit strategy will be. This really goes for any rental / property you own, but also think of it in terms of having a partner in your business.  There will likely come a time where one of you will want to exit the property. That doesn’t always coincide with when the other will want to exit the property.  So you need to think that through and agree advance how that will be handled.

As you run your numbers, realize that the property taxes that you look up online are based on the purchase price that your seller paid for the property. If you are now paying 2 to 3 times more for the property than your seller bought it for years and years ago, your property taxes will reset to a much higher rate than he is paying.  This could mean hundreds of more dollars per month in  property taxes, just depending on what the numbers were.

If you are brand new, it is sometimes difficult to know what a good deal looks like. You may just start running numbers and look at the market and think that where it is at is what the cost should be. That would be a mistake in today’s market, as real estate prices are really high, and interest rates are also historically high compared to the past 10+ years.

Investment properties really aren’t cash flowing very well with the relatively high prices and interest rates. So when you look at your numbers you are likely seeing what everyone else is seeing.  My suggestion to you would be to wait until rates settle back down and property start cash flowing better before jumping into the market. While everyone is always very excited when they first start on this journey, realize that it is usually a slow journey to your destination.  In times like we are in now, sometimes sitting still is the right move.  Continue to learn and absorb knowledge about real estate investing, and always keep your eyes out for a good deal, but don’t be so anxious that you buy something just to be in the game, when it isn’t a good deal.

All the best!

Randy

Kyle Marsh · Answer

Thank you everyone for the input!

Should I invest in my first multi family property with a friend?

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