“If you want to go fast, go alone. If you want to go far, go together” – African Proverb.
Should you invest in a property with a friend or go it alone?
One of the most difficult things for people in business is to find a partner/friend that is just as focused as you, trustworthy and dependable. In moments where it makes more financial sense to pool resources and buy property together to live or potentially rent out, just like in any other business, there are potential pitfalls of such a move.
Real Estate is characterized by low liquidity, a lot of work and maintenance and valuation problems. This can be aggravated by friendships in partner ownership. Sometimes, friendships change with money, spending and losing money. Quite often being in business with partners, who are friends sometimes family, can have bad endings for either the business, the friendship or both.
Potential Pitfalls:
- Conflicting Interests – Your interests maybe aligned at first, but things change and your partner may later demand to cash out.
- Liquidity problems – Real estate is difficult to cash out unlike stocks or bonds. Due to this fact, in the event that your partner wants to cash out quick, you may need to sell fast to meet that obligation. Note that a quick sale can lead to possible capital losses for both of you.
- Passive Investment? I think not, real estate investing can be quite time consuming. Purchasing, managing and maintaining property is hard work and can eat substantial amounts of cash, time and can strenuous on friendships.
- Cost of Owning – Unforeseen issues can arise with real estate hence, as partners you require substantial reserve to cover the unexpected costs.
At the end of it all, it all boils down to what you want to have: a property or a friend.
How to avoid these pitfalls:
- Draw up contract handling these little things or setting-up a limited liability partnership/company (whichever is better for you).
- Having a financial cushion and other investments.
Advantages of limited liability partnership/company:
- Allows you to protect the assets in case of bankruptcy
- Protection against quick sales and unforeseen problems
- Limits risks when you both take out a loan to purchase more property together
- You may get tax breaks under this set-up
- Re-investments can take place easily
- Peace of mind
It is therefore, imperative to have not only a financial cushion that will avert the potential pitfalls but also a legal framework to address the interest of both partners. Many people think that property investment is very obvious and straight forward route. It is not. There is a lot of work that goes into it and great returns too. Another unexciting route that you may want to consider is investing in a tax efficient investment fund that will provide the growth and income you seek with liquidity, less risk, less cost and less the stress.
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