Is it wise to invest with friends and family?
I would argue that the benefits far outweigh the negatives so long as there are clear rules in place beforehand. As with most ventures, knowing the destination before getting on the road is essential. While I’m all for spontaneity, when it comes to this type of investing, it’s critical to have a clear understanding of potential gains as well as potential costs, both financially and timewise.
One of the most positive aspects, however, has nothing to do with the investment itself. In fact, I would argue that the biggest benefit of working with friends and family is the process.
Pooling resources for the benefit of all involved can build communal bonds, strengthen us individually and build mutual resiliency when done the right way.
Real estate is a well-known, tangible item that is familiar enough to where most everyone can feel familiarity around doing some sort of partnership. It’s easier to wrap our minds around fixing up a home, for example than figuring out cryptocurrency or what might be the next big trend in the stock market.
It can be fun to collaborate and get creative together when doing a project.
Should you rent out rooms individually to college students?
Turn a lakeside home into an Airbnb?
Lease acreage in the backyard to a vineyard or grow Gogi berries?
Opportunities are endless.
That said, below are some steps to follow.
STEP 1 – Decide the Investment Strategy, Goals and Roles
Decide up front what everyone’s roles will be. Will the investment meet everyone’s goals? How will people be compensated fairly? What is the exit strategy?
Solidify this in a written business plan. Make sure all involved sign a copy of said plan.
STEP 2 – Decide on the Market
A Google search is a good place to start. I covered more of this a few weeks back.
This, however, gets tricky. Take California, for example. I personally feel you’d be much better served in a different state because of the tenant-landlord laws. That said, getting started is the biggest challenge, so maybe if that means staying local at first, then so be it.
STEP 3 – Create an LLC
This is a requirement when partnering. An LLC keeps friends as friends and families together. Establishing rules and personal asset protection is a must so nobody’s feelings get hurt. Money is not worth losing people over. Investments may go bad, but friendships shouldn’t have to.
I personally use Corporate Direct and highly recommend their services. I’d be happy to send an intro email, and they can provide a quote for their services.
STEP 4 – Find a Real Estate Agent
This step is interchangeable with finding a property manager. A great agent can recommend a property manager, and a great property manager can recommend a real estate agent.
You may have to interview several people to find the agent that’s a good match for your enterprise.
STEP 5 – Finding a Property Manager
The best place to start is with recommendations from your network. If that isn’t available, the second-best way to find a local property manager is to look at the NARPM website.
Call and schedule in-person or virtual meetings with, at minimum, three management companies to get a feel for each.
WARNING: This may be the most important thing to accomplish.
STEP 6 – Choose the Home
This is usually the fun part. Below is my dad and I touring one of the homes we visited in the middle of a remodel in Jacksonville, Florida.
STEP 7 – Taxes
With only one asset, paying taxes is straightforward. The property manager and mortgage company will provide you with the info you need.If you scale past one or two properties, you’ll want to find a tax person who specializes in real estate to ensure you’re taking full advantage of all of the benefits.
STEP 8 – Rinse and Repeat
The rinsing part? Find areas for improvement
The repeat part? Self-explanatory
Things to keep in mind:
· 5% closing costs
· 1% extra on the mortgage because it’s an investment property. For example, if the rate of a typical FANNIE MAE loan from a commercial bank is 3.5%, then expect the investment loan rate to be around 4.5%. I typically recommend locking in a 30-year fixed for fewer headaches.
· Remember, that you are not just buying a house. You are also purchasing a 30-year mortgage as an asset vs. inflation. The real level of inflation runs at 5-8%. If your mortgage is locked in at 4%, then you gain an extra 1-4% on the loan.
Our mission is to help passive investors become financially free by providing high-quality alternative investments. If we can help you in that way, it would be an honor to do so. Feel free to schedule some time for us to chat.