Buying a Rental with a Friend

15 Replies

Hello BP,

I have identified a property close to home that cash flows $150~ monthly after all expenses. My question is, is it a good idea to purchase a rental property with a friend? We've been great friends for 4 years, have similar goals/views in life, and are in similar financial situations. We agreed before we purchase a property together that we will outline on paper what we expect from each other as partners, who will be responsible for what, management, ect.

We plan on holding properties long term. This specific property was built in 1979 so would it be more beneficial in the long run to buy newer properties?

Thank you in advance.

If the house is In good condition buy it. I think any deal that readings in positive cash flow is a good deal. Now you and you friend are splitting the $150?

Strictly speaking to the partnership idea... (not cash flow) Why not! I have a business partner. He is a guy I met from work. We have known each other probably a year and a half or so. Make sure to set up the operating agreement (which you hinted at) with good details. The benefits are splitting expenses, two heads are better than one, two credit scores, splitting the work load, etc. 

My business partner tends to: Update our mailing list, meet with inspectors, handle setting up utilities.

I: Handle the contracts, meet with tenants, meet with our marketing guy, build spreadsheets.

There is definitely some overlap there as well. But it has worked great for us. We tend to do the work each other forget about. 

Down side is you have to split everything. For us the Ups are greater than the downs.

@Justin Howe  

The question I'd be asking is if it makes sense to buy a property that cash flows only $150/mth at all. That's a real slim return and just one turn over will pretty much wipe out a whole year of profit. 3 years ago would be a different story when prices were skyrocketing and you had good appreciation gain, but appreciation rates have cooled a lot and will continue to do so in 2015. Without some good upside in appreciation, I don't know if I'd get too excited about $75/mth once you split it with your friend.

Yes we will be spliting the $150 so $75 each. I can purchase the property by myself but I like the idea of spliting the risk/work as well.

What do you guys think of purchasing a property built in 1979 to hold as a long term rental?

@Ryan Dossey  

I understand $150 positive cash flow doesn't seem like a lot, especially when it's split in half. In reality we will be making $250 because we've included $100 per month for management expenses but we will be self managing the property at first.

Just be sure to put the terms of your agreement explicitly in writing. A lot of friend ships have been ruined by not communicating clearly and not putting things in writing.

Good luck!

@Mike D'Arrigo  that's why I spoke only to the partnership side. @Justin Howe  if you want to post up more details we can advise you more on this particular property. 

As for issues nothing to serious. I lost one of our checkbooks one time. (just found it yesterday) We missed out on an easy deal because we didn't have time to both go see it. (boy did we learn from that one.)

You guys need to decide if this is something you are doing on one house or long term. My business partner and I plan on building an empire together. Our end goal is 10K a month + in just cashflow. You can of course use this property as a trial period. Make sure you guys have an exit strategy as well. If your buddy falls off of the deep end make sure you have a way to exit the partnership. 

A house built in 1979 with a thin cash flow would make me nervous.  I think adding a partner would make it even riskier.

I would recommend each buying separate properties and helping each other out with them.  If you both like real estate investing and the assistance with the properties works well, then I would consider going in together on another property.

I think the keyword here is longterm. In AZ that is a solid strategy based on known demo trends. Just make sure you can exit anytime for a profit. Have all the alternative exit plans in place beforehand just in case you guys go your seperate ways. This is not necessarily a bad thing but common in partnerships. I love the fun color schemes on the desert style homes. Good luck in AZ.

Well first off a partnership is not bad as long as you set expectations in writing.

As for $175 cash flow.  No one can possibly give you good advice on whether that's acceptable.  We don't even have a deal to look at.  If you paid $10,000 for a property with low holding costs $175 would be amazing...while $175 on a $500,000 property would be downright scary.

Anyways good best advice is to take the most conservate approach between the two of you till you have enough experience to not get yourselves into trouble.

Here are the numbers for the property. Built in 1979, 3 bed/2bath, 1200 sq foot, located near good schools. ARV is $140,000 - $145,000.

Purchase Price: $117,000

Down Payment (20%): $23,400

Amount Financed: $93,600 (4.25% rate)

Repairs: $10,000

Monthly Mortgage Payment: $460.46

PM Expense: $100

Vacancy (8%): $80

Maintenance: $85

Property Taxes: $70

Insurance: $50

Rental Income: $1000

Total Expenses: $846

Net Cash Flow: $154

Speaking only to the partnership aspect and not the fiscal end of it - I work with my dad & brother on our places and I think its only brought us closer (and we were a very involved family beforehand).  I agree with having things written out, who does what as well as an exit/buy-out if one partner wants out for unforeseen reasons.  To be, one of the biggest aspects of it all is trust; there's no one I trust more than my family.  My brother is a CPA and does my taxes, etc.  If he advises me to do something I never for a moment question his motives (it still need to make sense, have legit reasons), but I always know where their hearts are at with decisions.  Good luck!

Be careful, partnerships are tough. I would avoid it.

Originally posted by @Mike D'Arrigo :

Just be sure to put the terms of your agreement explicitly in writing. A lot of friend ships have been ruined by not communicating clearly and not putting things in writing.

Good luck!

 This would really be my only concern. Partnerships are great as long as you both split responsibilities and costs evenly. 

"Any ship but a partnership"(per my Dad, after dealing with several real estate  partners during the 1980's RE crash)

Will the partnership that starts so optimistically when it looks like profits will be made still hold together when it is clear that losses will be taken? Are you likely to stay friends if you lose your shirts on this deal, and if not, is it worth it?

If you can purchase yourself, but want to share the burden what about a profit-sharing  arrangement too, where work = percentage of profit. Maybe you hire him as PM on this property so the two of you get a feel for working together?

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