The last few months have been a good time for investing in rental real estate property and the coastal areas have been particularly popular. Many younger buyers have spotted this, and have thought of innovative ways to get into the real estate market.
Hampered by insufficient funds, they plan on going into business with a friend or a relative. It would seem like a foolproof way to get yourself started on the property ladder and perhaps even make a profit.
So what can go wrong? Should you consider what may backfire? Well, yes you should, because if a contract is not drawn up to cover every eventuality, then it could result not only in financial loss, but also loss of the friendship with the partner.
Sharing a money-making project always starts off with the best of intentions and the most charitable thoughts. Each partner makes sure that the other is entirely happy with the setup and if things go smoothly – all remains well.
However, like everything else in life, it is only when it all starts to unravel that you may wonder what your ‘rights’ in this new partnership really are.
The benefits are immediately acknowledged: rental cash flow (which is a method of letting the home pay for itself) and even appreciation in the value of your property. Sounds like a deal, and it IS a deal, but in case things do not pan out the way you are expecting – you must have a comprehensive agreement spelling the terms out.
Supposing that an unforeseen event leaves your partner broke? In order to meet unexpected costs he may want to sell the investment property, or at least realize some equity from it. What if you want to keep the property, but cannot afford to buy him out at that moment in time?
If there is no agreement spelling out the provisions for a buyout of one partner’s share by the other, then it may cause a dispute. There are laws which will step in to cover several eventualities if there is no legal agreement, but they may not suit you.
There are instances where one partner wants to sell and one wants to hold onto the property. This would most likely be the case if sale of the property were to induce a loss of funds, due to the premature timing.
It may also induce further financial loss with perhaps the breaking of a tenant’s rental contract or a second wave of legal costs etc. If you buy your investment property through a local realtor, he/she will be able to advise you on rental agreements and assist you in finding a good lawyer with relevant experience.
Points that need to be covered will include the provisions for a buyout, as well as a time frame for the expected duration’ of the contract (when the property will be sold and under what terms) and how the management of the property will be allotted (weekly shifts or monthly rota etc) amongst other variables.
There are attorneys and property management companies who are familiar with these deals and have seen every type of pitfall there is. Shop around and talk to some of them before you choose one to help draw up a legal agreement.
As with everything else in life, there is less conflict, less decision-making and less stress involved when you have to play by hard and fast rules. You could benefit from their experience and feel reassured as you start on the road to becoming a real estate mogul!