4 People Not to Invest in Real Estate With
Check out the history of any property you buy, but don't forget to research your business partner, too.
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There’s no denying that real estate is hot right now. With most markets topping pre-recession property values and low inventory throughout much of the country, the potential to make money in real estate is growing as fast as prices in major U.S. cities.
This year, RealtyShares, a real estate investment platform, released a survey that found 15 percent of Americans are currently investing in real estate other than a primary residence. In addition, 54 percent of Americans between the ages of 18 and 54 who are not currently investing in real estate would be interested in doing so.
There are many ways to invest in real estate: You could purchase houses or condos to rent out to tenants, flip those spaces for a profit, facilitate the development of new properties or venture into the commercial side of real estate with ownership and development options. And real estate investment trusts or smaller investment groups allow you to be part of a larger investment when you don’t have the means to make such a purchase solo.
With any of these options, there’s often a good chance you’ll be looking to make a real estate investment with a partner or a group of people to help maximize your net profit. Whether it’s a sibling, a local expert or a group of strangers with some real estate know-how, you’ll want to weigh your options and do your research.
“In this game of real estate investing and lending, it’s all about mitigating your risk,” says Susan Naftulin, owner and president of Rehab Financial Group, a lender for real estate investors in Rosemont, Pennsylvania.
To help reduce your risk before you lay down money, take note of who you partner with in any real estate endeavor. Here are four types of fellow investors to avoid.
An industry newbie. For an industry that has no shortage of professionals and experts, it’s in your best interest to invest with someone who knows what they’re doing, says Arik Kislin, a real estate investor and developer and CEO of Linx Industries.
“Everything that I’ve done since I’ve started investing in real estate has been with people that are directly from the industry – I don’t want to be a guinea pig,” he says.
Especially if this is your first venture into real estate investment, it can be a better move to have a smaller stake in a project if it means gaining experience and a lower risk for failure. You lower the risk more by partnering with someone who has experience doing the same project before. So if you're looking to flip a house, seek an investing partner who's got a few flips under his or her belt. Or if you're looking to develop office property, look for a partner who has done office development in the past.
Kislin recalls one project where he took a smaller stake for a greater likelihood of success: “Instead of getting 50 percent of the deal, I got 25 percent, but at least I was dealing with a guy that would know what to do, not if the ‘if’ happens, but when the ‘if’ happens.”
A friend or relative you haven’t done business with. Before ruling out friends and family as your property investment partners entirely, considering someone you know who has the real estate savvy to help guide you to great business decisions could be a strong move.
“If my cousin is a real estate expert, then why wouldn’t I want to do business with him?” Kislin says.
In terms of securing financing on your project, Naftulin says a long-term relationship with your partner can be a selling point, knowing the commitment runs deeper than the deal.
“There’s less likelihood that you’re going to stick someone with a financial burden if you still have to have Thanksgiving and Christmas with them, or if they live down the block,” she says.
While the financial side of the deal may have more security behind it if you’re equally invested, you also run the risk of dissolution of the relationship because of strains on the business side of things.
“We lent to a partnership of four guys who are lifelong friends – they’re not friends anymore,” Naftulin says. For that reason, it may be best to avoid partnering with a loved one if your ability to work well together hasn’t already been tested.
Anyone who can’t be on the loan with you. Regardless of your relationship with the person, you should consider it a major red flag if your partner can’t be a co-guarantor on the loan with you – whether it’s for previous money or credit issues, a past criminal conviction or any other reason that makes you solely responsible for the loan.
Naftulin says it’s not uncommon in investor lending for a borrower to approach a lender solo, then later reveal that all the expected work on the investment property is planned to be done by another individual, a behind-the-scenes partner who doesn’t plan to appear on the loan.
“We see it over and over again where we make those loans, and when things go wrong or things go sideways or things get a little tough, the behind-the-scenes partner disappears,” leaving the borrower scrambling to make payments and complete the project, Naftulin says.
A stranger. Whether they’re located far away, haven’t been in the business long or you simply haven’t personally worked with him or her in the past, co-investors who are strangers can be a bad idea.
At the very least, conduct your due diligence with the individual as you would when buying property. Look into previous projects, call on former partners of the person and maybe even run a background check before you allow him or her to be a factor in whether or lose or make money.
With that dig into the past, a couple bad deals in a lengthy career of real estate investment doesn’t necessarily signal a problem. But Kislin says once you see a pattern of investments that don’t pan out or your potential partner has financial issues, consider it a sign to steer clear. He uses the age-old adage: “Where there’s smoke, there’s fire.”