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Real Estate Investing...

 
 
Reply Tue 17 Feb, 2004 03:53 pm
One of my friends I grew up with wants to buy an investment property, but needs someone to do it with. Basically, he wants to purchase a single or two family home, and convert it into a rooming house(convert the apartment(s) into multiple rooms, and rent them by the month). He has another friend who has been doing it for the past 4 years, who is making pretty good $$ doing this.

He doesn't qualify to purchase by himself with the money he has. I do qualify to purchase by myself, which obviously means I'd make more $$ if I bought an investment property by myself. But there's some other benefits for me if I did it with him...

IF I did this with him, I'd make sure he lives there(I wouldn't), and he has connections with people constantly looking for rooms. These would be the main positives for me. Again, it's guaranteed tenants...he knows of many, many people looking for rooms in the area we would buy. And he would live there, so there would be a "manager" on site.

Another concern is buying the "right" property, and not paying too much. He's kind of gung ho about running out and doing this, but I really want him to do more homework, shop the market, and get a feel for what's a good purchase rather than letting a realtor sell him into something. I want to know up front what to expect the numbers to work out to.

My main question: Is buying an investment property with a friend a disaster waiting to happen? Yes I know there's risk with everything, but is it a bad way to start(I've never owned), doing it with a partner?

Anyone with experience in this field have any insight?
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Type: Discussion • Score: 2 • Views: 2,706 • Replies: 13
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Sugar
 
  1  
Reply Tue 17 Feb, 2004 04:20 pm
As far as looking for property to convert, the #1 concern should be zoning laws. You can't do whatever you want with your house and a lot of towns are cracking down on multiple family homes. So, you really need to be careful about what you buy. Check the zoning laws in areas you are looking at. The other consideration is permits - just because you CAN doesn't mean they'll let you. There's a public hearing for every major renovation. If the neighbors don't want 10 people living next door, you won't get to build it.

The biggest issue - how good is this friend? It's easy to make decisions and make grand plans if it's someone elses money. My suggestion - look into a forming a trust. That way you'll always have a legal say and rights to the property. Another good idea is to get an objective 3rd party - so you'll have 49%, he'll have 49% and another party will be a 2% tie breaker if you ever need one.

Also, you may want to control who lives there and who doesn't. The only way you can really do this is if it is owner occupied. So another benefit to giving your friend a little piece of ownership is to keep out any :ahem: undesirables that would otherwise be able to issue a complaint. So, if you don't want any kids there, no problem.

There's a lot of pitfalls and pluses. Your best bet is to have a nice long conversation with a real estate lawyer. It can be a very rewarding investment provided that you cover your a$$.

Another option, instead of rooming houses that have a high turnover rate and a high pay-skip rate, is to buy a two or three family, convert it into condos and make a quick-flip profit. Condos are great now because no one can afford a house and people are sick of paying mortgage prices for rent. You'd have it done within a year, you can buy another if it goes well or go out on your own. And if it doesn't go all that great, well, at least the plan was to sell it anyway. A developer would take it off of your hands in no time.
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Slappy Doo Hoo
 
  1  
Reply Tue 17 Feb, 2004 04:38 pm
The zoning laws thing is something I'd have to look into...but I'm pretty sure this isn't something illegal we'd be doing.

He's a guy I've known since first grade. I can definitely trust him as far as money goes, I'm just concerned he's a litte TOO eager to do this. However, like I said, I wouldn't consider doing this unless he lived there, which he said he doesn't have a problem with.

I know people turn multi families into condos, but I'm not familar with the procedure....does it cost a lot of $$ to do the conversion?
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Sugar
 
  1  
Reply Tue 17 Feb, 2004 04:56 pm
Just a quick example - I'll have more tomorrow:

The Boy bought land and built a two-family. He wanted to put a smaller apt in the basement and the neighbors got so bent that they actually had community meeting about it (of course, not inviting him). The building inspector stalemated him citing that no other house in the neighborhood was a 3 family, so it couldn't be done. When presented with evidence of 3 families in said neighborhood, the BI then said they weren't within a 1/2 block radius so they didn't count. Building inspectors and those other city hall people are a pain in the...

The conversion costs as much as it takes to split the house up. If it's already a multi family it's basically updating and cleanup for condos. Also consider that the fire codes have gotten a bit stricter since The Station - the fire inspector may require sprinklers, 100 fire escapes, etc if it's a rooming house. Meeting those requirements adds some serious cash.

The drawback is that you will sell it to whomever, so you won't get rental income, just lump sums. But it might be a good way to get some capital before moving on to more serious projects.

