There is nothing greater in life than enjoying success with friends and family. As great as the highs of these moments can be there is another side to that coin. What if things go wrong? Many investors are steadfastly against investing with people they know because of all the potential issues it can create. They don’t want to have to deal with subpar returns, lengthy timeframes or tension with the property. Instead of shying away from working with friends and family embrace it. Put every possible scenario with the property on the table before you get started. Only when every question is answered and every concern is addressed should you move forward. By getting things out of the way before you start you pave the way for a long and harmonious partnership. Here are five areas you need to discuss before you start investing with friends and family.
- Expectations. What are you looking to get out of investing in real estate? Do you want the long term income that a rental property can provide? Are you looking to get in and out of a property within a few months? Are you looking to simply provide capital or are you willing to get your hands dirty? Before you decide to partner up you need to know what you both want out of the transaction. Your expectations will determine which properties you pursue, the markets they are in and their purchase price range. It will impact your budget and the type of improvements you make. Simply put your expectations dictate everything. If there are any differences of philosophy or opinion they should be discussed before you even look at a property. If you are not on the same page it is better to get it out now before you get too far.
- Risk. One of the popular disclaimers of investing is that you can and possibly will lose money. While the risk is low there is a chance it can happen. You need to talk about what types of deals you would feel comfortable with. Properties in better areas are safer investments but may not yield the returns you desire. Conversely properties in speculative markets can yield a higher return but come with a greater amount of risk. Whatever you decide this has to be discussed up front. If someone in the partnership is comfortable with a lower return it will impact the deals you pursue. It will also impact the way you market and your general approach to the business. Very few investors ever talk, or even think about, the downside on a deal. With a partnership you need to brace for the possibility that anything can happen. If you do your homework the odds of actually losing money are slim but if everything goes wrong it can happen.
- Finances. Discussing financials are never easy with friends and family. Like anything else in the business it is better to bring them up before you start than after there is trouble. As you can expect there are several financial items which must be covered. Start with the basic question of how much each person is willing to contribute. Next talk about who is going to pay for certain items and when the funds will be available. Finally it is important to talk about financial allocation. This is the most important issue in any partnership. Every partner wants to know what their return on their money be. However you see fit to divvy up any profits has to be talked about before a dime is put into a bank account. You never want to have this discussion after you have a check in hand from a closing. With the finances it is especially important to take your time and make sure everyone is on the same page.
- Timeframe. You may be willing to wait five months for a deal but if your partner isn’t you will have a problem. Delays and additions to the timeframe should be an expected part of the process. Even if you have your schedule mapped out things happen that can cause it to change. As much as you want to turn a rehab over in 45 days it is not always the case. Unless you talk about this scenario beforehand someone in the partnership may get frustrated with the process and begin to voice their displeasure. All parties in the partnership should expect that things will not always happen as quickly as they would like.
- Work Allocation. Plenty of good partnerships dissolve over work allocation. One side feels as if they are doing too much of the work for an uneven amount of the profits. Saying that one side will handle the property and the other will take care of the finances may not be enough. You need to make a list of everything that needs to be done on a transaction and assign someone to do it. Yes, this may be a long and tedious process but it is important to your success. Inevitably one party will feel overwhelmed at some point in the transaction. Unless the work allocation is broken down they will get upset and frustrated with the process. This can lead to a blowup which can hurt the bottom line. However you decide to break your work up you need to talk about it first.
The more you can get on the table before you start the better. There will be ups and downs and even disagreements with any partnership. Discussing these items before you get started gives you something to refer back to when you are in doubt. Investing with the people closest to you is too rewarding to harp on the negatives
