So, you’re thinking of buying property with a friend? This might be because you don’t have enough money to buy it on your own or just because you both think it is a great investment (and it is!).
Well, whatever the reason might be, there are some heavy pitfalls to watch out for and things to consider before you sign any contract. I’m not saying it is a bad thing to go into property investing with a friend, in contrast, I actually think it is a good idea, but I would definitely suggest that you read these tips and warnings first.
Make sure you’re on the same page
The first thing you should do is figure out the reason you want to buy this property. Is it going to be a rental property or do you want to flip it as soon as possible? This is probably the most important thing to discuss because if you’re not on the same page when it comes to the reason for the purchase it can have nasty consequences.
Just imagine one of you are entering the deal with the mindset that you are going to flip the property and your partner thinks you are going to get a tenant to rent the place. From the beginning, there will then be friction between you and if you can’t solve this problem it could cause you to lose the property or worse, law suites or a destroyed friendship.
Determine your investment shares
Are you going to enter the deal with a 50/50 partnership or are one of you going to own more than the other?
It is advised that when entering a property deal with a friend, you should use a 50/50% share distribution. This way both of you have equal rights and everything that needs to be paid (levies, rates, and taxes, etc.) can be easily allocated. As soon as you have an uneven shares structure things can become a bit more difficult.
You should also decide from day one, who pays what and when. This is sort off common sense but I thought I will still talk about this. When you own a property there are certain costs that you will have to incur. Whether it is levies that need to be paid or maintenance costs, you can’t avoid it. It is, therefore, wise to decide from day one who is eligible for what payment. My suggestion is that you split it according to the shares split of the property.
Sign a contract and keep record
This is the most important step of them all. As soon as you enter into a deal with your friend, make sure you have a legal contract drawn up with all the ins and outs of the deal. This will include things like share distribution, what happens when the one can’t keep his end of the deal, etc. Try and get this part done the right way by going to a legal firm to draw up a contract. This way you both know that you’re covered, should something go wrong.
You should also keep all documents that have to do with the property. If you’ve done any maintenance, keep those invoices, or if the tenant broke something and you had to pay for it, keep the correspondence and all receipts.
Ensure both of you will be able to pay the mortgage payment
It has happened a lot in the past where two people buy into real estate property and both are able to make their payments initially but later on, something happens to the one, like job loss, and then he’s not able to make his monthly payments anymore. If he hasn’t got a plan in order to get his finances sorted out and make his payments, it could affect your credit record as well.
Make sure that both of you have a backup plan in case one of you aren’t able to make the payments anymore.
In conclusion, I think it can be wise buying property with a friend if you have all the necessary documentation and precautions in place. Buying with a friend has a lot of advantages, but could also end up ruining your credit record if you don’t follow the necessary steps.
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