You’re close with your friend, but are you ready to take that friendship to the next level?
No, not that next level. We mean, are you ready to go into business with them? Because when you’re buying an investment property with a friend, that’s exactly what you’re doing.
You and your friend have daydreamed about buying an investment property for years. Maybe it's your dream to open the area’s hottest Airbnb rental, or maybe you’re handy and looking to flip houses together to sell for profit. Whatever your plan is, you need to consider a few vital things before pulling the trigger on that real estate listing.
This post will give you the scoop on four key considerations you should keep in mind when buying property with a friend.
Buying an Investment Property With a Friend: Choosing the Right Partner
The first step to investing in property with a friend is choosing your investment partner. You may already have a partner in mind, but if you are still looking for the right person to invest alongside, scan your social circle for a friend that meets these criteria:
- Likeminded: Find a friend who is wealth-minded and passionate about personal and financial growth.
- Serious about the opportunity: Partner with someone as emotionally invested in this investment property as you are.
- Capable of investing: Choose a partner with adequate capital to cover the cost of buying into the investment property you want to pursue.
Though it’s vital to choose the right partner for your opportunity, don’t overthink this part of the process. As long as your friend fits the criteria above, you can invest with friends successfully as long as you follow the considerations discussed in this post.
If you don’t have anyone who fits the bill in your existing circle, widen it! Find online and local communities surrounding wealth-building, investing, and more.
Tribevest was built based on my experiences investing in property with my brothers. We’re still close, which is proof this can be done while maintaining relationships and without making things awkward for everyone.
1. Align on Price
Once you’ve chosen your partner, the first thing you need to do is align on price. There are several sides to this consideration, so let’s discuss them all in detail.
Firstly, you’ll want to consider upfront costs. How much do you and your partner want to spend on the property? Consider how much you can afford for a down payment and how much you can afford in monthly mortgage payments if you’re not purchasing the property outright.
Ensure you and your partner agree on the state of the property you’d like to purchase. Do you want to renovate a diamond in the rough, or are you looking to invest in a turnkey property? Discuss the budget you and your partner want to reserve for renovations.
You also need to consider ongoing expenses related to the property. If you want to buy a rental property, remember that landlording can be expensive. You’ll need to consider costs like taxes, maintenance and repairs, and property management costs. You should have a dedicated bank account for each property to ensure you have enough cash on hand to cover unexpected repairs.
Lastly, consider your expectations for profits. What are you hoping to earn on this property? Ensure that both you and your investment partner have realistic expectations about what you can earn with this property.
Pro Tip: Use a rental property cash flow calculator to estimate ROI.
2. Align on Timeline
The next thing you’ll need to align on is your timeline. When do you want to move forward on your investment property? If one partner is ready to pull the trigger and the other needs a few months to pull the appropriate capital, this can cause conflict in your partnership.
Additionally, you should discuss how long you’d like to keep investing together. Are you hoping to purchase a single property and flip it for a profit, or are you looking to purchase a property and rent it out as either a long-term or short-term rental property?
Do you plan to invest in additional properties together down the road, or is this a one-and-done partnership? You and your partner should be aligned on the answers to all of these questions before you begin investing together.
3. Align on Responsibilities and Purpose
Buying a property with multiple owners comes with several strings attached. Before you begin your investing journey, you’ll want to ensure that you and your partner are aligned regarding responsibilities.
Start by determining what level of responsibility each partner wants to have. Are you both looking to be active partners or is one party hoping to be more of a “silent partner”?
The level of responsibility required from each partner will depend on your overall goals for the property. Is the property a vacation home that you both plan to use and rent out only when no one is there? Or are you investing in an apartment building or single-family home you plan to list as a long-term rental? Perhaps you're hoping to flip a home for profit. All of these options require different levels and types of responsibility.
Coordinate who will take on the “Founder” role in your partnership. Even if you are equal partners, one party should be responsible for coordinating payments and organizing paperwork related to taxes and more.
The easiest way to get aligned and formalize your business relationship is by creating an Operating Agreement and filing an LLC.
4. Align on Exit Plans
Lastly, you will want to consider what happens if one partner is interested in exiting the investment before the other partner is ready to sell. There is no better way to ruin a friendship than trapping one party in an investment they can’t afford anymore.
Set up and agree upon an exit strategy before you even sign the paperwork on your first investment property. Include this strategy in your Operating Agreement so it’s binding. This process will ensure that neither partner can trap the other party and that no one feels trapped.
The exit plan may include a “buyout” options where one partner can pay the other for their share of the investment. Alternatively, you may choose to sell the investment and split the profits if one party wants out.
5. Align on an Operating Agreement
Behind every successful investment group is a strong operating agreement. Your operating agreement provides the foundation for accomplishing investment goals and serves as the key document that outlines how the group will make decisions.
Basically, an operating agreement is a legal document that outlines the powers, rights, duties, liabilities, and obligations of all members of your investing group. It defines the rules of your group and how it will operate.
Creating an operating agreement can feel daunting. You’re not a lawyer, and you certainly don’t want to hire one at $300 an hour.
That’s why we’ve invested so much time and effort into making the operating agreement generator feature on the Tribevest dashboard. This tool allows investing groups to answer a few simple questions, and then it generates a fully-legal operating agreement in seconds.
Buying an Investment Property with a Friend: Align on Tribevest
In this post, you may have noticed a common thread among all our different considerations: Alignment.
Communication is the key to buying an investment property with a friend—and remaining friends. You’ll want to take steps to ensure you’re on the same page and both moving in the direction you want to go.
Investing with a friend is an excellent way to learn and level up together, building wealth and your relationship at the same time. Tribevest’s mission is to offer the tools and guidance your Tribe needs to invest successfully as a group.
With Tribevest, you can align your Tribe, maintain open communication channels, manage your funds, and establish your operating agreement all in one tool. We’ll even file your LLC for you. To get started, register your Tribe for free today!