Everything sounds like a great idea when dollar signs are involved (I am marrying such a man - que sera). I am the type that researches everything to death before I spend a dime. All about the baby steps because I don't have the cash to learn lessons the hard way.
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Sugar
 
  1  
Reply Wed 18 Feb, 2004 08:40 am
Alrighty - some other considerations:

Where did this friend of a friend convert homes into rooming houses? One of the major things that slipped my mind - many towns in Mass. have laws against brothels (an old throwback law still on the books). It is used in any case where more than 3 (I think, or 4)non-relatives are living in the same house - which is not the same as an apartment because they all have seperate kitchens, etc.. For instance - last year a girl came on the board and wondered why her and her sorority sisters were having such a hard time renting a multi-bedroom house. It's against the law, unless the house is already used for a rooming house and is grandfathered or if the house is on private property (like already established frat houses on university grounds). Ther are exceptions to the rule, of course, but it is a major hurdle.

Even in the event that you didn't run into this - many cities and towns already have ordinances against rooming houses (similar to the above mentioned brothel laws). You'd have to investigate the laws of the city or town you are looking in.

It really comes down to cash flow and legal ability on a case by case basis. And now for the old "If I were you" - run the condo idea by your friend or even suggest a three-family investment (so he could live there and the other rents could float the note AND give you additional cash gain). In that case he's still pay rent (probably cut rate) but he could also build a percentage of savings for himself in a "house account". Once the account builds, he is welcome to whatever pre-agreed percentage of the cash - to buy himself something nice or to bankroll his share of another investment with you.

You can always sell it if things go sour and you'll get a better return on your investment. Multi-families and condos have a higher return rate than rooming houses. And if you keep it, you'll always have a place to live (with your own bathroom) Wink

Just some thoughts. I'm sure someone else around here has more experience with real estate investments and the laws therein than I do.
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Slappy Doo Hoo
 
  1  
Reply Wed 18 Feb, 2004 09:43 am
Thanks for the insight sugar...he wants to buy in Framingham. However, I think we'd try to do it legally(or close to), have 4 or 5 rooms in each apt, rather than stretch it to 20 people living there like what his friend is doing.
I'd love to get a 3 family, but they're too expensive, a 2 family would be the max. If I would do the flip to condos thing, that's something I'd rather do on my own. Haven't thought much about that.
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Sugar
 
  1  
Reply Thu 19 Feb, 2004 09:53 am
I'm surprised no one else around here has popped in with some info about this. Don't you just love it when your surrounded by know-it-alls until it comes to practical and useful information? Title it "I love her but she doesn't want me.." and then put in your real estate question. Bet you'll get 100 views. Doesn't really help with the answers though.

OK - hijacked the thread to complain. Now back to your regularly scheduled program.....
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sozobe
 
  1  
Reply Thu 19 Feb, 2004 10:00 am
Well, a lot more people have some experience with relationships than with real estate investing, doncha think?

Have been reading along, good luck, Slappy.
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Slappy Doo Hoo
 
  1  
Reply Thu 19 Feb, 2004 10:31 am
I think I'm leaning against it. I'd rather do something like this on my own, considering I technically could, and the reason why he wants to do it with someone else is because he can't.
One of my good friends in the mortgage business is strongly against it.
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sozobe
 
  1  
Reply Thu 19 Feb, 2004 10:39 am
That probably means something.

My husband just got back from a trip to Boston (interview at MIT) and was told that housing prices have recently gone way up, like in the last 5 years. Most universities that are in expensive areas offer some sort of financial assistance with housing for faculty. MIT said they don't have a program like that but are just starting to look into creating one because of the recent increases.

That suggests that it's a good money-making opportunity, BUT I don't know which direction the market is going -- continuing to go up, or finally topped out. If it's as high as it's going to get, that's not when you want to enter the game.

Glad you have a friend in the mortgage business to talk to about this.
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Slappy Doo Hoo
 
  1  
Reply Thu 19 Feb, 2004 11:01 am
The prices are absolutely insane out here. In my soccermom infested neighborhood, which is 15 minutes outside Boston, you couldn't find a ranch under 400K. Even in the inner city of Boston, 2 families are rarely under 350K.

They say the market is topped out right now, but in the long run, real estate always appreciates.
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sozobe
 
  1  
Reply Thu 19 Feb, 2004 11:15 am
Does it?

I've been angst-ridden because we don't own, will probably be moving next fall and want to buy a house then, and it seems like a terrible time to enter the market.
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Slappy Doo Hoo
 
  1  
Reply Thu 19 Feb, 2004 12:09 pm
It cycles up and down like everything else, but I'd think it definitely appreciates in the long run overall. It might go down for the next couple years for instance, but always bounces back. Can you think of any housing that's cheaper now, than 10 years ago?

It is a "seller's market" right now, but that doesn't mean you can't find good deals.
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panzade
 
  1  
Reply Tue 19 May, 2009 02:08 pm
i've been chuckling over this thread...maybe now's the time to invest...all those foreclosures
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