Wondering what a Real Estate Investor is? Are you new to the world of real estate investment and want to know more about it? Confused about the dynamics of the world of real estate investment? What are the benefits of real estate investment? What will suit you more, investing with strangers or investing with your friends? What are some of the common scenarios of investment? What are the pros and cons of investing with friends and Family? What are the pros and cons of investing with a stranger? We will be covering all those questions in this article and more…
Interestingly enough, these are some of the most common questions which you may have when you are new to the world of Real Estate Investment. If you want to know more about this, then you have come to the right place. Because, in this topic, I am going cover all of the above queries about Real Estate Investment, along with some additional information that might be able to help to answer some of the concerns you may have. Especially about when to buy a property with friends, and when to buy with strangers?
I am sure you know the distinction between a property investor from a developer, but here I am defining property investment again.
What is Real Estate Investment?
For the purpose of gaining profit, the property is bought or sold. Month to month, a profit is made through managing or renting the property.
After all, the whole purpose of buying the property is to make income or profit from it.
Who are Real Estate Investors?
A real estate investor is a person who buys or sells property in order to make a profit from it. It can also be described as a profession. They look out for properties that are being sold with certain criteria and buy them.
If the property requires some repairing, then they fix them and may rent them. So, Real Estate investment is a way for them to generate income in the short term and a capital gain in the long-term.
Role of Lawyer
Having a lawyer is always a great option for a property investor, together with other vital tools.
A person should never pursue Real Estate investment, if he doesn’t have a good lawyer. It is crucial to choose a person that can be trusted. So, choose carefully.
Role of Broker
A broker is a person that acts as an adviser and even sometimes as a negotiator between two parties. When a Real Estate Investor, chooses to co-own with a stranger, the broker helps them meet and settle the contract.
Besides, mortgage brokers, financial brokers and insurances brokers also play a useful role for the investor.
Benefits of Real Estate Investment
Following are some of the benefits of real estate investment:
- It is a very profitable business.
- You don’t have to pay that much tax (depending on your country and state), if you buy the property for investment purposes.
- It is a passive income and will help make extra money on the side, if you do it right.
- It can also provide you with a sense of security for a long time because Real Estate Investment is a long-term venture.
- If you intend to buy a property for a long time, its value will increase over time almost every time regardless of your location.
- If you want to make a career out of real estate investment, then you are self-employed. You are not answerable to anyone but to you and your family.
- It can also contribute to the economic development of the community and your country.
Why Do Real Estate Investors Invest?
In this paragraph let’s find why a Real Estate Investor invests in a property.
Real Estate Investment is a very good way of investing and ‘parking’ money. It has long term benefits that can be very rewarding. It provides a sense of financial security to the investor.
For instance, if a person buys something else for as investment, he/she may have to pay full tax and a considerable an interest in finance. But that is not the case for real estate investment. Because, if the investor buys a property, he/she won’t have to pay the tax at a higher rate that had to be paid in case the property investment. Of course, they may have to pay a bit for than someone who purchases a property as an owner-occupier (for a living), but a considerably less than someone who ‘invest’ in a car, for example.
Can You Invest in Property With Friends and Family?
Yes, it is entirely possible to invest in a property with friends or family. In this case, a property will be owned by two or more than two people based on the money each individual invested.
There would be, of course, a certain amount of trust that will be required.
Common Scenarios of Investing With Friends and Family
There are many common scenarios when people typically invest in a property with their friends and family.
Some of them are given below:
This is the most common reason why some people invest in properties with their families. Sometimes, a person likes a property but cannot buy because the property is out of budget. If his/her friends or family is interested in investing, in that way, it will be easier to purchase the property for him/her.
Buying a dream property can sometimes be a very time taking process. But if you buy a property with a friend or someone from your family, it won’t take that much time. In that way, it will be easy to manage the budget.
When Should Real Estate Investors Invest With Friends and Family?
There are some things to consider before investing with your friends and family. Some suggestions are given below:
This is the most critical point. An investor should always invest with the friend that he can completely trust. This is the foundation of any dealing or transaction. Because, without it, jointly owning something can be a nightmare.
So, ask yourself, are you ready to put that kind of trust in your friend or family member.
When a person decides to buy a property jointly with someone he/she knows its because of the trust which enables them to communicate openly and honestly. But sometimes, the relationships do not remain the same if you damage the communication, so it’s important to keep an open communication channel at all the time. Everyone should be approachable!
Tip: Don’t underestimate the power of talking to neighbors before buying a house.
No relationship has a guarantee that it will last a lifetime. So, if a person is investing with a friend or a family member, it is needed to be put everything on paper like everything else in life. Decide beforehand how much each person will invest. Limits should be defined. All the possible scenarios in the legal agreement should be decided. Because a verbal agreement holds no value in court in the modern-day.
Keep everything legal in writing!
Keep everything open
No details should be spared. Each person involved should be open about finances. Decide what type of property would suit each and both. Can they pay the monthly mortgage? Who pays it, and in what proportion?
