buying an apartment building with friends

[Tien]

Partnerships in deals turn to crap when there is a failure to communicate, and that is really important.

If you lay out agreements and ways to handle potential problems then there shouldn't really be a problem especially if your friends have worked well together before.


How many partners are in this deal?

[spex x]

I agree what everyone has said. I no longer work with partners in real estate deals at all. A BIG BIG problem for you guys too is that you most likely don't all know about real estate investing. If some deal of a lifetime came along and I had to have a partner, I would ONLY ONLY ONLY ONLY partner with someone that I feel is equally as competent as I am about the investment. Otherwise one partner wil constantly have to justify everything to the others. It won't work that way and INEVITABLY will fall apart.

Not to mention that buying an apartment building is a serious undertaking that requires significant expertise to do properly and not get burned. The due diligence will likely take a month of full time work to do properly. Due diligence and legal fees will cost you a ton of money upfront, and a lot of the time the deal will fall apart during due diligence. Even if the you manage to complete the due diligence, will you have the necessary experience to negotiate based on the DD findings? Probably not.

Not to mention that you still need financing. I can't imagine a bank that will make you guys a loan with the situation that you're proposing. Put yourself in the banker's shoes: A group of 6 22 year old kids walks in and asks for $800,000 for an apartment complex. They want to own it jointly (bad idea). They have no experience in REI or property management. They do not know how to do proper due diligence. You ask the kids some basic questions about the deal, and they don't know the correct answers because they don't know what they're doing. What would you do in that guy's shoes? I'd kick your asses out of my office.


I like your spirit, but this idea is probably unworkable.

[jono]

dont

[petp_the_greek]

one word; CONTRACT.

and do you know anything about managing a building? with insurance, water bills, electricity bills, upkeep, renovation, repairs, possible deadbeat tenants....its not as easy as it seems.

with a 100K job and 22 years old just save your money first and go buy a condo somewhere.

[ChromePony]

I just did something pretty similar to this with my brother and a friend, except we got a 4-plex and none of us are living in it. We've had it for about 6 months now and everything has been fine so far. We structured the purchase through an LLC (this is a must IMO) and made it clear that all three of us would have to agree to liquidate the property but anyone can sell their share if they feel so inclined.

Its true that if you go to a bank with no credit, no cash and no idea what youre doing you wont get a good loan. This is why it helps to have some idea what youre doing. In our situation we all had good credit (720+), enough cash for 25% down and we did our homework and learned enough real estate to be able to have intelligent conversations with the loan brokers etc. It is a lot of work to do this properly, don't think you can just hop on craigslist and find a good investment property, you have to make the right connections and ideally get lucky to find an undervalued place.

Its been a great experience for me personally so far, and if you think you can get along with these people I would go for it, but the fewer the better for sure, there were times in our project that I wish there were only two of us simply for communication and decision making reasons. Let me know if you have any more specific questions.

[spex x]

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Also, real estate does not out-perform the stock market. You would be better off putting your money in NTDOY and let it double over the next year than buying some apartment building.

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Eh, it depends a lot on the kind of investing that you do. Most of my buy-and-hold properties give me a much better return than the market average.

There are lots of properties that don't though and for this OP, I highly doubt that he'd beat the market average. The OP is likely to pay too much for the property and will likely make only small gains or even lose money over time.

[tommo]

ok, so now I have lots of questions. my friends and I actually own some website companies that pull in a pretty decent income. These sites are fairly self sufficient and require probably only about 10-20 hours of work a week for us.

I have a lot of time to learn about real estate investing. So to all those saying "you don't know anything about RE investing, you are going to waste your money." Well please point me to some resources for learning about real estate investing.

Keep in mind we will also be living in the building. I think this means maintenance (and dealing with tenants) should be less difficult.

I think we intend to get a building with a non-apartment basement and use the basement as an office. Does this change anything?

I think we should have about 300k saved up in approximately a year. So how much time should I expect to spend learning about real estate before I am educated enough to make a good deal? Is there anybody I can intern under or work with to help my education process?

[tommo]

oh, and its me and 2 friends.

[spex x]

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I have a lot of time to learn about real estate investing. So to all those saying "you don't know anything about RE investing, you are going to waste your money." Well please point me to some resources for learning about real estate investing.

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I like just about anything by John Reed (www.johntreed.com), also Ray Alcorn's book "The dealmaker's Guide to Commerical Real Estate" is expensive but good. Both authors assume a certain basic knowledge about REI. I read "Real estate investing for dummies" and "property management for dummies" a few years back and liked them. I've heard from another investor that I respect that Mr. Landlord's stuff is good (www.mrlandlord.com), but haven't read it myself. Start with the Dummies books, then buy Reed's books (email him if you aren't sure what to buy), then Alcorn. Those books will spoil every deal that you come accross, and give you an appreciation for the rare good deal. But you'll learn how to analyze property.

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Keep in mind we will also be living in the building. I think this means maintenance (and dealing with tenants) should be less difficult.

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I'd expect the tenant issues to be worse. They'll be knocking on your door every day asking for things, exceptions to the rules, etc. Don't underestimate how much tenants are a pain in the ass. They're a major pain.

Maintenance will be somewhat easier if you plan to do all the work yourselves. If you plan to hire a handyman, living in the property will have little effect. You've still gotta pick up the phone to call him.

If you live w/ tenant, you need to establish firm, set ground rules upfront any always enforce them consistently. Also, if there are 3 owners living on the property, there should only be ONE manager. Don't even tell the tenants that the other residents are owners. One person deals with tenants for consistency sake (particularly when it comes to fair houseing laws, etc.). Either you train tenants or they train you. That is amplified tenfold by you living in proximity to them.

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I think we intend to get a building with a non-apartment basement and use the basement as an office. Does this change anything?

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It could have positive tax consequences and gives you some flexibility come tax time. The business could rent from the apt complex at high rents (as long as they're resonable), decreasing the taxable basis of the business. Or, you could take a home office deduction on all three owner's tax returns (but the offices have to be in the apt). Get with a CPA to figure out the best way to go.

Be careful about zoning though. Make sure and check with the city first as you may need a different zoning designation for the office space if its a separate rentable space from the rest of the building. Some localities force you to get a 'residential office' designation for this. So you might need a zoning variance (no fun, but doable).

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I think we should have about 300k saved up in approximately a year. So how much time should I expect to spend learning about real estate before I am educated enough to make a good deal? Is there anybody I can intern under or work with to help my education process?

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There are a lot of RE 'gurus' that sell 'mentoring' services for several thousands of dollars. Don't buy them. The best way is to read, study, and find a local REI club to get involved with. Start telling people that you're interested in buying some smaller apartment complexes. Ask plenty of questions. Buy your fair share of lunches, get to know people. They will help you.

I don't know how long it should take. It takes as long as it takes for you to feel comfortable agreeing to make a several hundred thou investment and pledge yourself to pay back a potentially crippling debt for the next 30 years of your life. When you are ready to sign those papers, you're ready.

[tommo]

how much would be a reasonable amount to pay the owner who we designate as the manager? If we eventually all move out, how much could we expect to pay somebody to manage the property?