Owning a rental property with a friend - good idea or not?

[joet86]

I'm a long time lurker of this forum and on my way to ERE, but would like to add some passive income to hopefully accelerate my FI date. I've been toying with the idea of owning a rental property for some extra income and recently found out one of my friends has had the same idea. We have discussed buying one or two foreclosed houses together and renting them out, splitting everything 50/50. Both of us are green when it comes to home maintenance and real estate investing, but we're capable of learning.

I know partnerships can lead to disastrous results, so I would like to hear your thoughts on the matter. Specifically:

1. Have any of you ever gone into business with a friend? If so, how did it turn out?
2. If a business partnership is a viable option, how should we structure it to minimize liability?
3. Would it make more financial sense for me to go it alone?
4. Would I be better off avoiding real estate altogether as a passive source of income and investing in the stock market instead?

Also, this idea of starting a partnership was just tossed around for a few minutes, and we definitely need to do more research before diving in. But I would like to get everyone's thoughts while it's still in the early stages. Thanks!

[Dragline]

Messy and complicated -- you would need a partnership agreement to be sure. How you would structure it would depend on the laws in your state, but insurance is what you use to minimize liability. Real estate partnerships are often formed as LLPs with a General Partner who manages the business and Limited Partners who are passive investors.

Yes, it's probably better to go it alone long-term unless you really trust the other partner -- you are effectively marrying them for the purpose of the venture. Also, someone needs to manage the property or you need to hire a manager. "Who does what" and who benefits would have to be squared away. I'm not one to ask, however, about the nuts and bolts of managing rental properties. Others can take that up.

You could invest in a REIT as a "stock market" alternative like O or GOOD perhaps. You are pretty much like a "limited partner" when you buy shares in a REIT.

[SimpleLife]

MMM has a nice blog post about his real estate partnership gone bad. I'd read that then pass...

[Chad]

Owning rental properties is a lot of work by themselves. Adding the extra difficulty of a partner and they would become a nightmare. This is doubly true for a partnership with a true friend. Who does what work? Rock/paper/scissors for who goes to kick out the delinquent tenant? He wants to replace the roof and you say it can go another couple years, who wins?...Ah, I just glanced at Dragline's response, so I will stop.

[saving-10-years]

Just posting the link to the MMM post that @SimpleLife mentions. http://www.mrmoneymustache.com/2012/02/ ... g-mistake/

Thanks for leading me to this. It ends on a high note of how to get through adversity and how great being on the other side feels - something that I can relate to. Although the amount of stess that MMM faced is nothing like anything I have personally encountered. Thankfully.

[chicago81]

I'll also chime in and say I don't think it is a particularly good idea to partner up with someone for managing a rental property. Just buy and manage the rental yourself. Or else, just invest a REIT that owns and leases property.

[robby152]

1. Buy Landlording by Robinson
2. IF (and that is a big if) you do it with a friend, only do 1 and do a cheap property to limit your financial exposure
3. I would personally just save up enough so that you could do one by yourself and then after you do one, if you still want to do landlording, then reevaluate with your friend. Money + friends ~ a mess

[joet86]

Thanks everyone for the responses! You have all basically confirmed my fears about attempting a business with a friend. If he raises the idea again, I am going to let him know we would be better off landlording separately. Either that, or I'll lie and say that I'm broke.

[chicago81]

Thanks everyone for the responses! You have all basically confirmed my fears about attempting a business with a friend. If he raises the idea again, I am going to let him know we would be better off landlording separately. Either that, or I'll lie and say that I'm broke.

I don't necessarily think lying to your friend is a good thing. Just be honest and say you don't think it would be a good idea, since it is hard to get two people to agree on a lot of financial decisions.

Maybe a better approach would be for each of you to separately and individually purchase your own separate rental properties -- You can agree to "hire" each other to do any potential maintenance or deal with tenant issues for certain blocks of time (e.g. if you want to go on vacation for 2 weeks, "hire" your friend to keep tabs on things during that time, and vice versa.)

[joet86]

I don't necessarily think lying to your friend is a good thing.

Yes, I agree, the lying part was in jest. Keeping our investments separate and hiring each other when necessary is a great idea - I'll propose that to him and see what he thinks. Thanks!

[JamesR]

At any rate, if you were to partner up, you'd definitely want an LLC or better. The paperwork should also have outs specified, such as ways to buy each other out, and perhaps even vesting over 5 years (i.e. 50% over 5 years, or 10% a year). For example, if either of you left the business after a year or two, the person leaving would only be have ownership for the vested amount (i.e. 10-20%).

In terms of MMM's situation, most of that pain could have been obviated with the proper contracts. And in fact, the contract would've eventually kicked out the moocher and protected his stache.