Investing with friends?

[TMNT]

Now, we've all heard the never mix pleasure and business before, especially family.

However, all the succesful large developments deals ive been seeing, are all owned by 2-3 friends

that got me thinking, maybe its the smaller deals eg 2 friends buying a property, renovating it over a few months and selling it for a profit type of deals are the ones that are fraught with danger?

I have been discussing with the brother of a friend whom I have known for over 25 years, who is fairly cashed up, and we are looking at a 5 site townhouse development

so trust/financial backing isnt an issue, it would be the other factors.

whats everyones experience with investing with close friends, that you implicitly trust

 

[D.T.]

Deal goes bad ya lose a friend
Id choose losing a deal over losing a friend any day
You never know if circumstances will change during project

 

[devank]

I would say, what is the point in having a friend if you can't do anything money related.
If a friendship is going to be broken because of a deal then is that friendship worth having?
Put everything in writing and do it as you don't know each other. Don't leave anything as 'gentlemen's agreement'.

 

[pinkboy]

Deal goes bad ya lose a friend
Id choose losing a deal over losing a friend any day
You never know if circumstances will change during project

Wanna join forces in a project DT?

pinkboy

 

[D.T.]

Wanna join forces in a project DT?

pinkboy

I couldn't be that lucky

 

[nhg]

There are friends I would do deals with and others I wouldn't.

The former have four things in common:
1. Understands the risks of business;
2. Are invested in the projects successful performance;
3. Are level headed and good communicators;
4. Have something to contribute other than 'being keen'.

Other friends have approached me and I ask them straight up. What can you give the project this other person can't.

I've lost 10's of thousands and made the same working with friends. As long as they didn't intentionally try to screw me I had no problems with it. I understand every investment carries a risk.

Your friend has the cash. What do you have? If he puts in 70% cash is the expectation he will put in only 30% of the effort? If things get tough will he get stubborn? And vice versa.

 

[Terry_w]

Issues tend to arise if held long term but if it is a quick sale then these won't arise or less likely to.eg. death divorce bankruptcy. Accessing equity etc

 

[Badger]

looking at if from a long term perspective if its a buy and hold- things could get messy if they want to sell a few years down the track. Everyone has different goals and circumstances

 

[moridog]

I bought with my closest trusted friend a few years ago. We are tenants in common on the title, we each altered our wills leaving each other the debt. I am currently living in the property and pay him half of market rent. We have not had the slightest issue. I know if the right offer came along he would prefer to sell whereas my intent would be to demolish and develop. Having said that he would not sell if I absolutely did not want to, or would happily have me buy him out. He had income no assets so I used my PPOR to underwrite the loans, he is way in front on repayments (unlike me lol). I had reservations but was really keen to buy an IP and did not have enough money on my own. It has worked out much better than I imagined, we did do a fair bit of redecoration and contributed joint labour, halved cost of materials and did equal amounts of running around.
HTH.

 

[Peter_Tersteeg]

From a finance perspective...

On many projects, you're applying for finance together, the same way as a husband and wife do. You're liable both jointly and separately for the entire loan so if one of your friends doesn't pay up, the remaining borrowers or guarantors are expected to cover it.

If you apply for a new loan the new lender will assume you are responsible for the entire loan. In many cases they'll assume you're only receiving your percentage share of the rental income. In many cases, this means that people are no longer able to borrow on subsequent deals on their own.

The big advantage of joining forces with others is that you can leverage into bigger deals to access opportunities that you might not be able to otherwise. The disadvantage is it can limit further options and you've got to be able to work effectively with the rest of the group towards a mutual goal.

If you're going to go down this path, make sure you're all very clear on the strategy being employed from start to finish. Make sure you all understand how you'll get out of the deal before you get into it. Make sure you've got contingency plans in place.

If you can, put it in writing.

 

[Terry_w]

we each altered our wills leaving each other the debt.

That is generous, but what about the property?

 

[Terry_w]

he is way in front on repayments (unlike me lol).

How do you treat this for taxation? i.e. is he claiming half the interest or just 'his' loan interest?

 

[moridog]

We each left each other the debt/half of the property. He claims his entire loan interest, ie, half of the property in his tax, I obviously do not as I am living in it. He is entitled to half of the expenditure and the usual tax implications, of his loan etc.

 

[Terry_w]

We each left each other the debt/half of the property. He claims his entire loan interest, ie, half of the property in his tax, I obviously do not as I am living in it. He is entitled to half of the expenditure and the usual tax implications, of his loan etc.

He would probably only be able to claim half of the overall interest, not the interest on his loan.

 

[moridog]

Sorry, whatever the entitlement is, we do see the same accountant who is quite scrupulous about correct procedure, I don't think he claims the entire interest, because they are two totally separate loans, but whatever he is entitled to, the accountant claims. The accountant is aware of the current arrangement and before I moved in, it was simply rented out and managed by an agent.

 

[saiman]

i'd only go into business with somebody who has the same business goal as I do regardless of the size of project and i'd ensure there would be some written agreement surrounding this outcome. Change your mind? tough titties (unless ofcourse you both agree in which case it will again be agreed in writing).

As with anything business related, best to keep emotions, friendship, "trust" and other birds-bees-&-fluffy-white-cloud factors etc. at bay and focus on numbers and contractual agreements.

 

[MTR]

Issues tend to arise if held long term but if it is a quick sale then these won't arise or less likely to.eg. death divorce bankruptcy. Accessing equity etc

Agree with this comment. If I was going JV I would always only go with the view of selling on completion of project.

Also, I would only go JV if I needed to ie not enough funds to finance project etc. Generally speaking though I think I would not want to be going down this road with friends

 

[Rockstar]

Also, I would only go JV if I needed to ie not enough funds to finance project etc. Generally speaking though I think I would not want to be going down this road with friends

Same here MTR. I have friends who want to do JV's but I am not interested while I have the capacity to finance my own projects. It would have to be something a lot more lucrative than what I am currently doing to make it an option.

I do have a friend and family member currently lending me substantial dollars and have borrowed large sums of money from friends before. They take out a mortgage and we draw up an agreement with IR's, timeframe, etc. We pay them around 2% higher than bank deposit rates and pay all set up costs for the mortgage including their legal fees. When it comes to money ventures with friends and family keep things very clear and detailed and discuss and detail any variations along the way.

 

[antistar]

Did a silly thing like this a few years ago and it almost ended up in tears. What may seem like a good idea at the time may not turn out to be one in a year, two, three or five. In my case I was lucky that I managed to maintain or maybe even strengthen the friendship because of the process but it was so so very close to going the other way.
Now that we are in the clear and settled - I would never think of doing it anything like it again. When I need a partner for a property purchase there is always the bank.

 

[Deltaberry]

Deal goes bad ya lose a friend
Id choose losing a deal over losing a friend any day
You never know if circumstances will change during project

If it's a friend you'd lose over money, he's not a friend worth having.

I've done 4 deals recently with friends, about to cash out on three of them and hopefully make a bit, everyone happy. One deal we had 5 entities, one we had around 15 entities. Works perfectly.

My advice is, always choose partners with big vision, deep pockets and ones who don't stress the small things, which rules out most people. The question you also need to ask yourself, do you have big vision and deep pockets? Because maybe you're the problem.