Pooling together capital with friends to invest

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Pooling together capital with friends to invest

Jeff Hsieh
Investor · South San Francisco, CA · Member since 2017 · 15 posts · 4 votes

Hi everyone,

I apologize if this has been brought up before in a different forum, but I'm looking for thoughts/advice and any experience when it comes to investing in real estate with friends.  We are 3 married couples (6 people total) thinking about pooling together our capital for an investment property.  The idea is that by pooling our money together, we would be able to afford a downpayment for a property we otherwise would not be able to.  A bit about us:

-We live in California (SF bay area)

-2 of the couples currently own a single-family home.

-1 couple would potentially live in one of the units if it were a multi-family home.

-5 of us have stable jobs, 1 is finishing up law school.

We have great trust in each other, but we recognize that things can get messy quickly when mixing friendship and money. We've already met up for a discussion to identify each of our goals to make sure that we have a compatible vision for the future. We've agreed that if any of this were to move forward, we would have detailed written agreements that cover as many bases as we can (i.e. what happens when a couple wants to sell but another doesn't?..etc) We briefly talked about setting up an LLC but not entirely sure how it works.

I'm looking for any thoughts from anyone that's had this type of experience before, good or bad, as we are still researching if this is an avenue we want to go down.

Thanks in advance for your advice,

Jeff

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Steve Kontos
Investor · Great Neck, NY · Member since 2016 · 679 posts · 467 votes
9y

@Jeff Hsieh

This is exactly how I started.  Proper contracts as well as a clear understanding of your business model will help mitigate SOME of the risk.  I say some because at the end of the day despite all the contracts in the world, emotions might seep in and maybe one friend will want out and then you have to make the harsh decision as to whether they should honor the contract (business is business) or honor the friendship.  

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  • Steve Kontos
    Investor · Great Neck, NY · Member since 2016 · 679 posts · 467 votes
    9y

    @Jeff Hsieh

    This is exactly how I started.  Proper contracts as well as a clear understanding of your business model will help mitigate SOME of the risk.  I say some because at the end of the day despite all the contracts in the world, emotions might seep in and maybe one friend will want out and then you have to make the harsh decision as to whether they should honor the contract (business is business) or honor the friendship.  

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  • Jeff Hsieh
    OP
    Investor · South San Francisco, CA · Member since 2017 · 15 posts · 4 votes
    9y

    Thanks @Steve Kontos for your quick response!  If you still happen to have any sample contracts that you used between you and your friends, that would be most helpful!  Of course please remove any sensitive information.  I'm more just looking to see what types of agreements that we should consider writing down.

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  • Andrew Johnson
    Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
    9y
    Jeff Hsieh Have any one of you done this before? Do you all have idea of what tire looking for? I'm sure a (neutral) lawyer can put together an agreement and likely has a litany of what-if questions for all parties to consider. However, of the risk profiles of investors are different, preferred geography is different, appreciation vs. cash-flow preference is different, etc. you could be wasting money with an attorney, drafting agreements, etc. It could come down to crazy small things like how far the couple who wants to live in the property wants to be from the BART station. Investment property criteria is different (often) than primary residence criteria. Not to mention if that the one of the occupant couples are also investors so (the investment group) will be paying for "their" refrigerator when it breaks. What if they want a Viking instead of a Whirlpool? I'm rambling now and just throwing things out there but if you're not in violent agreement now then paying an attorney to solidify the logistics might be getting ahead of yourselves.
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  • Jeff Hsieh
    OP
    Investor · South San Francisco, CA · Member since 2017 · 15 posts · 4 votes
    9y

    Thanks @Andrew Johnson- This is the first time any of us are considering investing in rental property with other parties.  This is great and exactly what I'm looking for.  You bring up some great points we need to think about, things that can be as small as what refrigerator do we want to buy, and who is using it, so what is considered "fair".  At this point, we've set up a group gchat for "continued discussions" where we post listing we've found to get everyone's thoughts, or just topics in that we think of in general, and see how discussion goes (are we finding ourselves agreeing or disagreeing over hypotheticals?)  I agree that it is probably too early to pay for an attorney at this stage.

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  • Jon Pitcher
    Property Manager · Oklahoma City, OK · Member since 2016 · 87 posts · 69 votes
    9y

    @Jeff Hsieh

    I'm not licensed in your state, so no legal advice here.  You should consult an attorney before you go too deep into this venture.  

    You can avoid many problems with a well-drafted operating agreement that addresses the following issues:

    1.  Who will make the day-to-day decisions?  Typically you want one or maybe two managers who can handle managing the property (or hiring a property manager) and making choices on paint colors and appliances.

    2.  Which decisions will require member consent?  Big decisions should require a majority (or super-majority) member vote or written consent.  Examples would be decisions to purchase a property, borrow money against a property, sell a property, etc.

    3.  How and to whom is any member allowed to sell his/her membership interest?  Does it trigger a right of first refusal in the other members?  You don't want to allow the members to sell their interests without approval.  And if a member dies, you don't want to be stuck with the member's heirs as your new business partners.

    4.  What happens when a member wants out of the deal?  You should have some kind of forced buy/sell mechanism so that you don't have to resort to litigation to split up the business.

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  • Andrew Johnson
    Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
    9y

    @Jeff Hsieh It also wouldn't hurt if somebody took the lead on the initiative.  And it probably shouldn't be the couple who is going to be living in the house for ___ amount of time.  The last thing you want is too many cooks in the kitchen.  The refrigerator issue is a small one that has the potential to build resentment.  The chosen market to invest in is a massive hurdle.  Let's face it, you're in the Bay Area and while it's great to lump it all together, San Francisco is different than Palo Alto and that's REALLY different than East Palo Alto.  I *think* what you'll find is that the small things are negotiable in your pending partnership.  You 100% need to lay out all of the details in writing but the "refrigerator policy" isn't going to make-or-break you.  If you have 2 Couple A and Couple B believing that "East Palo Alto is ripe for gentrification and appreciation" and Couple C screams: "Heck no, we're the couple that has to LIVE in that place!" you might be at an impasse before you get into the minutia. 

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  • Dominique Van Ryckeghem
    Real Estate Agent · Palo Alto, CA · Member since 2016 · 16 posts · 6 votes
    9y

    Here's a thought:
    Buy a property as tenants in common and work with an attorney to create a TIC Addendum.
    A typical TIC addendum is like having condo documents with the exception that they're not recorded. I've seen the ones that Andy Sirkin has drawn up and they're quite elaborate.
    That creates rights of use for different units, defines how things are paid for (e.g. new roof), etc. It also means that somebody wants out, that they can sell of their portion.

    There's some downsides to going this way, e.g. TIC loan if leveraged purchase, figuring out the proper TIC percentages if units in a building are not the same size, etc.
    In a 3 unit building you would then each own a unit that you can do with however you choose (within the scope of the TIC agreement and local laws that is). 

    Not giving you any advice, legal or otherwise, just pointing out something that's out there.

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