Is Real Estate Investing with Friends a Good Idea?

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Purchasing real estate with friends can be a great way to pool resources and split the costs and responsibilities of owning a property. However, it’s important to be aware of the potential pitfalls and to set clear guidelines and expectations from the beginning. Before buying a property with friends, it’s crucial to have open and honest conversations about financial contributions, decision-making, and potential exit strategies. Additionally, it’s a good idea to consult with a real estate attorney to ensure that all parties are protected and to create a legal agreement outlining the terms of the purchase.

In recent years, more and more people have been turning to their friends as business partners in order to enter the world of real estate investing. This trend makes sense, as real estate investing can be a costly and risky venture, and having friends by your side can help to mitigate some of these risks. With careful planning and communication, buying real estate with friends can be a great way to achieve homeownership and build equity.

Play it safe!

We never want to think the worst of our friends, however, issues do arise…

You need to make sure that you play it safe when getting into a such a big financial commitment. Putting an agreement in place through a lawyer ensures that you are protected in the event something goes wrong.

In your agreement, you’ll want to make sure you both know and agree on what happens in the event of:

  • Selling of the property and proceeds
  • Sharing of loss and exit strategy
  • Marriage
  • Death
  • Ownership arrangement changes
  • Market fluctuations‍
  • Tax implications and insurance
  • Repairs and upgrades

Buying a house in Toronto is both exciting and full of challenges, but these ideas will help you achieve your goal:

Challenges with Investing with Friends

It’s important to be aware of the challenges that may arise when investing in real estate with friends, such as:

  • Misunderstandings or difference of opinions. Everyone has their own opinions and their own style of living, which can cause conflicts within the home and ultimately the friendship.
  • Unexpected job loss and potential for credit score damage. You’re never prepared to lose your job, however, it is easier to control your own situation than that of your friends. If someone suffers a job loss, and cannot make the monthly mortgage payment on time, this will affect everyone’s credit score.
  • Difficulty moving. If one of you becomes upset or decides to leave, you can’t just pack up and move out. To break all ties, you have to either sell the house, or refinance in one owner’s name. Neither option is simple – it can take several months to sell a house, and if you can’t qualify for the mortgage on your own, a lender will not refinance, and the other owner’s name will be stuck on the mortgage.

And of course, one that you don’t want to think of – losing a friend.

Benefits to Investing with Friends

Despite the challenges, there are also many benefits to real estate investing with friends. Here are some:

  • Easier home loan qualification. Lenders have become more strict with their standards in regards to credit scores, existing debt and downpayment amounts. Combining two incomes and credit scores makes it easier for you to qualify for a mortgage.
  • Splitting the monthly costs. Living in the City of Toronto can be extremely costly for someone to do on their own. Investing with friends allows you to improve your personal finances and in turn will help you save more money.
  • Home equity gains. Unlike renting, home ownership lets you walk away with money in your pockets when you decide to sell!

Additionally, having friends by your side can make the experience more enjoyable and less stressful.

Even with all the recent changes in the Toronto market, real estate remains an excellent investment. Here are some other resources that can help you get started:

What is Your Future Plan?

It’s important to have an exit plan in place, in case one of the friends wants to sell. This can help to avoid conflicts and ensure that the relationship is not ruined. Additionally, having processes in place for decision making and communication can help to mitigate potential conflicts.

At the end of the day, real estate investing with friends can be a great idea, but it’s important to consider all the potential challenges and benefits before making a decision. If you have the right plan in place, it can be a great way to enter the world of real estate investing. But remember, as with any business venture, it’s important to do your due diligence and make sure you’re making an informed decision.

Choosing to buy a home with friends is a big decision, but also a great option to get into the Toronto housing market.

Are you ready to buy a home in Toronto? We can help! We know the West End like the back of our hands and are happy to guide you in the right direction. Reach out to us today