I'm a fairly new member to the site, and this is my first time posting, so apologies if this isn't the right section of the forum for this post. This is basically my/our situation.
We are four college students who are completely debt free with the exception of utilities (phone bills, insurance, gas, food, etc.). We all own our own cars and live with our parents because of the fact that our university is literally five minutes from our respective homes. Rather than doing the "normal" thing that college grads do (like buying a car or getting into credit card debt) we have decided that we would like to pool our resources and invest in a multi-family real estate property so that we have a source of income. We are located in an area of the country that has seen significant growth (30+% over the past ten years) and has a foreclosure rate of ~60% higher than average. With that said, we feel that we have a great opportunity to invest in Real Estate BUT none of us have our "real jobs" yet.
I personally am about to begin med-school, and my three friends are about a year-and-a-half from beginning their careers (~$40k - $60k/year before taxes). What we wish to do is continue saving until we each have $10,000 each to put as a down payment on a multi family property (we're at approximately $5,000 each at the moment). What we want to do is invest in a property, aid each other in the management, and split any profits/liabilities equally between the four of us. For example, it would be much easier to pool resources and each make a $200/mo. payment, as opposed to attempting to pay $800/mo. as an individual, assuming we have to take on the entire mortgage/insurance/tax payments because of 100% vacancy.
Now before you say "Don't mix friends/family and finance." We know. However, we've known each other well enough, and are certain enough, that character issues won't be a problem. Arrogant, I know, but the question we have is how can we each contribute an equal amount of the down payment and receive equal amounts of profits/expenses? Is there a way to make a corporation or, for lack of a better term, small scale REIT? Sorry if this was long-winded, but I want to see if I can get any sort of help with my situation. Thanks in advance. Appreciate any help.
Disclaimer: I am not an attorney, so you must double check this advice before making potentially destructive decisions.
You guys are smart for starting early. Most people who raise private money tend to do their early rounds with friends or family, so I don't think you are off in that regard. 'Don't mix...' is great advice, but mix with the proper legal structure is probably a bit more realistic.
With $40,000 in total, you guys are not looking at a super high value investment (don't get me wrong, completely notable), but you want to make sure this is not dwarfed in legal fees and other craziness that can come from a prohibitively complex legal structure.
My simple advice would be to start and LLC with each of you as unit holders (equal shares). Then you can draw up your LLC agreement as such to distribute as you have required. There could be some anomalies, for instance if one of you was more involved in active management, that person may be entitled to some additional compensation. In order to keep the conversation simple (and priced reasonably), form the LLC with the entire goal being this property. Then you don't have to include/worry about future acquisitions, and can hopefully keep recurring legal costs to a minimum.
@Trevor Ewen undefined
Thanks, Trevor! I appreciate the advice. I know that, relatively speaking, a $10,000 investment is nothing, but to us, it's essentially our life savings. I've been researching more heavily than ever due to the impending transaction (We're about a year to a year-and-a-half away, hopefully!) and we're giving ourselves a lot of room for error (we think). The property we're looking at is a very nice duplex (built in 2012, 5 minutes from University). A 20% down payment on a $160,000 property would be $32,000, so we're giving ourselves about $8,000 leeway for legal fees, and plan on saving the remaining in case any unforeseen expenses pop up.
Does anyone, that has experience forming an LLC and using that as a method of group investing in real estate, have any words of advice? We really want to be thorough in the creation of the legal documents to assure that no one gets "burned" during (what is to us) a large investment/risk.
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