Overcoming the common problems faced by property investment partners
Investing in property with a friend or partner is becoming increasingly popular. It allows you to pool resources and complementary skill sets. If you both commit equally financially, you could buy a larger property and double your potential profitability. However, there are also some risks of investing with a friend, not least of which is that you have a communication breakdown and the friendship becomes irretrievably broken.
In this article, you’ll learn how to avoid a fallout of epic proportions when you invest with a friend, as you keep your property investment relationship on a profitable path.
Common problems of property investing partnerships you must consider
There are several common problems when you invest in property with a friend. Most of these are tied to financial considerations in some way, and include the following:
1. Joint mortgages are affected by both credit reports
As both your names will be on the mortgage, the lender will check both credit reports. Your friend’s bad credit score could affect the interest rate offered by the lender. Every 1% increase in the mortgage rate will cost you and your friend £83 in monthly cash flow. Over a holding period of 20 years, that’s £20,000.
Before applying for a buy-to-let mortgage, check your credit scores and take steps to correct errors on your credit report.
2. Forgetting that you are liable for the entire mortgage
Even though both your names will be on the mortgage documents, if something should happen to your friend and property partner, you will be liable to keep up mortgage payments. If the property is providing positive cash flow, this shouldn’t be an issue – the rental income will cover the mortgage and other expenses.
If it is in negative cash flow, this could put a strain on your finances and may even lead to you making late mortgage interest payments or defaulting. Either way, your credit score could be adversely affected.
Always seek to invest in a positive cash flow property or one that will move into positive cash flow swiftly. Also, make sure that you have an emergency fund suitable to cover short-term shortfalls in cash flow projections.
3. Difficulty getting other credit
Because you could be liable for the entire mortgage, your ability to obtain another financing could be impeded. Lenders will assess your debt-to-income ratio, and if this is too high, they won’t offer you the finance you need. If you’re investing with your spouse, you get over this hurdle by applying for other loans jointly, too. But will your friend want to be named on your personal loans?
4. Disputes over strategy and general disagreements
Let’s say that your property investment partner decides they want to sell. Perhaps they need the money for other purposes or have decided to emigrate, or simply want to cash in. Perhaps they have lost their job. There are all sorts of reasons why your partner may want to sell. But you’re not ready or feel the price you’ve been offered doesn’t reflect the property’s true value.
Perhaps some property maintenance has been neglected – you thought it was your partner’s responsibility, and they thought it was yours.
Before you enter into a property partnership, always set out in writing your responsibilities and strategy. Make sure it covers all eventualities, including death. It should also include details such as ownership percentages, and how income and sale proceeds will be split between you.
How to avoid communication breakdown in property investment
The key to successful property investment partnerships is communication. You’ve probably been friends longer than you will be investment partners. The profitability of your property investment and your continuing friendship rests on your ability and willingness to communicate. When you fail to communicate, little issues become insurmountable problems. Here are five tips to keep communication, your relationship, and your property investment partnership on an even keel.
1. Be honest with each other
Be honest at all times, and with yourself, too. Don’t exaggerate your experience or your network. If you’re not comfortable with a potential investment opportunity, say so at the outset. It gives you both an opportunity to discuss pros and cons and come to an amicable agreement.
2. Discuss your goals
Your goals should be aligned. It’s not a good investment if you buy a property together and then discover that one of you wants to flip the property and the other wants to rent it out. Talk about your lifestyle ambitions, and how property investment will help achieve them. Discuss your values, morals and ethics, and how you intend to manage your property after completing.
3. Put it in writing
Now that you understand your goals, and are confident that your ambitions are aligned, put everything down in writing. Make sure the agreement between you details everything – including how unexpected events will be dealt with.
This agreement should become your plan of action: what you want to achieve and how you plan to do so.
4. Bring complimentary skill sets to the investment table
Investment partnerships work best when you both have something different to offer, as when joint ventures are set up between businesses. One business may have the technical know-how, while another has the client base. It means the joint venture is more valuable than the two parts on their own.
Look for your complimentary skills – you’ll discover that two and two can equal five!
5. Communicate!
Good personal and working relationships are held together by the glue of communication. Unfortunately, when a personal friendship evolves into a business one and money becomes involved, rational communication can go out of the window. While things are going well and the rent is coming in, you’re both happy. But if tenant leaves or other circumstances change, not only could the property investment be in danger, but so, too, could your friendship. Keep communication channels working by:
- Finding the right time to discuss investment issues, when both of you can concentrate.
- Talking face to face – text messages are notorious for being misinterpreted.
- Being honest at all times.
- Thinking before you say something you might later regret.
- Listening first, and then expressing how you feel.
We’ve helped many friends become successful property investment partners. Whether you want to invest on your own, with a spouse, or with a friend, contact one of the team today on +44 207 923 6100. You’ll soon discover why hundreds of property investors have chosen Gladfish as their partner in off-plan property investment.
Live with passion,
Brett Alegre-Wood
