Myself and two other investment partners have decided to pool our resources and purchase a rental property together. We are in the very early stages of this endeavor, so I thought I would seek the advice of some more seasoned investors.
My first question would be do you think this is a good idea?
Our thinking is that:
As far as coming up with down payments and just getting started in general, 3 heads (or wallets) are better than one.
We plan to form an LLC together and purchase the property through the business. (Any thoughts on this?)
Duties and responsibilities can be divided, allowing for more focus in each individual’s duties and saving time over all.
I will leave it at that for now…
Thank you all for any words of wisdom you can provide.
I think buying a rental property with 2 other investors is a TERRIBLE idea. Partnerships often end very badly when one partner doesn’t think the others are pulling their weight (physically or financially). In addition, I’m guessing that you are all newbies. Having 2 newbies for partners is a horrible idea. Your idea to start a LLC is a good one, but unless you have a significant track record of businss success, you will all be required to sign personally for the commercial loan.
The vast majority of new landlords fail in a short period of time. It requires education, hard work, and persistence to be succcessful. It is hard enough for one person to have these qualities and succeed. Adding partners just multiplies your probability of failure.
What happens if you all don’t agree on the property to purchase? What if one thinks an investment is going south and the others disagree or vice versa? What if someone doesn’t pull his own weight? What if someone needs money and wants to cash out? What if one views this investment as a lower priority than the rest? A partnership is not the situation that gives the best chance for success. That relationship is lender/borrower. You borrow money and they stay out of your business unless you don’t pay. Keep in simple. Your only partner is your spouse.
dittto that. a partnership will only add a coplexity that you really don’t need at this point and a 3-way is MUCH more difficult than even 2 people. I’ve been down that road with 2 other partners starting out in real estate. It ended on a rather sore note as I was the money guy and my partners doing the work and at a certain point they decided they did n’t like the agreement andpretty much hi-jacked the business from me.
start on your own and after some experience then consider to have one partner to expand…
If you need someone to kick in extra funds to get you started you can just borrow from the same folks rather than partner with them. That makes you the sole chief and leaves out some complexity. You’ll have to figure out a interest rate to pay them that will be attractive to them and workable to you. Get everything in writing and have a lawyer look it over.
Thank you all, for what sounds like really good advice.
I guess I’m just getting impatient. I’ve been researching for quite some time now and I’m ready to take some real steps towards that first investment property. I’m aware of the state of the market today, and I know that it’s no longer promising for borrowers with a low to mid 600’s credit rating and less than 10-20% down. (Me in both instances for the moment)
I read somewhere else today that one should first be a home owner before looking to get a loan for a multi-unit rental property. (Any thoughts?)
I’m also currently living in Germany. I know plenty of people here with rental property back stateside and they seem to be able to manage. Well the property managers manage, but you know what I mean. Lol
What are your thoughts on me starting from over here with only being able to return 2 or 3 times a year?
Wow after reading this, it sounds to me like I might have to be more patient than I thought. :help
IHMO< the first real estate investment should be your primary residence. Obivously, currently in a sitaution that makes it very difficult.
Starting out as a newbie with remote property manager puts you are yet another disadvantage. Property managers are no different than any other business in the service sector; fairly low barrier to entry and somewhat difficult to assess their ability until you have seen them in action. Particularly tough situations. Its easy to work with people, but when things start to go wrong that where your business relationship with them will be put to the test. I use several different property managemnt companies as I have rentals in several locations and it works for me as I have a full-time day job. However, it has taken awhile to build a team at my remote locations and even then I have suffered through some less than stellar property managers.
Lastly where do you plan to invest? I personally only buy rental in areas where I have lived and undersdtand the market. If you to do not have intimate knowledge of your market, you will buy crap passed over by the locals because its in the wrong neighborhood, etc, etc.
If you have a target market in mind with good, proven property management available (i.e. used by someone you know well and trust), then maybe you should proceed to investigate further. If you are looking at buying somewhere you were told was good to invest and hope to get good property management out of the yellow pages, then I think the deck is stacked against you for success.
aak once again, thank you for slapping me back to reality. These are all things I’ve learned on paper, but I’ve grown very impatient over the past few months. I’ve been reminded of what I need to do and I’m taking heed.
I will now return to my original plan of attack and will return soon with my first success story. And in between time, with any other brite ideas I come up with. Just to run it by you guys (and gals) first.
I have to counter some of the advice regarding the partnership issue – as a real estate investor and business attorney I’ve seen a hundred different partnerships fail. That’s an absolute fact. HOWEVER, and this plays into your question regarding an LLC, if you set up an LLC the right way in the beginning, you’ll be able to avoid 99% of the heartache in the future.
