Is it better buying a real estate property with a friend?

Question

I’m thinking about buying a property with a friend of multiple units at least 6 units down in Florida. Don’t know exactly where yet. We’re in the process of saving up money, my credit is at about 640 and so is his but I don’t get paid as much as he does and I’d think 2 incomes are better than 1 and so is our credit scores combined to get a approval on an apartment building. What would be the best way to go about buying this property? I don’t know exactly all the overhead costs monthly with water, AC, electricity, or if the tenants would pay thay themselves. I'm new to this. Anything would help guide us. Thank you!

Aaron K. · Answer

You don't combine credit scores to qualify for a loan.  You'd want to talk to an attorney, you'd probably be setting up an LLC, do not buy with a friend without getting what you agree to in writing.  It sounds like you are a ways off so take the time to learn how to analyze properties with no risk while you wait.

Chris Babcock · Answer

@Franklin Marte

I don't think you're ready to buy any property yet. Questions abound like:

- Why Florida?

- Why at least a 6 unit?

- What market in Florida?

- Why don't you know your estimated utilities?

- Have you reached out to property management companies to find out what is standard for the area?

I don't mean to be critical about this but it doesn't seem like you've done any homework or research on where to start. Based on what you've described about your financial situation so far I would say you're not ready to take the risk of getting into real estate. Get your credit score up, save your money, maybe get a better paying w2 and start researching properties. Identify a market, Identify a property, have a reason to invest there. All of that can be done without spending a dime or needing a partner. It also might be wise to start with a smaller property than a 6+ unit so that you might get an understanding of the basics first.

Good luck.

Todd Dexheimer · Answer

My advice is to learn more. Read books, go to conferences and meet-ups and engulf yourself into podcasts. Pick a niche and then focus on that. BP podcast will give you a general overview of a lot of strategies. My podcast is more focused on Multi-family, others are on SF rentals, flips, wholesaling, raising money, etc.

Matthew Baltzell · Answer

@Franklin Marte I would figure out your investment criteria first. What is it specifically your looking for, units, price, cap rate, sub market, etc. The more information you know the better. If you're looking to secure any financing they will want to know more specifics as well in what you are trying to acquire.

You mentioned 6 units, this will be a commercial loan which is different than residential. In commercial, they will look at the asset first, then to the investor.

Aaron K. · Answer

Commercial is more difficult to get into partially because loan terms are not as favorable.  When I say what you agree to I am referencing if for example one of you contributed more money and/ or time to the endeavor do you expect a bigger chunk of the pie.

Chris Babcock · Answer

@Franklin Marte

Good.

So you're set on Florida? Ok, next challenge based on your description, I think, is finding a 6+ plex to buy. I don't know all the markets in the US, but of the ones I do know, any properties bigger than a quad are usually few and far between and usually end up getting snapped up by bigger fish otherwise you probably don't want to touch them.

Things I look for in a market are:

- Good School District

- Low Crime

- Low Vacancy rates (aka few rentals available)

- Employment

- Transportation

Others may advise you to also look for appreciation forecast for areas. I think this is icing on the cake.

If I were you, next steps would be:

- Identify where you want to target in Florida

- Once you've found an area or region, find some well reviewed realtors in the area and share your goal with them. They should be able to tell you if it's feasible in that area or they might tell you to temper your expectations.

- If they tell you it's feasible they will probably tell you a price range you are looking at if said units exist in that region. Now you get to decide if it's financially feasible for you (solo) or if you need to think about alternate ways of financing (friend included). You might also factor timeline into this equation.

Keep in mind that you aren't wrong about multiple doors under one roof, however, many other people have the same feeling you do, so that commodity in the market might be hot. You might have to weather a few seasons saving money to have ready to put down for one of those properties the moment it comes on and snap it up. Or maybe you might want to temper your expectations and find a duplex or tri?

Franklin Marte · Answer

Thanks for the reply all your feedback is helpful and No you’re absolutely right I’m not ready, I plan to go for it at the end of the year if possible and Florida because My friend and I are planning to move out there but, there are mostly SFH and if we’re going in on something together it wouldn’t benefit us to go for something small. Bigger is better since the cheaper rent out there for the tenants that way we can both get a piece and We we’re planning to live in one of the units. We don’t know what market and I’m still learning how to put in all the expenses I’m not sure exactly how to do or what goes into it. What are good things to look for in a market?

Franklin Marte · Answer

I know but how else would I be able to do this without risking it with someone else who I don’t know much about

Chris Babcock · Answer

Aside from the very legitimate legal complications to work out. Ask yourself if you want to mix $$ and your friendship and then refer to the adage: "Friends and Money: Oil and Water". I know of several friendships that were ruined by mixing business interests into the equation.

Edward Liu · Answer

If you purchase 5 or more units in a multiplex, then loan must be commercial.  You do not have a choice.  The credit score is not as important, as commercial loans evaluate the property to see if it can maintain loan payment on its own and be profitable under normal conditions.  Usually we purchase these larger multiplex using LLC, not in personal name due to liability.  Your credit score will help - Lenders don't want to lend to owners with history of bad debt, etc.

I agree with other comments that do some self learning first.  Plenty of resources around.

Is it better buying a real estate property with a friend?

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