It can feel like multiple cooks in the kitchen when you try to buy a house with multiple owners, especially if you don’t follow the right process.
Picture a scenario where you pool funds with friends to raise the cash you need to buy the perfect investment property. But it then turns out that the buying decision isn’t the only decision you need to make, which is normal in any investment.
The decisions could get you and your partners clashing in interest. For example, while one prefers to rent the property out to a family for the long term, another recommends flipping and selling. There could even be another who prefers to use the house as a short-term rental.
In the end, you’ll find yourselves in a circular argument that’s going nowhere. That said, investing in property with friends should be fun and rewarding rather than frustrating.
Is it even a good idea to pool resources with others?
An important question about benefits needs to be answered before you proceed to buy a property with multiple owners.
There are several good reasons you’d want to acquire a house with a few friends. For starters, you’ll have more access to capital than you would be investing solo. On a solo, you may not be able to access higher-value properties, compared to when you pool the funds as a group.
Investing as a group helps you to spread the investment risks and diversify your investment portfolio, compared to investing your capital in a dream property alone.
Moreover, you could even buy multiple properties, giving you the opportunity of even greater returns while spreading the risk instead of spending all your investable capital on one property.
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Apart from pooling funds, investing with multiple owners comes with much more benefits. You’d have access to the brain trust of the entire group and can confidently make decisions by leveraging the know-how of your group instead of depending on just your experience and knowledge of real estate investment.
You can also level up with your friends and family members by building your wealth through the help of buying a property with multiple owners. Understand, also, that it helps to strengthen your relationships with others, as well as returns on your investments when you learn the ropes of investing in real estate. Co owning a house with sibling, parent, or extended relatives could also be a way to keep in touch with each other more often.
How to buy a house with multiple owners
Having known the benefits of group property investment, below are the steps to buy a house with multiple owners:
1. Pick a reliable group
You’ll need to find your group or potential multiple owners before buying the property. It could be a group of friends already planning property investment, or you could team up with your siblings to purchase a vacation house.
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You should be able to find your perfect investing partners within your social circle if you don’t have a particular group in mind. People who are serious about building wealth and who have the necessary capital to participate in an investment like real estate are your target and are available in your local online communities.
When you have your group, you can use a tool like Tribevest, which is a collaborative, group investing platform that allows you and your family or friends to organize as an investor group. A platform like this also protects your relationships and investments.
2. Create a mission statement
Regarding how to buy a house with a group of friends, note that any investment is business at its core. As such, for the investment group to succeed, you need a mission statement, just like any other business.
A mission statement is so much more than an ordinary formality, and the foundation of your investment group is built on it. Your property investment journey together as a group is guided by the mission statement as you use rely on it to ensure that every member stays on the same page.
Try to get rid of potential conflicts or issues between group members before going deeper to establish the mission.
Besides, it’s better to be informed earlier so you can address any issues before a cash-pooling opportunity. Members with conflicting interests should exit the group in the early stages.
3. Establish an operating agreement
Buying a house with family members can be a problem if there is no existing agreement guiding each participant’s decision. This could be really helpful when you are co-buying a house with parents. The mission statement is not enough when setting off the investment on the right foot, even though it is a great way to ensure all group members align with the purpose.
That said, the roadmap of your group’s operations should be guided by an operating agreement. The investment plan, voting procedures, bylaws, etc., should be made with this document. Moreover, the smooth sailing of all rules and procedures followed by the multiple owners should align with this contractual document.
Clear expectations of group members are a benefit tied to creating any operating document when buying property as a group. So, make sure to prevent potential challenging conversations by laying out these expectations from the onset. Legally, you should have an operating agreement to proceed with that investment group in states like California, Delaware, Missouri, and New York.
4. File an LLC
As multiple owners of one property, youare now ready to set up a formal business entity since you now have that mission statement and operating agreement.
