Is it wise to invest with friends or family? The benefits far outweigh the drawbacks as long as clear rules are in place beforehand. As with most ventures, knowing the destination before getting on the road is essential. When it comes to investing, it’s critical to have a clear understanding of potential gains and costs, both financially and time-wise. In this article, I will outline eight steps to buy a single-family rental home with your friends. 

Investing with friends and family is about the process

Pooling resources for the benefit of all involved can build communal bonds, strengthen us individually and build mutual resiliency when done correctly.

Real estate is a well-known, tangible item familiar enough to where almost everyone can feel familiar with doing some 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.

Collaborating and getting creative together can be fun 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 goji berries? 

Opportunities are endless

That said, below are some steps to follow.

STEP 1 – Decide the Investment Strategy, Goals and Roles

Decide upfront 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 the 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 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 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. Money is not worth losing our loved ones over. Investments may go wrong, but friendships shouldn’t have to.

I use Corporate Direct and highly recommend their services. I’d be happy to send an introductory email on your behalf, 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. 

STEP 6 – Choose the Home

Finding the right property is usually the fun part! 

STEP 7 – Pay your Taxes

With only one asset, paying taxes is straightforward. 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. The property manager and mortgage company will provide you with the information you need.  

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 against 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.

Investing with loved ones may seem intimidating initially, but it could also be a great way to strengthen your relationship while bringing in more financial freedom. It sounds like a win-win to me!