Going 50/50 with a partner in a real estate purchase. Good idea?

November 1, 2011 4:52 PM

Real estate investing filter: Buying a condo in Florida as a rental property with a partner. Good idea?

Hi there, Sorry if this is a repeat of an existing question.

A friend who owns 5 rental properties in Florida is looking to buy more and is offering me the following deal:

I put up the funds needed up front (down payment) to purchase a place and he maintains the property (including finding renters and collecting rent.)

The ownership of the property is split 50/50 and he takes some money to cover maintenance.

Does this sound like a reasonable deal and what type of questions should I be asking going in to this?

Thank you all for your help.

posted by seatofmypants to work & money (11 answers total)

Does this sound like a reasonable deal

Nope. That sounds straight-up crazy, and I think you're about to get robbed. Legitimate property management services take a cut of monthly rentals and/or charge a service fee. They don't suddenly own half the property.
posted by mhoye at 5:26 PM on November 1, 2011 [1 favorite]

As a general rule, don't go into business with friends you'd mind losing. And unless you're in Florida, I'd be hesitant to go into business with a real estate investor if you're not nearby--seems like a real easy way to get fleeced when a mortgage payment is due on property number 3 and the tenant is a deadbeat...
posted by Admiral Haddock at 5:30 PM on November 1, 2011

I would not buy condos or rental property in a state that still suffering from a real estate collapse, especially if I didn't live there myself. This sounds like a good way to lose all your money, and your friend.
posted by alms at 5:31 PM on November 1, 2011 [1 favorite]

So the idea here is that, essentially, you buy a property and he manages it, and you use the rental income to make the mortgage payments, and he for some reason gets 50% ownership?

That sounds like a terrible idea. Who is going to make the mortgage payments while the unit is vacant? Who will be responsible if there is an unexpected assessment by the condo association to replace the roof or something? Who is going to cover the insurance on the property? If your friend is so good at managing his rental business how come he can't cover a down payment for a new property? What's your exit strategy if you need to sell your share of the property? Why should he get equity in the property for doing something you could hire a property management company to do?

If you do go ahead with this, which you definitely should not do, at least make sure you consult a lawyer with experience in this area and get everything in writing (or let the lawyer talk you out of it.)

Also consider why your "friend" is trying to scam you like this.
posted by ghharr at 5:52 PM on November 1, 2011 [1 favorite]

I put up the funds needed up front (down payment) to purchase a place and he maintains the property (including finding renters and collecting rent.)

The ownership of the property is split 50/50 and he takes some money to cover maintenance.

I'm not your lawyer and I'm not giving you any legal advice.

Just help me understand the deal.

You pay 100% of the cost of the property. He pays nothing. You pay him more money to cover maintenance.

And in exchange for you paying for everything and paying him more money to maintain the property, he gets a 50% ownership stake.

I'm not giving you any advice. I'm just asking you to slowly and carefully answer those questions. Then if you want advice, find a lawyer or financial advisor.
posted by The World Famous at 5:55 PM on November 1, 2011 [3 favorites]

A friend who owns 5 rental properties should have the money to come up with a down payment. He wouldn't need yours. Run.
posted by santaliqueur at 6:08 PM on November 1, 2011 [3 favorites]

If you're going to be putting up all of the money yourself, go ahead and buy a local property on your own and then hire a management company to handle it.

Better yet, invest that money in a REIT (real estate investment trust) and save yourself the headaches.

Your friend seems like he/she is trying to scam you.
posted by Ostara at 7:18 PM on November 1, 2011

You could always counteroffer him with 100/0 split on ownership, and he property manages for a fee. At the least, his explanations of why this is impossible or a bad idea should be illuminating.

I don't want to say this sort of deal is impossibly wrong. Believe it or not, this isn't that dissimilar from how many commercial developments (skyscrapers to shopping malls) are built. But in those cases there are ponderous legal frameworks in place, for instance a REIT, and up-front investors are paid back with income through what's called a structured sale. You don't get there without a lot of lawyer hours and stacks of paperwork as high as an elephant's eye, though. Doing with pretty much the equivalent of a nod and a handshake feels dodgy, especially from out of state.

But what santaliqeur says: I bet dollars to donuts his existing portfolio is underwater and he's struggling for cash flow. Maybe he truly in his heart believes that just one more property will make it work, but he can't get there so he needs you. This may not be a scam, per se, but it is an unequal partnership and there are significant downsides for you. Just for example, Florida is a recourse state in foreclosure law, meaning that if you guys default on the property (say, imagine it goes empty for six months, or he goes bankrupt or vanishes with the last month's rent), the bank can sue you personally for any deficiency between the mortgage and the sheriff's sale. That can be tens of thousands of dollars, depending on a lot of different factors.
posted by dhartung at 2:12 AM on November 2, 2011

This is slightly eponysterical. I agree with other posters that this is at best not a good deal for you and at worst a scam.
posted by Aizkolari at 5:33 AM on November 2, 2011

OK, my apologies to you all. It seems like I got it wrong.

In fact we are going in half way on the investment. So we each put in 50% of the down payment and the rent pays off the loan. Loan is in my name and the ownership of the property is in both of our names.

My apologies again!!
posted by seatofmypants at 8:16 AM on November 2, 2011

Again, this seems like a really bad deal for you. Under this scenario, you're only putting up 50% of the up-front money, and getting 50% of whatever profit there is, but you're assuming 100% of the risk if there is a problem. This is NOT "going in half way."

Let's say you buy a 250,000 condo. (I am making up all of these numbers).

Each of you puts up 20,000 so you alone get a loan for 210,000. For convenience, let's say your monthly outflow is 1200. You rent it for 1500, and there is approximately 100/mo needed for maintenance, condo assoc fees, etc. Despite the fact that YOU are paying the mortgage, you split the income over and above the expenses, so you get 100 each.

Then, ooops! there is a hurricane and insurance doesn't cover it all, or prices continue to go down and no one is renting an apartment for 1500/mo because they can buy one for 1000/mo. Or you get some tenants and they lose their jobs and stop paying rent and it takes you 4 months to evict them and they trash the place. The mortgage still needs to be paid and repairs made. Can you cover the outgo during this time?

If not--Guess whose name is on that $210,000 loan? The one that has to be paid back no matter what? Hint: NOT HIS.

OR--you decide this isn't really for you and you'd like to sell the place and get out of the landlord business. He may not be willing to sell, OR he might be willing to buy the place but not be able to get a loan. If you have to sell and real estate prices haven't gone up, guess who is on the hook for whatever shortfall you have to bring to the table? That's right, you.

Why doesn't he want to be on the loan? My guess would be that he knows his credit isn't good enough to get the mortgage, possibly because he has a lot of debt on underwater properties. I'm not saying your friend is out to scam you, he may very well believe that this is going to work out well, but in this scenario you're assuming a LOT of risk that this guy is not taking on himself. I would be very, very careful about going into business with someone who is not willing to take on some of the risk beyond his initial down payment.
posted by The Elusive Architeuthis at 10:09 AM on November 2, 2011 [1 favorite]