Whether it is due to income constraints or a lower risk taking ability, a lot of people jointly invest in real estate with their family and friends. Members of family are generally considered trustworthy co-buyers, where sometimes the whole family may have a vested interest in the real estate business or may decide to support one member who is involved in this business. However, investments with friends become a bit complicated, especially because it is difficult to establish an equivalent to familial trust between the co-buyers. Hence, the question arises ‘whether you should invest with friends in real estate or not?’, here are a few pros and cons that you should consider before giving you friend a thumbs up for the next property deal.
Pros For Investing With A Friend
- Income pooling for down-payments
Pooling resources for the down-payments has become a recent trend in the real estate market. This is usually favored over the traditional approach of taking a loan from the bank, where you have to pay a higher interest rate. Borrowing from friends or investing together in a real estate property means that you will now have to a lower or non-existent interest. This is precisely why most people prefer such peer-to-peer lending platforms over formal lender.
- Risk Sharing
It is important to note that investments in real estate does involve a lot of risk, hence, co-investing in a property will allow you to share this risk with a friend. When you would be sharing the risk and the financial constraint with another person, you would be more likely to invest in a riskier and perhaps, more rewarding project.
- Skill sharing
You may be great at the legal and financial side of the business, whereas you friend might be really handy with construction work as well as socializing. All these skills are important for running a successful business and mostly, not everyone possesses all these skills at one time, or sometimes, may not even have the time to carry out every function of the business themselves. Therefore, having a partner that you can trust with these responsibilities would be a great addition to your real estate business.
Cons Of Investing With A Friend
- No contracts
It is common for friends to start a new business venture together and not have contracts determining the legalities of this partnership. Although, this may work when there is a high level of trust between the co-buyers, but it may get complicated when a conflict of interest arises between any two parties, both of who want the business to go in different directions.
- Credit ratings
If you have decided to purchase a property with your friend on mortgage, and both of you are listed on it, both of you must be responsible for making regular payments. If one of you falls behind in making their payment, the credit rating of the other person would be affected. Although, investing with a friend in real estate may be a risky business, but with a few re-arrangements and some understanding it is possible to make this partnership work.
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