buying an apartment building with friends

[PanchoVilla]

I can second Spex's recommendation of Reed's books. I have about 5 or 6 of them. They are excellent IMHO. Although he is STRONGLY of the opinion that the only partner you should ever own RE with is your wife. I am not saying I wouldn't do it, but you really have to have a thick skin and be able to be objective about things rather than get emotional or worry about things. I recently got my first investment property 4-plex and I have already learned a good amount. It can mainly be summed up by stating that tenants will amaze you with how little they know about things like leases.

I also second the one person managing. And the agreement should spell out that they get paid for it too. Otherwise you will have problems with one person getting bitter about doing all the work. Figure out what a 3rd party manager would charge and base it off that. (probably discounted since the 3 of you live there) Setup tenant requirements and apply to anyone who lives there even if one of your co-owners moves out and wants to let his buddy have "his" apt.

Agree up front to exit strategies. What if partner 3 wants to sell to a person that partner 1 and 2 can't stand or feel is unethical? Spell out the exact distribution of all profits and expenses, sure it just you 3 now but what happens if one of the partners sells and the new person is not as agreeable about the profit allocations? There are lots of complications and you should definitely use some lawyerin now to avoid problems later.

[spex x]

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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?

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eh, depends on the market, but I think 7-10% is probably about average for management. Most places that I'm aware of its 8%. Thats a percent of gross rents. And make sure that you're only paying on gross rents COLLECTED, not gross rents due.

You should be figuring the mangement costs of the complex into your property analysis. Many lenders require this in case they have to take over the property. So you guys will have the money if the deal is right. Mangement costs are not optional. I'd say that if only one of you guys is managing the property, he should get the whole 8%. IMO, thats fair.

[tommo]

how does the fact that I will be living there effect loan rates?

[spex x]

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how does the fact that I will be living there effect loan rates?

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hmmm...I'm not too sure for a fact. My guess would be that since you are likely going to need a commercial property loan, the fact of you living there won't matter. In commerical RE, the banks usually look at the property much more closely than they look at the borrower. As opposed to residential RE where banks look at borrowers much more closely than properties.

Ok, here goes. In commerical RE, the bank doesn't really care what your personal income is necessarily. They assume that your income isn't high enough to service the debt on the property anyway, so your personal income and assets doesn't really matter nearly as much as they do in residental RE. What matters to the bank is that the numbers work for the BUSINESS of landlording that property.

So basically if you buy a 4 plex (residential) property, the bank says, "hey, does THIS GUY have the credit and income to carry this debt if he can't get any tenants" if yes, you get the loan. If no, you don't. But if you want to buy a 10 plex, the bank says "hey, can THIS PROPERTY support this level of debt given all expenses, is there a market for this type of housing, and can this guy manage the property effectively?" If yes, you get the money, if no, you don't.

Ok, now I told you all of that in order to tell you this: If you and 3 other owners are occupying 30% of the units, I suspect that the bank is going to HATE that 30% of your potential income is getting sucked up. If you give away a third or a half of your income, I can't see that the bank is going to play ball.

So your other option is to just buy a bigger place. But how big of a complex to you have to buy in order to spread out the collection losses on three units? I don't rightly know. I'd say that you need a lot of units.

Another problem is that the collection losses will lower the value of the property when you guys want to sell it.

Ok, so the only way around all that is to have an LLC or some entity own the complex, and each of you guys pay rent to the LLC. The problem with that is that the LLC still going to get taxed on the income from those rents.

I dunno whats the best way to handle it. Maybe someone else has some ideas.

[SossMan]

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how does the fact that I will be living there effect loan rates?

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on anything greater than 4 units, it won't. Sometimes you can get primary residence financing on a 3 or 4 unit property, but that's pretty much been taken away with a lot of the recent mortgage guideline changes. Some lender did a study on 4 unit "Owner Occupied" properties found that something like 40% of them had occupancy fraud.

2 unit owner occupied are still pretty much available.

Anything over 5 units, though, is considered commercial real estate and is a whole different animal.

[Tien]

If this is a 1 time thing that you want to do with friends or else you wouldn't do it yourself than it isn't a bad idea.



If you are planning to buy more and more properties in the future it is better off learning how to do it yourself and forget having partners.


On certain 1 time new business ventures that I am doing for fun, I don't mind having partners if that means I wouldn't do the venture otherwise.


For example:

My main bread and butter real estate flipping business I will not bring in a partner until it comes to a point where I want to sell off the company and have someone step in and take over operations of the company. I predict this to happen in 3-4 years depending on market.

My other website venture I have a partner in the deal and no more people after that.

My other super part-time ventures I have have multiple partners in the deals. I don't mind because each of us contribute just as much but we wouldn't do it otherwise if we had to do it alone.