Conflict will be reduced to the bare minimum among group members when you file the LLC that formalizes the group because the process makes no single group member the owner of the said property. This means that each participant is an equal partner in the investment.
At this point, opening a joint business account is important to aid co-owning property with family. Remember, this is business and the thought that you’re buying a house jointly with son, daughter, spouse, or other relatives should be kept at bay to avoid influencing decisions negatively. Your group’s investable capital should be separate from personal finances with a business account, which also prevents the entire group’s capital from being held by a specific group member.
Make sure to choose your group’s investment platform wisely when buying a house with friends LLC. You want a platform that can handle the tedious LLC filing while you and your group focus on building wealth.
5. Identify the house to buy
It’s now time to get started with your property investment after the building blocks of your investment group are set when co-owning property with family or group of friends. You want to start researching properties at this time if you do not already have one in mind.
Concerning time and money on the commitments you are about to make, you’ll need to ensure all group members are on the same page. The level of work everyone is willing to do to make the property ready for rental or resale and the price point for your property should be agreed upon.
Decide if you prefer a more turnkey solution or to flip the property together. If the agreement is to rent out the house, consider the number of hands that will manage the property.
At this stage, the answers to these questions should be feasible. You should also consider inspection results before the purchase, and try to work with a real estate agent. When buying the house, find whether there are tenants or not and know whether the lease allows you to get them to move early.
6. Pool funds and buy
Once the price tag of the property is established, go ahead and pool capital. If you’re investing with family members or friends, it can get a little awkward to ask for the money. To get rid of the feeling of being a collection officer, consider setting up automated money contribution reminders to keep all group members notified. If your current platform does not offer this feature, it could be time to move from it.
It’s the right time to purchase your dream property after every group member contributes their capital. Go ahead with the plans in your mission statement and operating agreement after the purchase.
Maybe the decision is to list the house as a short-term rental on Airbnb, use it as a joint vacation home, or look to flip it for a profit. Whatever the case, the rewards of your joint investment are ready and up to the initial agreement to get your returns.
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Types of co-ownership
Below are 3 types of co-ownership:
1. Tenancy in common
Tenancy in common (TIC) involves an equal sharing of property ownership. It allocates percentages of homeownership according to the investment amount by individuals instead of splitting it equally.
However, each individual has an equal right to use the property. The home can be sold when all parties have agreed but the proceeds from the sale are divided based on the percentages.
Before a co-owner can sell their shares of the property, they must get permission from the other owners. A co-owner’s share of the property can be left to any beneficiary they prefer if they pass away, so it does not go directly to other shareholders—Cornell Law School.
2. Joint tenancy
In joint tenancy, the shares are divided equally. However, the designated shares are not impacted by the amount invested by co-owners.
As a joint tenant, you can’t choose the beneficiary of your share of the property. Your share is divided equally among any surviving co-owners and you don’t have to ask for permission to sell your shares.
3. Tenancy by the Entirety
Tenancy by the entirety is recognized in most states but is only available to married couples. Spouses owning property as tenants by the entirety individually own an undivided interest in the property, with full rights to occupy, as well as the right of survivorship.
Note that if you buy a house as a tenant by the entirety, you can’t transfer your interest in the property without your spouse.
The downside of pooling funds with multiple owners for a house
If all parties are on board and willing to keep up with the financial commitments, then joint ownership will work. If problems and disagreements occur, attorneys and court proceedings would be required to remedy the situation.
That said, it’s tougher to cancel a mortgage when there are multiple borrowers. Each investor might not qualify on their own, even though an individual can buy out the other and refinance the venture.
If one of the homeowners can’t afford to or won’t pay their share of the mortgage, it becomes a problem and may lead to foreclosure or credit score damage that affects all parties. All in all, any default will affect every part and not just one person.
But if all parties are equally responsible and prepared financially, buying a house with multiple owners can be a great idea. Just make sure the people you’re dealing with are trustworthy.