Buy a House with a Friend: Real Estate Partnerships Explained
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At Open House, we’re strong believers in real estate partnerships. It’s how Co-Founders Steph Douglass and Kristina Modares were both able to buy their first homes, and they have continued to buy with friends throughout their real estate career.
When people hear us talk about real estate partnerships, we often hear a lot of questions and concerns:
"Where do I even find someone to partner with?"
"How do I protect myself and my money with an operating agreement?"
"Isn't it less risky to buy with a romantic partner?"
This is our response to all those questions and more!
It all comes back around to our motto: Houses Before Spouses. People partner to buy their homes all the time - it's just been, traditionally, with a significant other.
But there’s no rule stating that you have to be married to someone to buy a house with them. Your friend may be a better real estate partner than a spouse!
So, we ask that you set your preconceived notions aside and read through this entire post with an open mind. Buying a house with a friend is an amazing way to buy your first home, a vacation home, or even an investment property!
Why Use a Real Estate Partnership?
When Kristina was 26 and her sister Stefanie was 24, they partnered to purchase a home in Austin. Stef works in the fashion industry in Los Angeles. Her weeks are spent creating, traveling, and managing.
Because of her crazy schedule and the expensive fashion-forward cities she lives in, buying real estate was super unattainable for her to do on her own.
When they first decided to buy a house together, Kristina was also facing some challenges to buying by herself. She had just started working for herself, and she didn’t have that nice, shiny, stable W-2 income lenders were looking for.
Their experience is a great example of why real estate partnerships are so empowering. On their own, neither Stef or Kristina had everything they needed to buy a home. But together, they were able to leverage each other’s strengths.
Stef had the W-2 income lenders wanted and an eye for design, while Kristina had knowledge of the real estate industry, renovation experience, and time to house hunt.
Let’s break it down a bit more. Say you’re looking to purchase a $450K home. On average, our clients pay around 1.75 percent in closing costs, so we’re calculating this example at 2 percent. That’s…
3% Down Payment: $13,500
2% Closing Costs: $9,000
Total cash needed to close: $22,500
Divided between two people, you’d each need only $11,250 to close!
We’d venture to guess most buyers would prefer dropping $11K rather than $22K at once, especially first-time buyers who don’t already have equity to pull from. And, this number may be decreased even further with additional partners.
While an obvious benefit of real estate partnerships is sharing the financial expense, another very important aspect is the shared responsibility and workload.
If your week is packed with meetings and a home pops up on the market that you just have to see, your partner could offer the flexibility to tour it for you. Maybe one of you likes physically doing things like design/yard work and the other likes spreadsheets and organization - there are so many ways to use each other’s strengths and expertise to work together.
What Makes a Good Real Estate Partner?
As you’re reading this, there may be a friend or family member who is already coming to mind. And if so, that’s great!
But as you seriously consider this option, we want to be clear - not every friend will make a good partner. There are certain qualities you want in a good real estate partner, and of course, some red flags to watch out for!
There are four essential components that we have found that make the best real estate partnership possible: time, talent, cash, and buying power.
Consider: does my potential partner have the components I lack? Are we both missing any of these components? If neither of you have cash or time, the deal will quickly fall apart.
Finding the right real estate partner is a little like dating. Always trust your gut, and don’t settle for a partner you’re not entirely sure about.
You need someone who is trustworthy, a clear communicator, and shares your values. If they are constantly changing plans, never responding to communication, and don’t share your vision - run!
Sometimes, it doesn’t always work out. We’ve been there! Kristina and Steph partnered with a mutual friend several years ago expecting great opportunities based on their already solid relationship.
But once they started looking at houses, they noticed their friend was constantly changing her mind and pushing for something bigger and better.
They ended up settling on a property none of them were excited about, which they sold soon after. While the real estate partnership didn’t work out, it didn’t end in a financial disaster because they utilized an operating agreement to outline the details and structure of their partnership.
What is an Operating Agreement?
Simply put, an operating agreement is a document that outlines the terms and conditions of your real estate partnership. There is no “right” way to structure a partnership, but an operating agreement is a vital part of the relationship!
Usually, this part is overseen by a lawyer, and we highly recommend talking to one before starting out. Once we became more familiar with how to legally structure a partnership, we also started using a system called IncFile.
So what should you include in your operating agreement? Here’s a list of what we always include - these also serve as good conversation starters to help determine if the real estate partnership is the right fit!
Ownership Percentage
You don’t have to split ownership 50/50! Especially when you have more than two partners, your ownership percentage can vary. Steph and Kristina are part of a 5-person partnership where each partner has a different percentage of ownership (varying from 9.5% to 37% based on the cash they brought to the deal) .
What is each partner’s initial cash contribution?
What happens if someone dies, wants to exit, etc?
Will you take owner’s draws?
An owner's draw is an amount of money taken out from partnership by the owner for their personal use. If you are making income through renting your home, this is a consideration.
How much money do you want in reserves at all times?
Do you have an exit strategy?
When will you NOT sell?
When will you sell?
Who will manage the property?
Who will do your taxes?
How will you handle it if you need extra money for repairs or updates?
How do you make decisions? Unanimous?
Ultimately, an operating agreement clearly outlines expectations and responsibilities so that everyone is on the same page.
While you never want to start out thinking things will go wrong, it’s important to protect yourselves. An operating agreement can save the relationship even if your real estate partnership falls through. It’s kind of like a prenup!
Next Steps
Okay, so now you’ve realized the possibilities and want to get started. First thing? Start the conversation with someone you trust. And don’t expect the answer will be no before you ask! You never know who might be willing to invest with you.
Also, keep in mind that this will likely be an ongoing conversation before you move forward. Steph and Kristina talked about buying together for a year before they took the plunge and did it!
If you’re still feeling unsure about the home-buying process, check out our free mini-course. This short, 3-video series answers lots of questions about what you need to know as a first-time home buyer. Even better, watch it over coffee with your potential partner!
Once you’re ready, you can book a call to talk with an Open House Realtor. Our team is well-versed in helping clients work out real estate partnerships. In fact, they use partnerships themselves!
