Rental Property as Investment

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SeekingBogle
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Rental Property as Investment

Post by SeekingBogle » Fri May 04, 2018 12:10 pm

A few of my friends and I are thinking of going in together for a duplex/fourplex property. We are all slightly upper middle income professionals - i.e. less than $150K household income - and have modest retirement savings. The goal would be to chip in $20K each to purchase a, say, $300K property that would be managed by me. The goal is to grow our respective wealth and possible contribute to retirement security.

Any thoughts on whether it would be worth it (real property as an investment vs the securities market, etc). Any experience with renting real estate would be appreciated.

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Pajamas
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Re: Rental Property as Investment

Post by Pajamas » Fri May 04, 2018 12:21 pm

The biggest risk is in losing the good relationship between friends. If you want to do something as a group, go on vacation together. Maybe go to one of those all-inclusive resorts in Mexico or the Caribbean or maybe take a cruise or charter a fishing boat or rent a place in the mountains or at the lake or on the beach for a week.

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unclescrooge
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Re: Rental Property as Investment

Post by unclescrooge » Fri May 04, 2018 12:24 pm

Why are you managing it?
Is that your job, as in are you getting paid extra?
Or is your free time worth less than theirs?

Hire a 3rd party manager if you want to keep your friendship.

Ideally, you would each buy your own $100k property. What happens when one losses a job and you have extended vacancies or repairs. How are you going to handle that cash call?

mrgeeze
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Re: Rental Property as Investment

Post by mrgeeze » Fri May 04, 2018 12:54 pm

Bad Idea.

Suppose, for arguments sake:
you get paid 7%+- of monthly rent for your services
you get paid one months rent every time you find a new tenant
you recognize this is a job, especially when a pipe freezes sunday morning.
you have a list of qualified,fast responding tradesman- the ones you want charge full list for their services.

AND,
you get a real deal on the property in question so that you actually make a little $$ every month.
given today's real estate markets, I'm skeptical you will- too many other people in the game.. very tough for the amateur to make money.

I still wouldn't do it.
There's just not enough $$$ in that deal for a friendship. You'll need as many friends as you can get when you get older.

bloom2708
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Re: Rental Property as Investment

Post by bloom2708 » Fri May 04, 2018 1:00 pm

Pajamas wrote:
Fri May 04, 2018 12:21 pm
The biggest risk is in losing the good relationship between friends. If you want to do something as a group, go on vacation together. Maybe go to one of those all-inclusive resorts in Mexico or the Caribbean or maybe take a cruise or charter a fishing boat or rent a place in the mountains or at the lake or on the beach for a week.
The only "ships" that don't sail. Partnerships.

You would be taking on a bunch of responsibilities beyond the daily management. It will be a second job. You should form an LLC. Elect officers. Each member who doesn't actively participate in the daily details will be a passive member. Accounting, tracking ownership percentage and expenses and making sure the K-1s are done at tax time.

What is the exit strategy for each member? If one of the 4 needs the cash to get out, can the other 3 buy them out?

It isn't a "let's all get rich together" plan. Just some things to mull over.
"We are here not to please but to provoke thoughtfulness" Unknown Boglehead

SeekingBogle
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Re: Rental Property as Investment

Post by SeekingBogle » Fri May 04, 2018 1:03 pm

Pajamas wrote:
Fri May 04, 2018 12:21 pm
The biggest risk is in losing the good relationship between friends. If you want to do something as a group, go on vacation together. Maybe go to one of those all-inclusive resorts in Mexico or the Caribbean or maybe take a cruise or charter a fishing boat or rent a place in the mountains or at the lake or on the beach for a week.
Lol

SeekingBogle
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Re: Rental Property as Investment

Post by SeekingBogle » Fri May 04, 2018 1:05 pm

unclescrooge wrote:
Fri May 04, 2018 12:24 pm
Why are you managing it?
Is that your job, as in are you getting paid extra?
Or is your free time worth less than theirs?

Hire a 3rd party manager if you want to keep your friendship.

