Buying Real Estate with Partners

Years ago my brother Bill and I lived next to each other in South Fort Myers. Sunday mornings while the wives slept in we would jump in the car and go look at property or boats. One Sunday we decided to go look for a dock slip to rent or buy so we could house our boat. Up to this point every time we went boating we had to trailer the boat to a boat ramp. (This little trip was a good combination of our passions – real estate and boating!).

After meandering around for a while, I saw a sign on a dock on the way to Fort Myers Beach and called Marty Wallerstein, the agent on the sign. Marty informed me this was actually not a dock for sale but a house with a dock. I told Marty what we were looking for and he said he had a perfect home with room for a boat in the back yard. ( For those of you that know me, this is a typical Bill and Gregg story – go out looking for boats and come back with a house!)

The home was a tri-plex with the top floor elegantly furnished, a three car garage, a boat slip that would let us be minutes by boat from the Gulf of Mexico- and it came complete with two tenants in the two efficiencies on the first floor. Bill and I had owned boats together before and loved the economies of joint ownership. We normally played on our boat together anyway and owning it as partners made everything, in essence, half price.

The next day, after doing some research, we made a deal on the property. I decided to try to put together the purchase of this income property with a few friends. Here is how we worked it out:

My brother Bill and I and two friends from Scotland each put $30,000 into a new bank account. This money was used as the down payment and as a cushion for any negative cash flow. We also needed some funds for a lawyer to draw up the agreement and a few repairs on the property.

We agreed that we would each be able to use the house for two months a year. The prime rental months we would leave for rental in season: January, February, March, and April. We would choose our personal use months by lottery. (Actually we never had to do this – over the five years we owned the place there was never a conflict on use.) I calculated the break-even amount we would need to bring in as rent and I agreed to manage the property.

We owned and enjoyed this vacation retreat a half hour from our home for five years, never had a cash call, and sold it at a handsome profit. All in all the partnership was a very positive experience and one that I can recommend to you with a few changes.

Let me tell you what I didn’t like about the deal. Unlike a Condo, with a home like this there were maintenance and management issues all the time. Whenever Bill and I went to the house there was something that had to be fixed, or cleaned, etc. It made our visits less enjoyable. The manager of a deal like this should get his share for less money or free.

If this home were a condo, this maintenance issue and management issue would have been taken away from us. A condo in a resort area is a wonderful property to buy with partners. The partners can each enjoy the condo, the maintenance to taken care of, and because you have partners you can afford a more expensive condo and spread your risk out among partners.

Some Key Points

Titling the Property. Check with a competent attorney. I suggest an LLC. Your agreement with your partners should be in writing and prepared by an attorney.

Financing. On my deal, I signed on the note by myself. I am not sure I would do that again, but it gave me more control. Back then I titled the property in my name and my deal with my partners was a separate instrument. It worked out fine because everything was formally drawn up. Expect to pay about $3000 for the legal work; you can also have each partner put up cash and be responsible for his own share. Home equity loans these days are very cheap; your third alternative is to get a mortgage on the property with each partner signing the note. One of the keys with partners is you can come up with a great deal more cash and your LTV will be lower. I can put you in touch with a competent mortgage lender that can handle this.

Exit Strategy. Figure this out when you put the deal together. A good attorney can structure this for you.

Partners should have the same objectives and financial position.

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