As part of setting up an LLC, you put together bylaws and/or an operating agreement. In doing so, you all can lay out not only just how decisions are made, but you can even state the short term and medium term strategy of the company to get where you plan to go. This works in two ways: 1) you get it in writing, and it’s something you can return to later if it becomes a problem. This usually diffuses any situation before it escalates to something worse, or 2) when putting these things down on paper you may realize that you and your partners share different views of the partnership and how it will operate. It’s kinda like marriage classes – you can get out before you make a big, long term mistake. =)
Speaking from experience mentoring new investors with little to no start-up capital, having partners go in with you may be the difference between affording a property and not. So, personally, if you do it right, I recommend it. As for a number of partners, 3 is better than 2 because if you only have 2, you could come to decision gridlocks constantly. At least with 3, some decisions has to be made. 9 times out of 10 that decision will be unanimous, but for the one time when it isn’t, it’s good to know ahead of time.
I’m sure there are some examples of those bylaws and operating agreements somewhere out there on the net. Do you know of some places for me to look, other than Google Lol? I’m not a fan of re-inventing the wheel. That’s why REI is so appealing to me. It’s all been done before me, so all I have to do is learn from you guys!
Also, would it be smart for us to meet with a professional like yourself to help us cover all of these bases before and while we’re forming the LLC? Well, I know it would be. I guess a better question would be whether or not you could refer me to someone (like yourself) to help us out.
We’re all in Germany at the present, but at least one of us will definitely be returning to the states this time next year. (ATL I think) We were thinking that we would use this year to build the business and continue to research our market. We would like to make our fisrt purchase by 2009.
I would definitely recommend seeking professional assistance in the creation of your LLC. Not because I’m a lawyer, but because it’s one of the more important aspects of your future in the real estate business. It’s important to do it right.
I would be more than willing to assist you in preparing those documents, however you are right that there are many such documents throughout the internet. And those, of course, are free. Also, you can access the information you need regarding how to set up your LLC from your state’s secretary of state. You’re saying you’ll likely set up in Atlanta? Here’s Georgia’s SOS website:
I would tend to agree that spenidng a few buck to get it set-uip right will go a long way to minimizing propblems in the future (not sure about the 99% part), but a seasonedprofdessional (atty) can also providing some mentoring and mediate the minor bumps in the road that might occur.
Also, one additional aspect is to look at your potential partners and they should have similar financial position and motivation as well as outlooks in general on money. That’s not to say you have to be clones, but if one partner has significantly more cash involved or one person is having to do all the grunt work, this is fray the relationship over time. IN terms of outlook on money (and business), I can best illustrate this with an example. I have a friend who has similar experience as myself (and similar levels of capital) and he is always talking about doing rehabs together. The fact is I will never do a rehab with him as I seen his work and he likes to cut ever corner in the book, does cash transactions to avoid tax issues, etc. Personally, I do everything top-notch, above board so when I go to sell I get top dollar and transactions make it to close instead of hassle with Buyers about findings in the inspection report, etc. We have doing ways of doing the same business and thus would not make good partners.
remember, you won't be able to 'buy' through the new LLC until it has created some credit for at least 2 years.
That is absolutely WRONG! You can set up the LLC this week and buy a property with it next week. The bank will require you to personally guarantee the loan, but the property will be deeded directly into the LLC.
Thanks again guys for taking the time to post ur advice.
anf301, thanks for the link. Where are you located? I just might be interested in your assistance with the paper work. Thank you for offering. We’re also consulting with a tax attorney next week.
Also, would allotting into a company account, a set amount of $ by each partner, each month be a good idea? We would do this over the next one to two years.
Something else I just thought of… I’m a disabled vet with a VA home loan certificate. Does any one have any experience with that? Would I be able to use that through the LLC? Or does any one know of grants we may qualify for? One of the other partners is active duty for another year as well.
I’m located in Minnesota, but am able to assist you wherever you are. That’s the wonder of technology…now if only I can work it so I can invest in real estate and run my law practice from a beach somewhere in the Bahamas!
Regarding funding your company account, I would direct you towards your tax attorney or accountant regarding the technical aspects of this. Each payment into the company account is considered a “contribution” and has a specific tax implication. On the investing side, I would say that’s a good idea, although not necessary. When we first started our real estate company, and it was just myself and our other lead partner, we each put in something minimal each month, just to keep the company account liquid during projects. We started with something very little, I think it was $200 a month each. Could have even been $100 each. Although we never needed it, it served two purposes – one, it kept a small flow of cash in the account just in case, and two, it kept us emotionally invested during the leaner times when we were scouting properties and not having any luck finding the properties we wanted.
I’ve thought about it, believe me these Germans are getting rich off of the US military over here. I pay, (well my company pays) about $2500 a month depending on the conversion rate, for a 3br 2bth, 2470 sqf. The locals would probably only pay about $1500, but because they know the US military is footing the bill, the land lords can get away with it.
I would love to invest over here. Where I live, we have the highest concentration of Americans outside of the US. There are so many business and RE opportunities over here it’s rediculous. And the bases I’m close to aren’t going anywhere any time soon.
My problem is that I have a work agreement (TESA) with the German government that says I can’t have a second job, own real estate, marry a German woman, or basically do anything other than the job I’m here to do. Lol
I think it has something to do with the fact that I have a US tax exempt status. Not sure if I could use the LLC, once formed, to purchase over here though… Hmmmmmmmm might be a good question for my tax man
Any thoughts or know of any ways around my TESA status limitations?