As I’ve said in previous posts, the entry into property investment for the average person like me is becoming much more manageable. Whether it’s help to buy, shared ownership or buying with friends, there are various options that a person can use to get on the ladder.
The prospect of investing in property with friends is by far not a new concept but is generally misunderstood by many. Growing up, I was always interested in this topic but did not know how to implement it practically. Will I buy with friends? Yes, and under the right circumstances.
Why should we as friends only have a good time, eat, chill and crack jokes together? Surely we should be able to do all these things but also make some money in the process.
The problem
With rising property values which require a larger deposit, the route of entry onto the property market can be daunting. Getting on the ladder can be scary, but with some moral support, you will grow to be comfortable navigating the market; hence why doing it with friends is a good idea.
A 25% deposit for a buy to let can be almost impossible to save for alone. For example, if a property is priced at £400,000 in London, this will require a £100,000 deposit, stamp duty and legal fees. This sum is significant even for most property owners or investors.
Why would you invest with friends ?
Investing in property with friends is a huge commitment and should not be taken lightly. What may be difficult for one person will be much more comfortable with more people in the picture.
Another benefit of investing with friends is that it allows the team to utilise individual skills and perspectives. One person may be good at identifying the property, another may be good at arranging the mortgage, whilst others may be handy and good at dealing with agents and tenants. Everyone has an opinion which is a good thing when looking at the risks involved.
If your salary is not high enough to buy in the location you want to live in, you may consider partnering with likeminded friends. The basis of your partnership could be for occupation or investment purposes. Either way, it is much easier to do these things with others.
As we grow older, our reliance on friends diminishes as our priorities shift towards our new formed families and children. Investing with friends is a tangible way to add a new lease of life to friendships that you value.
Examples of investing with friends
That same £400,000 which requires a 25% deposit of £100,000, legal fees of £3,000 and stamp duty of £22,000 will require a total of £125,000 which is a considerable amount of money. However, it can be much easier with more friends and family involved in the same transaction as seen below:
One person- £125,000
Two people- £62,500 each
Three People - £41,666 each
For four- £31,250 each
The above shows how putting your brain and resources together with friends can make what could be an impossible feat very possible.
A few close friends of mine put their heads together to buy a property in Leeds. With a property value of £72,000, my three friends put in £7,000 each to come up with a 25% deposit, stamp duty and legal fees. The property was purchased, and they were able to find a tenant reasonably quickly.
The reality
I feel that you will never honestly know a person until there is money involved and money brings out the best and worst in people. I have always been careful about whom I work with personally as I always ask myself this question if the worst happened, will I still be able to look at this person in the eye? If your answer is no, then find someone else. Ideally, you want to work with people that irrespective of what happens your friendship will still be intact. This statement only relates to friends doing business with friends and not people doing business with business associates.
How do you get this started
Set the tone: Firstly, roles need to be set from the get-go. These roles could include property finder, chaser and fixer. Everyone in your team should have a role. Things can be challenging if the weight is not spread equally. At this point, you will need to establish whether the property will be managed by the group directly or via a lettings agency. You will also need to strongly consider what the overall goal of the group is, as this will determine what you do with rental income and your approach to remortgaging.
Do your maths Establish a budget between your group before going out to find properties. At the point that you find something you want to buy, try and make sure that you are all aligned on it and run the number. You will consider the property/ rental value, the local area, licensing implications, demand for properties. Once all parties agree on these point, you will then put in an offer.
Sort out the mortgage: Try to establish which the mortgage route you will also decide to take. It could be that you purchase a property through a limited company or you can add your names. Some mortgage providers limit the number of names that can go on buy to let mortgage. Most people who are purchasing with more that one party tend to do so via a limited company. The process of buying through a limited company will be in a future post.
Other matters: if your investment is far from where you live, try to find a handyman in the event of there being any damage to the property. You will also need to consider the following:
- Licensing- updated once every 5 years
- the Energy Performance Certificate (EPC) - every 10 years
- the gas certificate- updated every year
- electric certificates- updated every 5 years
Once the above is in place, and your goals are aligned, you are good to go.
The good, the bad and the ugly times
The good times involve collecting rent on time and everyone fulfilling their responsibilities. The bad times could include the tenant not paying rent and friends disagreeing on how to resolve the matter. The ugly times are when there is a complete communication breakdown, and parties can not agreeing on anything.
Through my experiences, I have learnt that legal agreements are useful, especially in the event of things going wrong. Agreements are good at setting out key terms and bind parties to fulfil their obligations. As much as friends coming together means you can cushion a lot initially when things go sour between friends, it can become very personal. I strongly recommend that there is a legal agreement between parties to add some level of formality between friends.
If investing with friends is something you want to pursue, I suggest you consult a solicitor to draw up an agreement which sets out your arrangement. This agreement should cover what happens in the event of a dispute. It will also explicitly explain what happens if a party decides they no longer want to continue with the investment venture.
Key lessons
Enjoy the process and be mindful that it is always a good thing if people can work together to achieve more. In the same tone, you should be mindful that things can go wrong and that you should be protected legally from the onset by getting an agreement drawn up between your friends.
Utilise the skills of all the members of your team as this could allow you to maximise on opportunities that you may not have considered previously.
Finally, please don’t shy away from coming together with friends to achieve a greater goal as it sets an excellent example for our children who will follow in our footsteps. Remember there is strength in numbers, and together everyone achieves more.
