You’ve seen the articles out there stating that investing in property is one of the best things you can do to set yourself up for financial success, but with your income and savings, you’re not sure that’s a possibility for you right now.
If that’s your situation, you’re not alone—fewer than 38% of Americans under age 35 own property. Depending on your location, owning your primary residence isn’t always possible—or financially wise.
But just because you live in an expensive area doesn’t mean you can’t own property or build wealth. Instead, you can pool resources with a friend or family member to finance your property investment. Of course, this approach isn’t without risk.
This post will cover the top 3 mistakes people make when buying a house with a friend, and how to avoid them.
How to Buy a House with a Friend
If you’ve never seriously considered buying a house with a friend before, you may be wondering if buying property with friends is even possible. As you may have already guessed, the answer here is, yes, it is possible! When you do it right, buying a house with a friend can be a great financial decision. But, how do you make sure you’re taking those right steps?
First, we recommend you ensure you and your friend are on the same page about buying a rental house. If your friend isn’t as serious about the investment opportunity as you are, that’s a recipe for conflict.
Tribevest has helped hundreds of families and friend groups buy property together without damaging their relationships. Keep reading to learn what pitfalls to avoid when buying a house with a friend, and get our best tips for keeping your investing group aligned.
Skipping the Paperwork
When undertaking an investment opportunity with someone you trust, you may be tempted to make it a handshake agreement: This is the biggest mistake you could make when buying a house—or anything else—with a friend.
Before you even hop on Zillow.com to start scoping out properties, you need to start seeing your investing partnership for what it is: A business.
Instead of risking your friendship by keeping things informal, you want to create a formal LLC. Creating an LLC allows you and your friend to contribute equally and fairly to the investment opportunity. It also protects both parties—and your friendship—from misunderstandings that could spiral into catastrophes down the road.
You can also work with an intermediary to manage your LLC and investment partnership. Tribevest offers a platform that helps you align and communicate with all group members. You can also use our tool to pool your capital, and we’ll file your LLC for you.
Related Read: The Limited Liability Company (LLC) Checklist
Whatever method you choose, when investing with a friend, don’t make the mistake of trying to keep things too casual. Don’t skip the paperwork.
Choosing the Wrong Property
One of the surest ways you can go wrong is to pull the trigger on the wrong property. You can avoid this mistake by taking a few steps.
First, you’ll need to do your research. Start by researching the location of the property. Check things like crime reports, flood risk, and other risk factors. You also may want to do research regarding your specific income property goals. For example, if you’re planning to run a short-term rental (renting your space through Airbnb or VRBO), you’ll want to research tourist and travel information for the area. How many other Airbnb listings are there in your target area?
Next, you need to align with your friend to ensure you’re on the same page regarding your budget. The reasons this alignment is important are pretty self-explanatory: If you’re looking for a $200,000 property and your friend is looking for a $500,000 property, that’s a conflict waiting to happen.
Lastly, ensure you’re securing the proper home inspections before signing on the dotted line. Consider the inspection results, and align with your partner on whether you’re looking for a fixer-upper or something more turnkey.
Clear communication is essential to any group investing partnership. If you want to build wealth and buy a house with a friend without ruining your friendship, communication is key.
Keep lines of communication open and constant. Even when you’re not actively investing in a new property, maintain strong communication regarding your current investment properties to ensure both parties feel included and in the loop.
You’ll also want to make sure you bake an exit plan into your operating agreement. As much as you and your friend may think you’re both in the investment for the long haul, the quickest way to sour a friendship with investing is to trap one party in an investment property they can no longer afford.
To make communication clear, simple, and organized, you’ll want to use an alignment tool. Using Tribevest for your communication tool means you’ll only need one tool to build, manage, and maintain your investing partnership.
Avoid Costly Mistakes When Buying a House with a Friend
You would never want money to come between you and your friends, but you can safely invest with friends without worrying about damaging your relationships when you take the proper precautions. Filing the proper paperwork to make things official, doing your research, and keeping lines of communication open go a long way toward ensuring you and your friends’ investment adventure is smooth sailing!
If you’re looking for a surefire way to avoid two of these three costly mistakes, building a tribe with Tribevest is the way to go! Our platform helps you align you and your friends, coordinate and pool funds, and manage payments and tax documentation. What’s more: We’ll file your LLC for you. Check out Tribevest today to see how we can make buying a house with a friend fun, easy, and profitable!