Buying rental property with your friends is a business deal and, as with any business deal, there are issues that should be considered before taking that step. Below are 5 keys to buying rental property with friends.
1. Be sure that your friends can be relied on. Entering into a partnership with friends who are not dependable or do not follow through with promises may not be your best choice for purchasing a rental home with.
2. Discuss how much you can collectively afford to spend on a rental property and what each friend’s contribution will be. You should also decide how you will hold ownership of the rental property. Generally, when friends buy property together, they hold ownership by tenancy in common. This means that each owner has an equal right to the property and can sell his interest without the other owner’s approval. Any number of individuals may own different percentages in one piece of property under this type of ownership. For example, you own 25 percent, a friend owns 25 percent and another friend owns 50 percent. Generally, the percentage of ownership is decided by how much each person has invested to purchase the property.
3. Create a written partnership agreement outlining the details of ownership and how future transfers of ownership will be handled. For example, if one friend decides to sell, the other partners have the first right of refusal. The agreement should also spell out the financial obligations of each friend and what will happen if one friend stops meeting his financial obligations. Other details to consider include who will be responsible for ensuring rent is collected and that the mortgage, insurance, taxes and maintenance are paid for? Who will be responsible for maintenance and repairs? It would also be wise to include a procedure for resolving disputes. For example, by unanimous vote or by a majority of the vote.
4. Consider forming a limited liability company, LLC. Purchasing rental property as an entity rather than an individual can help protect the owner’s personal assets. Each friend will become a shareholder, but you will not be personally liable in the event that the owners, you and your friends, of the rental property are sued. LLCs have the ability under law to conduct business including purchasing, owning and conveying real estate, the power to make contracts, and to borrow money when necessary.
5. Make sure the rental home is a good investment. An LGBT real estate agent will know and can help you find an investment property and assist you with the purchasing procedure.
The advice contained in this article is for informational purposes only. It would be wise to seek the advice of a real estate attorney to assist you with the legal aspects of buying rental property with friends.