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A blog from CityRealty (Links below will take you to the 6sqft site)
 
 

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Although properties are frequently purchased by two or more family members, for most people, the idea of buying with friends simply sounds like a bad idea. After all, no matter how many issues you have with siblings, parents or extended family, even a nasty older sister may appear to be a less complicated co-buyer than a friend. With the rise of peer-to-peer funding, however, investing in real estate with friends is an option that is gaining steam.

Turning to Friends for a Down Payment 

If you want to establish a start up, make a film or engage in many other costly endeavors nowadays, you are just as likely to turn to your peers as you are to a bank. Although raising capital was once primarily carried out through formal lenders, it is now increasingly executed via peer-to-peer lending platforms. Whether one needs just a few thousand dollars or several million, the idea of turning to one’s peers for start-up funding has become the norm—especially for many Millennials—and the trend is increasingly impacting real estate deals too.

Compass agent Jake Velazquez sees clients turning to friends for a range of reasons. “There’s a rising trend in the use of crowdfunding for real estate investments,” says Velazquez. “Groups of friends are also taking the same idea and pooling together their money and skills for investments. In some cases it works very well, since different people can take on different roles, and this can be more efficient.” Whether the deal involves a buyer turning to friends for help with a down payment or friends pooling resources to invest in a residential or commercial property, as peer-to-peer lending continues to move from a peripheral to central funding strategy, it is also restructuring how buyers approach real estate investments. But is it wise to purchase with friends?

'Pre-nuptial Contracts' for Friend Co-owners

Most friends buying together don’t want to think about worse-case scenarios, but it is one of the most important things to consider when it comes to co-ownership. Indeed, like newlyweds who walk down the aisle with a pre-nuptial contract already inked, friends who buy together—even if they are driven by a desire for community rather than profit—are advised to prepare for the worst and hope for the best.

Compass agent Marina Schindler is currently working with two friends who are in contract to buy a townhouse in Brooklyn. The pals are purchasing a two-family home that they intend to share. “At one point, they gave up and decided to search on their own,” says Schindler, “But ultimately, they realized they couldn’t find what they wanted on their own. It was less expensive for them to buy a townhouse together than to do it individually and, together, they were also able to find the home they both wanted.”

Schindler points out that while friends co-purchasing may be on the rise, there is a long history of friends buying properties together in New York City. “Many artist buildings in Soho and the East Village were purchased by friends, and these are now among some of the city’s most coveted spaces,” she points out. While Schindler is very optimistic about friends buying together and enjoys the community-building aspect of bringing friends together as owners, she notes that both of her current clients are working with attorneys to ensure their agreement is as tight as possible. “You really need to nail down all the possible worst-case scenarios,” she says, “What if the roof needs to be replaced? What if the basement is flooding? Who is responsible? The most important thing is having an internal agreement.”
A $1.385M Harborview beach house in East Hampton. Image via Sotheby's

Buddying Up for a Vacation Home

While some friends team up to invest and others team up with the intention of purchasing a primary dwelling, for others, the goal is a shared second home. After all, even for some of the city’s more affluent buyers, a second house in the Hamptons may otherwise be out of reach.

Compass agent Cindy Scholz has worked with multiple sets of friends buying homes in the Hamptons and, by and large, she considers these co-purchasing arrangements to be a great option for people looking to buy a second home. “Co-purchasing is a great way to build equity while minimizing the upfront and ongoing costs of purchasing a home,” explains Scholz. But building equity is usually not the only or primary goal for these buyers: “My clients know the Hamptons is their destination of choice for the summer and are tired of someone else’s mortgage. Co-owning allows my clients to divide up the costs and responsibilities of a home while experiencing all the benefits. They are not overextended financially, allowing them to still take ski vacations and travel to other destinations in the off-season.”

Scholz also emphasizes that for many her clients, co-purchasing even represents a way to immediately increase their cash flow. “My clients often rent their homes for a portion of the summer and use the profits to take a trip elsewhere,” says Scholz, adding, “The Hamptons is prime for appreciation and ability to rent for ultra-prime prices. These conditions allow purchasers to choose between a long- and short-term hold—for co-purchasing, this flexibility is very appealing.”
“Keep things simple, be realistic, and don’t get discouraged. It’s easy for a group to persuade you to have unrealistic expectations—just stick to the numbers and make sure the team stays focused.”

To Buy with Friends or Not—That is the Question

While there are no guarantees, there are at least a few factors that appear to contribute to the success of friend co-investments. Scholz has observed that while the length of friendship prior to buying varies and doesn’t appear to be a major factor, her clients nearly always have “aligned interests, mutual friends and similar financials.” Velazquez has seen both good and bad deals among the friend groups with whom he has worked. His advice? “Keep things simple, be realistic, and don’t get discouraged. It’s easy for a group to persuade you to have unrealistic expectations—just stick to the numbers and make sure the team stays focused.” Schindler agrees that co-purchasing can be a great way to buy into the city’s real estate market but adds, “it is also crucial to have completely honest communication between both parties.”
Contributing Writer Cait Etherington Cait Etherington has over twenty years of experience working as a journalist and communications consultant. Her articles and reviews have been published in newspapers and magazines across the United States and internationally. An experienced financial writer, Cait is committed to exposing the human side of stories about contemporary business, banking and workplace relations. She also enjoys writing about trends, lifestyles and real estate in New York City where she lives with her family in a cozy apartment on the twentieth floor of a Manhattan high rise.
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