Buying Investment Real Estate With Friends and Family
A lot has been made about crowdfunding lately. It’s a way for individual investors or buyers to pool funds with others in order to finance whatever it is they want to finance. With real estate, it’s also an opportunity to pool funds and financing together to invest with the assistance of others instead of flying solo on a particular project.
When buying and financing a property individually, the buyer assumes every single bit of risk associated with the purchase. The buyer must vet a potential renter by performing basic background checks. Tenants must provide copies of recent paycheck stubs and contact information for their employer.
Certainly, determining whether or not the potential tenants can afford the rent payments is an essential task. Bank statements should be reviewed to make sure what the prospect says he or she makes is reflected as deposits in a bank statement. Credit is reviewed. Rent is collected each and every month. Late payments must be tracked down. There are maintenance issues involved. When the hot water heater goes out, it’s the owner of the property that must stop and take care of the issue.
And, as it relates to financing the purchase, the buyer must qualify for a rental loan. If it’s the first rental being purchased, the buyer must qualify without the benefit of the rental income generated from the unit. There’s certainly a lot to consider before making such a move. But when buying with others, the risk is associated with all parties on the note. It can also mean making a larger purchase instead of a three bedroom single family home. Apartment buildings come to mind.
When pooling investment funds together with others, lenders will treat everyone involved the very same. Everyone’s income must be verified. That’s relatively easy to accomplish but instead of reviewing one paycheck stub and one suite of bank statements, everyone involved must provide the same amount of paperwork. This will be a bit more complicated when there are four investors buying together instead of just one. It’s relatively easy to add up the income but there is also the situation of reviewing everyone’s monthly credit obligations. All income and all bills are lumped together to arrive at a single set of debt ratios.
Further, credit must be reviewed individually. In such a situation, if four people are buying together, it takes just one of the buyers to have less than stellar credit scores. For instance, three buyers have credit scores of 745, 776 and 750. But the fourth buyer has a representative credit score of 590. Guess which score the lender will use when reviewing the application? That’s right, the 590. The higher credit scores of the other three can’t overcome the 590 and no, they’re not averaged together. In this situation if the transaction is to move forward, the fourth buyer will have to be removed from the contract.
When buying together and financing will be sought, all parties must be prepared to show to everyone their income, asset and credit histories so there won’t be any surprises. Buying with others increases leverage, but care should be taken that everyone involved is financially stable to take on the new project.