There are few better ways to make money in the United States than by buying and selling real estate. Many people have made their fortunes purchasing real estate, renovating the property, and then selling it for a significantly higher amount of money than the original purchase price. If you have the funds to back your initial investment, this can be a quick way to pull in a very large amount of money. Unfortunately, not everybody has the money to invest in the real estate market. In situations like this, people often elect to pool funds with other investors (usual friends of theirs), to purchase real estate as a group. This can be a fabulous idea — or it can be an absolute disaster. Here are some things that you should know before investing in real estate as part of a larger group.
Make a contract
This is the first, second, and third rule of investing in real estate as a group. Contracts are absolutely imperative when you invest as a group. They eliminate the “he said, she said,” and help keep subjectivity at bay. For instance, without a contract, someone may claim that the group agreed to pay them a larger amount than they got. With a contract, they can’t make claims that aren’t already in the contract.
For this reason, it is essential that you not only form and sign a contract before investing, but that you cover every possible detail imaginable in the contract. When a large amount of money gets involved, people’s attitudes can change, and you’ll want to get something in writing.
Cover all topics
Before investing as a group, it’s important that you cover all scenarios so that everyone knows exactly what he or she is getting into. This should all go into the aforementioned contract, but it needs to be discussed first. For instance, if multiple people invest in a piece of real estate and each contributes different amounts of money to the initial purchase, there are several different ways to handle the payout after the investment is sold.
For example, imagine that two people purchase a house for $100,000. Person A pays $70,000, and person B pays $30,000. Then suppose they sell the house for $200,000. Person A may feel like they should receive 70% of the profit, since that’s what they invested, which would be $140,000 to Person B’s $60,000. But Person B may feel like each person should get their initial investment returned, then split the remaining profit, which would result in $120,000 for Person A, and $80,000 for Person B. This can only get complicated further if one person invests something other than money, such as time or expertise. For example, how does the previous scenario change if Person B was the one scouting houses to invest in?
The danger of getting friends involved
Many people want to invest in real estate with a group of friends. This can be great fun if it works out, but disastrous if it fails. For instance, if your investment loses money, you may end up with a large amount of finger pointing or bitter feelings among friends. Choosing to invest together can, unfortunately, be a quick way to lose a friendship.
This is just some of what you need to know before investing in real estate as a group. Good luck!
This article was written by Richard Craft, an MBA student who hopes to help you with your finances. He writes this on behalf of Wood Crafters, your number one choice when looking to upgrade your driveway with pavers. Check out their website today and see how they can help you!