Real estate is one of the best investments for long term growth, a steady flow of income and security. But getting started can be difficult without financial resources. Buying a rental property with family members can help alleviate many of the issues.
Buying rental property with family will make achieving your investment goals much easier. A family member can help secure a loan and contribute towards a down payment. This will enable you to buy better quality property and divide responsibilities.
But there are some obstacles to investing in real estate with family members. Let’s look at how to do it the right way first.
How to buy rental property with multiple owners
I made a lot of mistakes purchasing rental homes with my brother and dad (which I will detail later). But, once we had several properties under our belt the process became much easier. Here is a roadmap you can follow for success buying investment property with a partner:
- Find a partner
The first step to buying rental property with a partner is to find a willing investor. One of the most common scenarios is parents who invest with their children. Many parents are more than willing to give their kids a jump start into a sound investment.
If you are seeking out a family member to split a rental property, the best thing you can do is just ask. But before you do, have some thoughts about how you want to proceed such as where you want to buy a rental, how much you want to spend, and a general idea of the income potential. You should also prepare a few ideas on how to share responsibilities.
If you can’t find an appropriate family member, consider buying a rental property with a friend.
- Agree on terms
When you own a rental property all by yourself, you get to make all the decisions. But when you co-own with a family member, your ideas may have different paths. This is why it is critical to agree on any terms before you invest.
I cover this in more detail below but you will want to document the basics such as percentage of ownership, how income will be divided, how either party can exit the investment, and how ongoing management will be handled.
- Arrange funding for down payment
The next step is to find out how much money you have for a down payment on financing. This will enable you to know exactly how much you can invest on a rental home. There are a lot of extra fees when buying a rental property such as closing costs, attorney fees and inspections that will reduce the amount you have available.
Find out from your family member(s) how much they have, or are willing to invest. In an equal relationship, you will want to match that amount. Be sure to keep a separate account for any funds you have saved so they are available at time of purchase.
- Create a business structure
Consider forming a business for your rental property for personal protection. The cost to set up a simple LLC is minimal and there are a few extra forms to complete at tax time, but your family will be shielded from unforeseen trouble.
- Create a legal agreement
As part of your business, or in a separate document you want to spell out all of the agreements between you and your family member. This is a great time to hash out all of the details. In addition to maintenance you will want to be prepared for emergency repairs, interviewing tenants, cleaning a property between vacancies, and even tax preparation.
- Find a property
Now that you have many of the details aside, it is time to find a rental property that will be a good fit for you and your family. Location will be a priority as you will want to make sure there is a large pool of tenants. Also, you and your family member may want to live close enough so you can get to the rental when needed.
It can take time to find the right property. It is a good idea to be familiar with the market well in advance of this step so when you see a rental that is a good fit, you are ready to move.
A few things to consider are price, number of bedrooms, layout, age of appliances, maintenance requirements, and cost of utilities.
- Secure financing
Finally, you are ready to get some financing and buy your first rental with the help of a family member. This is another step that you can start earlier by researching several finance options, reviewing their average lending rates and terms.
Before you find a property, you can obtain a prequalification letter that informs a seller how much the lender is willing to give you which can help with negotiations. When a seller knows you have the full amount needed to purchase a dwelling, it can give you an advantage over another buyer who is not as well prepared.
Advantages of buying rental property with family
Easier to get a loan – If you have limitless funds you don’t need a partner. But splitting your investment with a family member can mean more money for a down payment which will allow you to buy a bigger and better property. Also, having multiple sources of income will improve your debt to equity ratio making it easier to get a mortgage.
Build wealth faster – In most cases, if you can buy a bigger and better rental versus a small apartment, the value of your investment will grow faster. Within a few years the equity in your first rental could help you buy a second investment. This is less likely if you buy on your own.
Share the responsibility – Buying a rental with a family member means you can split the responsibilities such as maintenance, management, finding tenants, and banking.
Improve your credit score – For those just getting started with investing, or with a weak credit score, purchasing a rental with family members can help boost your score. It will make all the difference in the world when you are ready to buy a property on your own.
What issues will you face co-owning rental property with family?
Differing objectives (when to sell, when to raise rent) – One of the biggest issues you will face co-owning rental property with family is not fully understanding each other’s objectives.
A major life event can require one of you to have a need for money invested in the rental, forcing someone to sell their share. If this happens, you may face a large capital gains income tax as well as depreciation recapture.You might also decide that being a landlord is not for you.
Earn less income – With most co-owned investments, you will have to split the income earned.
