Friends pooling money together to purchase property (Thoughts?)
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Linda WeygantPro Member
Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votesI have pooled my money and had nothing but success so far.
That doesn't mean every property has been successful (I have one property that's a bit of a dog, to be honest), but the partnerships so far are all successful. Here's how I made it work:
1. Have a legal, written Operating Agreement for your LLC. Make sure everybody has had enough time to review it and understand it before agreeing to it. If anybody has any issues with any provision, see what can be done to rewrite the agreement or allay their fears.
2. Recognize that not everybody has the same wants/needs. If you can't write the Operating Agreement so that it works for everybody, then don't be afraid to cut out folks who have vastly different needs.
3. Understand how the voting works. Does everybody vote their percentage of ownership or is it one person/one vote.
4. Whatever you're doing (landlording, flipping, whatever) there should be ONE person who is the front of the project or property. Having a tenant or contractors with multiple points of contact makes communication break down fast. Make sure the front person is a good communicator with the rest of the group. Too many cooks really can spoil the broth.
5. If/when you are the front person for a property or project, and you make a mistake - own it, communicate it, work to fix it. Don't try to hide stuff from your partners. Trust is key in these relationships.
6. Understand how the taxation works and get professionals involved for all areas where nobody in your group has expertise whether that's law, taxes, etc. If you have a CPA or a lawyer in the group, and they choose to be on the hook for those services, make sure they know what's expected.
I think that's about it. I'm invested with friends, my romantic partner, family and some folks who are one step short of being a stranger. All in different configurations. I would not shy away from investing with co-workers, I would just make sure that everything is spelled out and communicated. Also, make sure you invest with people who can afford to lose it all. Investing, even in real estate, can be a calculated gamble. If you're investing with people who are gambling with their baby's next meal, things can go south much quicker than if you're investing with people who have disposable assets and income.
Good luck!
9 Replies
- Lender · New York City, NY · Member since 2017 · 194 posts · 56 votes9y
@David I. - I've seen situations where "friends" pooling money together works out well and other situations where it becomes a huge disaster. Besides having a successful project, the common factor in whether the arrangement is successful or not are: transparent roles, leadership, legal/work responsibility, stake, costs/fees responsibility, and exit strategy.
Also, from that i would add, much like accredited investors, you don't want to take $5K or $10K from "friends" who could arguably not afford to lose that money.
To answer your question, the level of return they should expect should be outlined as part of the stake I mentioned. The payout can be a percentage tied to the equitable portion of their investment, or it can be a flat fee for usage, presuming a set profit margin is reached.
As far as success stories, I personally know of a group of about 7 friends who have all been in the real estate industry for years. They decided to pull their monies together to start a fund to purchase and rehab higher end homes and some commercial properties. Granted, their pool of funds is in the millions (some provided much more than others), but the transparency I mentioned above has allowed them to successfully purchase properties, conduct business, and above all remain friends.
- 9yLinda WeygantPro MemberInvestor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
I have pooled my money and had nothing but success so far.
That doesn't mean every property has been successful (I have one property that's a bit of a dog, to be honest), but the partnerships so far are all successful. Here's how I made it work:
1. Have a legal, written Operating Agreement for your LLC. Make sure everybody has had enough time to review it and understand it before agreeing to it. If anybody has any issues with any provision, see what can be done to rewrite the agreement or allay their fears.
2. Recognize that not everybody has the same wants/needs. If you can't write the Operating Agreement so that it works for everybody, then don't be afraid to cut out folks who have vastly different needs.
3. Understand how the voting works. Does everybody vote their percentage of ownership or is it one person/one vote.
4. Whatever you're doing (landlording, flipping, whatever) there should be ONE person who is the front of the project or property. Having a tenant or contractors with multiple points of contact makes communication break down fast. Make sure the front person is a good communicator with the rest of the group. Too many cooks really can spoil the broth.
5. If/when you are the front person for a property or project, and you make a mistake - own it, communicate it, work to fix it. Don't try to hide stuff from your partners. Trust is key in these relationships.
6. Understand how the taxation works and get professionals involved for all areas where nobody in your group has expertise whether that's law, taxes, etc. If you have a CPA or a lawyer in the group, and they choose to be on the hook for those services, make sure they know what's expected.
I think that's about it. I'm invested with friends, my romantic partner, family and some folks who are one step short of being a stranger. All in different configurations. I would not shy away from investing with co-workers, I would just make sure that everything is spelled out and communicated. Also, make sure you invest with people who can afford to lose it all. Investing, even in real estate, can be a calculated gamble. If you're investing with people who are gambling with their baby's next meal, things can go south much quicker than if you're investing with people who have disposable assets and income.
Good luck!
- Professional · Anaheim, CA · Member since 2017 · 1k+ posts · 686 votes9y
I had a friend and partner once, and both ended. He even mentioned he was going to sue me. $10-15k is not much. You need to discuss if friendship is worth the 10-15k.
If decide to continue, have everything in writing, and exit plan or consequence if they want out. Also, since 10-15k is not much, are you planning to get a loan? A loan will complicate and thus produce legal obligations. For example, if one cannot pay, then who will pay that portion, if default, then will affect credit for all.
Everyone needs to be on same page, same level of expectation, same commitment, same risk tolerance, same level of rational thinking, etc. That's a whole lot of consensus to risk friendship.
Terry Lao
- Investor · Kansas City, MO · Member since 2017 · 791 posts · 1k+ votes9y
That's all you need to absolutely not do it!
- 9yMindy JensenPro MemberBiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votes
@David I. , I think "going with your gut" gets a kind of bad rap here on BiggerPockets.
No, you shouldn't go with your gut when the info tells you the person isn't good, but you want to give them a chance.
You should absolutely go with your gut when it's telling you no.
$5-$10k? That leaves almost nothing in the coffers if you hit a snag. I'd say no, too.
However, if you DO go through with it, before you pool that money together, hammer out everything in writing beforehand. Most specifically, what happens if they want to sell but you don't? What happens if you want to sell but they don't?
- Hermosa Beach, CA · Member since 2015 · 1 post · 0 votes9y
Originally posted by @Linda Weygant:
I have pooled my money and had nothing but success so far.
6. Understand how the taxation works and get professionals involved for all areas where nobody in your group has expertise whether that's law, taxes, etc. If you have a CPA or a lawyer in the group, and they choose to be on the hook for those services, make sure they know what's expected.
Good luck!
Sorry to revive an older thread, but curious on this point. At a 1,000 ft level, how does the taxation work - I'm guessing just a 1099 is issued showing investment and return for the investor?
- 9yLinda WeygantPro MemberInvestor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
Originally posted by @John Soto:
Originally posted by @Linda Weygant:
I have pooled my money and had nothing but success so far.
6. Understand how the taxation works and get professionals involved for all areas where nobody in your group has expertise whether that's law, taxes, etc. If you have a CPA or a lawyer in the group, and they choose to be on the hook for those services, make sure they know what's expected.
Good luck!
Sorry to revive an older thread, but curious on this point. At a 1,000 ft level, how does the taxation work - I'm guessing just a 1099 is issued showing investment and return for the investor?
In a traditional partnership or multi-member LLC, a Form 1065 is filed for the partnership. Each partner then gets a K-1 from the 1065 and uses that to fill out their own tax return from there. 1099s would be completely inappropriate in a partnership model.
- Member since 2020 · 2 posts · 0 votes6y
Is forming an LLC easy? And if I and in CA and my friend is in Texas and the property is in Texas where should we register our LLC?
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