Ideally, you would each buy your own $100k property. What happens when one losses a job and you have extended vacancies or repairs. How are you going to handle that cash call?
I'll go with hiring a 3rd party manager. My interest is in learning more about managing real estate, and my expectation would be that I would take a fee for my services. In any event, the transaction would be structures so that there will be a large enough cushion for repairs and improvements (think money in money market account or CD).

SeekingBogle
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Re: Rental Property as Investment

Post by SeekingBogle » Fri May 04, 2018 1:07 pm

I hear you that going in with friends is a bad idea. Any real issues with the actual ownership of rental properties??

Sasquatch
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Re: Rental Property as Investment

Post by Sasquatch » Fri May 04, 2018 1:08 pm

unclescrooge wrote:
Fri May 04, 2018 12:24 pm

Hire a 3rd party manager if you want to keep your friendship.

Ideally, you would each buy your own $100k property. What happens when one losses a job and you have extended vacancies or repairs. How are you going to handle that cash call?
+1, sage advice

I have been in partnerships on real property and I won’t do it again. Each family had different life goals and financial needs. As we all grew older the paths grew farther apart. We all remained close but eventually dissolved the partnership.

I have one new single family home as a rental paid off producing a gross 6.8 cap. I like to have different income streams. I believe in real estate income properties as a balanced portion of your portfolio.

Tal-
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Re: Rental Property as Investment

Post by Tal- » Fri May 04, 2018 1:12 pm

I'm a big fan of real estate and own several rentals myself. But I would never (ever!) do something like this!!!!

Lots and lots of reasons around this. It's complicated, with ongoing complications in taxes, decision-making, exiting, etc. It's inflexible. It confuses friendship with money with time with risk.

Just to illustrate an example. What happens when you have a $15K repair bill, but two of you are out of work due to a recession? Or, what happens if someone wants out, but the others can't/don't want to/etc. buy them out? These are not unlikely...

Please please please don't do this.
Debt is to personal finance as a knife is to cooking.

bloom2708
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Location: Fargo, ND

Re: Rental Property as Investment

Post by bloom2708 » Fri May 04, 2018 1:13 pm

SeekingBogle wrote:
Fri May 04, 2018 1:07 pm
I hear you that going in with friends is a bad idea. Any real issues with the actual ownership of rental properties??
My sister brought on a new tenant in the fall. Everything looked good. They never made one payment. Hung on almost a year before eviction by playing all the cards they could.

A friend with 19 properties has fixed fire damage, knife damage to a door and gunshot holes in the past few months. What could go wrong? :wink:

I would suggest heading over to biggerpockets.com. You will find a much better audience encouraging you to sail your partnership. Many paths.
"We are here not to please but to provoke thoughtfulness" Unknown Boglehead

renue74
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Re: Rental Property as Investment

Post by renue74 » Fri May 04, 2018 1:23 pm

I've partnered with a friend on 2 rental houses 4 years ago.

He was handy and I am too...so we both fixed things as needed. About 2 years ago, his wife decided she would quit/retire. He was already retired.

They moved to Naples, FL, but we still had the 2 rentals here. He was more than fair and offered to pay me more out of the partnership.

Last summer, I suggested we sell the 2 we had because the real estate market is so hot now. We made pretty good money on the rentals and I think we both walked away feeling like we won.

Moral of the story....goals may align right now with you and your friends, but long term they may not. Lives changes. New jobs, moving away to other towns, new commitments, etc.

You can't control that with your friends, and it's difficult to unwind with an asset that is not as liquid as other assets.

SeekingBogle
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Joined: Wed Mar 21, 2018 3:38 pm

Re: Rental Property as Investment

Post by SeekingBogle » Fri May 04, 2018 1:25 pm

Tal- wrote:
Fri May 04, 2018 1:12 pm
I'm a big fan of real estate and own several rentals myself. But I would never (ever!) do something like this!!!!

Lots and lots of reasons around this. It's complicated, with ongoing complications in taxes, decision-making, exiting, etc. It's inflexible. It confuses friendship with money with time with risk.

Just to illustrate an example. What happens when you have a $15K repair bill, but two of you are out of work due to a recession? Or, what happens if someone wants out, but the others can't/don't want to/etc. buy them out? These are not unlikely...

Please please please don't do this.
Point taken. Thanks!

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