Split appreciation value – Upon sale of the property, you will also have to share the proceeds.
Dividing responsibilities – It can be difficult to divide responsibilities fairly. You may have needy tenants with lots of questions and issues, or a property that needs a lot of care.
Occupant vs. Non-occupant Co-buying – If you or your family member will be living in the rental, there may be more expectations to manage tenants, repairs and issues. It may also further complicate how revenue is divided when one party takes up rental space.
Managing the property – Often when family members decide to purchase a rental property together, hiring a professional property manager is not the first thing that comes to mind. It may not fit in your budget. It is important to identify anything that must be managed for your investment and assign responsibility.
Tips for how to make co-buying successful
I invested with my brother (and later with my dad) and I assure you it was worth it as we now have a portfolio of properties completely paid off and providing steady income. But, make no mistake, we messed up a lot! Below I share some of the mistakes we made over the past few decades and some tips for you to avoid the same fate.
These are just a few examples to give you a taste of what it is like to share landlording responsibilities with a family member. Many unexpected things can happen so when you are prepared before buying a rental property, managing issues will be much easier.
Did not set up a separate account to deposit rent and pay owners
Mistake:
Collecting rent has always been a pain. Some renters mailed a check, others dropped it off. Payments were late all the time. We did not have a separate account for our rentals which made accounting tough as well as created challenges dividing our income.
Tip:
At the very beginning of your partnership, set up a checking account for your business. Shop around because many banks have crazy fees.When it comes to collecting rent, use a rent collection service where your tenants make an electronic payment right to your bank account.
Did not research professional service providers before issues happened
Mistake:
Even if you plan to be a DIY landlord, having professionals to back you up is critical. I thought my brother would handle all these issues as he was pretty handy. But, when your partner goes on vacation, that is when you will get a call about a water pipe bursting or bugs suddenly appearing.
Tip:
Research and agree on contractors who can handle various responsibilities. Shop around for a handyman who can fix a lot of things. Test that person out on a few small jobs to see if he or she is reliable. Ask other landlords in the area who they use.Also use social media to inquire about other services such as a plumber, electrician, pest control. Keep a file with their contact information and backup providers.
No screening of tenants (we were just happy to fill the vacancy)
Mistake:
That first rental property was a joy. The day we took ownership, some renters walked up to us and asked if it was available. We quickly signed a lease but it all went downhill from there with missing and late rent, and constant complaints. We never discussed anything about seeing if the tenants would be good for us.
Tip:
Agree with your partner to have a background check and a credit report completed for each of your tenants. Incorporate the cost of these services into your rent. If a renter can’t provide good references or does not have satisfactory credit, then move on. The cost of filling vacancies is expensive. Marketing, vacancies, evictions and legal forms can all eat into your income. Get the right tenants and you may not have to deal with those costs for a long time.
Allowed pets without an agreement or security deposit
Mistake:
I love dogs. And when one of our tenants showed up with a cute Labrador puppy, I just wanted to play with it. We didn’t allow pets. He just showed up. And neither of us planned for this circumstance.The result was scratches in hardwood floors, holes in the door and chewed window moldings.
Tip:
Discuss with your partner whether or not you will allow pets. Include a rock-solid clause in your lease and make sure if you do allow pets, that you collect the maximum security deposit your state allows. It should also include what happens if there are undisclosed pets.Keep in mind that some tenants may have a service dog or emotional support animal where different rules apply.
Did not check up on tenants frequently
Mistake:
My brother lived around the corner from our first rental and I assumed he would be checking in on our tenants as needed (and often he did). But many times, months would go by and we did not check in on our investment until there was an issue. For example, when the tenants failed to put the garbage out, mice showed up and we had to deal with that issue.
Tip:
Create an agreement with your partner detailing each person’s responsibilities. Include who will check up on tenants and how often. It is a great idea if both/all owners share this duty.Allocate time each month to visit the property even if nothing is wrong. Create a list of repairs you would like to make and use that as an opportunity to stop by. Be sure to give your tenants advance notice, but keep them on their toes.
Should you buy a rental with a family member?
Buying investment property with a family member can be a rewarding experience. It gives you the opportunity to build a solid financial future. Your long-term income and capital appreciation can be much better than investing on your own. With proper planning and preparation, you can avoid costly mistakes that can sometimes lead to disputes that could disrupt relationships and your investment.
[…] read through this page several times, follow the tips and have your act together, find a partner. Start with family, then relatives and friends and just […]