When it comes to real estate, there’s a saying many of us have heard: “Never do business with friends or family.” Despite this age-old wisdom, countless people still find themselves partnering up with those closest to them to make real estate dreams come true, whether it’s for an investment property or even a primary residence. While this may seem like a great idea at first, real estate partnerships with friends or family members can quickly turn complicated. Let’s explore the benefits, risks, and precautions you should take if you’re considering entering into such an arrangement.
It’s easy to understand why partnering with a friend or family member can be so appealing. Picture this: you’re at a barbecue or holiday gathering, chatting about how you’d love to get into real estate. Suddenly, you find yourself realizing that while neither of you can afford it alone, together, you have enough resources to make it happen. The idea of combining resources to break into real estate and start building wealth becomes very enticing. After all, you’re dealing with people you trust, right?
More and more people are jumping on this trend, especially as property prices have made it difficult for individuals to purchase homes on their own. In fact, recent statistics show that 7% of home purchases this year involved friends buying together, and that number was even higher last year at 14%. While the idea is becoming more common, it’s essential to understand both the advantages and the potential pitfalls.
Key Point #1: Get Everything in Writing
One of the most critical steps in any partnership is establishing a comprehensive partnership agreement right from the start. This is where many people make the mistake of skipping formalities because they’re working with someone they know and trust. However, without a clear and legally binding agreement, you could be setting yourself up for financial and legal trouble down the road.
Imagine this scenario: You and your friend have purchased a property together, but a few months in, one of you loses your job or decides they no longer want to be a part of the deal. If you haven’t outlined these possibilities in a written agreement, you could find yourself battling it out in court, with your once-trusted friend now on the other side of the courtroom.
Key Point #2: Clarify Roles and Contributions
Another major component of a successful real estate partnership is clearly defining each partner’s responsibilities. Who will handle the yard work? Who’s responsible for repairs? Who will manage the finances? You’d be surprised how quickly resentment can build when one partner feels they’re doing more than their fair share. Even seemingly minor tasks, like mowing the lawn or washing dishes, can cause disputes if one person feels like they’re always doing the heavy lifting.
By agreeing on roles and responsibilities upfront, you avoid misunderstandings and ensure that everyone is clear on their contributions—both financially and otherwise. Remember, contributions don’t always have to be monetary. For instance, one partner might invest more cash, while the other contributes time and labor.
Key Point #3: Discuss Money Matters Upfront
Clear financial expectations are the foundation of any real estate partnership. You need to decide how much each person will contribute to the down payment, monthly mortgage payments, and other expenses. Additionally, consider what will happen if one partner faces financial difficulties, such as losing a job. Will the other partner be expected to cover the full payment temporarily?
Having an emergency fund is another crucial element. Just as you would with any other investment property, make sure you set aside funds for unexpected repairs or financial setbacks. This ensures that you’re not scrambling to cover costs if something goes wrong.
Key Point #4: Keep Finances Organized
Opening a separate bank account for all partnership expenses is a practical way to manage finances. Both partners should have access to the account, and ideally, there should be two signatures required for any transactions. This helps maintain transparency and ensures that both parties stay informed about the property’s financial health.
By having a dedicated account, you also make it easier to track expenses, payments, and contributions, reducing the chances of any financial misunderstandings or disputes.
Have Regular Meetings and Open Communication
Key Point #5: Communication Is Key
Even if you’re living under the same roof, it’s important to have regular meetings to discuss how things are going with your property. Consider setting up a monthly or quarterly check-in where you review the finances, discuss any repairs or maintenance, and assess whether the partnership is meeting everyone’s expectations. This kind of communication can help catch potential problems early and keep the partnership running smoothly.
Key Point #6: Prepare for Change
Life happens. Partners may need to relocate, experience financial hardships, or simply want out of the partnership. It’s essential to have an exit strategy in place that outlines how to handle these changes. Will one partner have the option to buy out the other? How will the property be appraised if you decide to sell? These are questions that should be addressed in your partnership agreement before any problems arise.
Key Point #7: Consult an Attorney or Accountant
As tempting as it might be to handle everything informally, involving a neutral third party like an attorney or accountant is invaluable. They can help draft a legally binding agreement that covers all potential scenarios and ensures that both parties are protected. Spending a bit of money upfront for professional guidance can save you a lot of headaches and financial losses in the future.
While real estate partnerships with friends and family can be a great way to pool resources and enter the market, they come with their own set of challenges. By being proactive, setting clear expectations, and protecting yourselves with a detailed agreement, you can significantly reduce the risk of conflict and enjoy a successful partnership.
Always remember: friendships and family relationships are priceless, and it’s important to approach any real estate partnership with the same level of professionalism and seriousness as you would with a stranger. That way, you can enjoy the benefits of real estate investment without jeopardizing the relationships that matter most.
You can also learn more about this topic from our episode “Real Estate Partnerships with Friends and Family” posted September 24th, 2024 on The Jon Sanchez Show. You can find all episodes on any of your favorite podcast platforms!
Sources
Brown, Dalvin. “They Bought Homes With Their Friends—and Now They Want Out.” MSN, 23 Sept. 2024, www.msn.com/en-us/money/realestate/they-bought-homes-with-their-friends-and-now-they-want-out/ar-AA1r501T.