Real estate is a common and attractive investment for many. From a financial standpoint, you build equity in a property that appreciates over time and there are tax benefits. From a personal perspective, you own your own home that you can live in, rent out, or flip to sell. It seems like a win win, but when investing in property with friends, there are five things you should keep in mind:
It seems obvious, but investing together is different from brunching together, so you’ll want to make sure you trust the person you’re investing with and set up ground rules (we’ll talk about this later), so that you’re both protected. From a financial perspective, when you invest in a property with a friend, the mortgage will be in both names, which means both of your credit reports will be pulled. If one of you has bad credit, that means you may not qualify for a low interest rate or qualify at all for the loan you were hoping to receive. This also means if someone misses a payment, your credit score could be affected. Make sure you know your friend’s financial situation before going into business with them.
Outlining an agreement or forming a limited liability company (LLC) are great ways to identify responsibilities, roles, and risks for your investment. When forming an LLC, you’ll have to draft an operating agreement (tips to do that here), so that it’s clear how your allocations, ownership, and roles are outlined. This also will provide you with a certain layer of legal protection as a business that a personal engagement would not. If you’re curious about starting an LLC and business bank account, check out Tribevest.
In your personal agreement or LLC operating agreement, you’ll want to make sure you both know and agree on what happens in the event of:
Again, this is what an Operating Agreement for an LLC can help with, but in the meantime, make sure you consider and document the following:
There are two types of ownership to consider: Joint Tenants or Tenants in Common. In this case, “tenants” refers to the type of ownership and not the individual renting. Please note each of these legal arrangements have various implications, so you’ll want to consult a legal advisor, as needed.
Real estate properties come with a variety of expenses from taxes, insurance, maintenance, homeowner’s association fees (HOA), repairs, appliances, and more. You’ll want to assume that 1-3% of your property value should be set aside for these expenditures. While you can create separate bank accounts for investments, brokerage accounts, or do a joint account, we’d recommend going the business banking route. When you form an LLC, you can set up a business banking account. This allows you and your friends to schedule contributions to one account and ensure all business transactions are handled through one account under the protection of your LLC status.
If you’re nervous about investing with friends and family, you don’t have to be. With Tribevest, we make it easy for you to start an LLC, open a business banking account, pool money, and invest in property in no time at all.