This should be agreed upon before purchasing the property. There should not be any room left for surprises in a latter-day after your purchase.
Future Possibilities should always be decided, and this is where legal input could be immensely helpful.
For instance, if the property is to be sold in a few years, what percentage each person would get. Talk about all the possible scenarios to avoid conflict later on. It should be decided before how long, both persons intend to keep the property.
Pros of Investing With Family and Friends
- It is an easy process to collect funding.
- All parties involved gains benefit in the long-term, which will be shared within family or friends.
- The repair expenses can be divided among all parties.
- There is a level of trust in investing with a friend or a family member instead of trusting on a stranger.
- It can make the relationship stronger, if you do it right.
Cons of Investing With Family and Friends
- The conflict can arise in the case of one person disagrees with the other.
- A strain can be put on the relationship can result in you losing a good friend.
- It can get very messy.
- It is difficult to walk away from a friend, especially from a family member.
- If one person doesn’t pay the monthly mortgage, things would become very awkward.
When Should Not Real Estate Investors Invest With Family and Friends?
Following are some of the common scenarios when a real estate investor should not invest with Family and Friends:
Not enough trust
If a person cannot trust his family and friends, then, they should not invest with them. It is not a good decision.
Difficult to agree upon
If their is an amount of trust but cannot come to an agreement regarding every aspect of the buying property, then, it is not a good idea to invest together.
It should always be decided beforehand, how much each person will spend in case of maintenance and repairing. Warning bells should ring in the head, if they can’t decide and all of a sudden one kept ignoring day to say expenses of owning and managing a property.
If someone suggests a verbal agreement regarding some of the points, it’s never a good sign. An investor should always steer clear of such agreements, and they should be in writing for at least as an MoU.
Not knowing when to sell
Both parties should come with an agreement before buying a property about when they are going to sell it (The exit strategy). If they can’t decide about that, it will become a cause of trouble later on.
Can You Invest in Property With Strangers?
Yes, investing in a property with a stranger is another option.
In this scenario, everything will be done on paper and decided legally with the presence of Lawyers of both parties. A broker may also be presented as they may help both parties come to an agreement.
Common Scenarios of Investing With Strangers
There are many common scenarios when people invest with strangers. Some of them are given below:
Budget, in this case, is also the most important point if a person cannot afford to buy a property by himself. So, buying a property with a stranger is the best option.
In my personal view, investing in property with a stranger with a good reference is a better option than involving family or friends.
When a broker can find a good match for co-owning a property, both parties involved come to an agreement.
When Should Real Estate Investors Invest in Property With Strangers?
A person cannot trust a stranger, so, everything should be done legally. Having a lawyer studying the document and going over each and every aspect is a must.
Make a joint fund together for paying the start-up cost, pitch in extra money for the maintenance all should be in paper and transparent. Remember everything should be legally binding.
Note: it’s a good idea to have witnessed when signing the contracts of the property or any other legally binding document between the parties.
Avoid awkward Situations
Owning a property with Family or Friends can sometimes be very awkward. So, when people want to avoid that they always go for co-owning a property with a stranger.
When Should Real Estate Investors Invest With Strangers?
If both parties can come to an agreement on all matters, then a real estate investor can invest with a stranger. The mutual agreement regarding every aspect is an excellent way of starting the process.
When the people have agreed upon the partnership. Like, how much each person will own.
Time to sell
Let’s talk about why this is the most important step.
When both parties agree on a time limit for how many years they will keep the property, all that should be in writing. The time limit of selling and circumstances prompting for sale must be decided before going into the agreement.
Pros of Investing in Property With a Stranger
- You can maintain the level of privacy that is not possible with owning a property with a friend.
- You don’t have to worry about hurting the feelings of a stranger. You can simply be direct.
- You can be more transparent with strangers.
- Walking out of the agreement is easier, if you are in contact with a stranger.
Cons of Investing in Property With Stranger
- It is difficult to establish a trusting relationship. It’s all formal!
- It would be problematic if the two parties cannot agree on a matter.
- Disagreements can lead to awkwardness and legal battles.
- Involving lawyers, on every disagreement, will put a financial strain on both parties.
When Should Not a Real Estate Investor Buy Property With a Stranger?
Following are some of the scenarios when a Real Estate Investor should not invest with a stranger:
If a person thinks that he cannot establish a relationship of trust with the stranger, then he should not think about getting into a contract with the stranger.
Sometimes, people cannot agree on the same point, and that is normal. But when it happens frequently, it is a cause of worry. So, if that is the case best to look for another partner.
Communication is key to solving any matter. So, if the line of communication is not available or not robust, that means their will be no solving of the matter.
Real Estate Investment is a very good way of investing money. There are lots of benefits to it. A person who is a Real Estate Investors can have a variety of options to choose from. He can either sell or rent the property. But, sometimes the property can be way out of budget—this where co-owning solves the issue.
A person can choose either co-own with the friend or a family member or even with a Stranger. Whatever makes a person comfortable just Remember one thing, talk with a lawyer and stick with the person (partner) who can be trust and open to communication. It really helps in every scenario.