Should You Buy Your First Property with a Partner or Solo? (Rookie Reply)

Ashley:Welcome back to the Real Estate Rookie podcast where we tackle the real world questions. New and growing investors are asking every day.

Tony:And today’s episode is proof that no matter where you are in your journey, whether you’re closing on your first deal or managing 20 plus units, real estate brings new challenges at every level.

Ashley:We’re breaking down three powerful questions from rookies at different stages, including if you should buy a property with a friend. What happens when one tenant wants to vacate and the other wants to stay? And lastly, some feedback from an investor who was a guest in an Airbnb that felt DI am Ashley Kehr.

Tony:And I’m Tony j Robinson. And with that, let’s get into today’s first question. So this question comes from Jason in the BiggerPockets forms. He says, I live and work in LA and currently pay $2,750 per month in rent. I have $80,000 saved up and want to buy a fourplex and live in it so I can stop renting. I have my VA home loan to use as well. I make a bit over $200,000 a year. My plan is for me and a friend to go in on one together, I’d own 75% and he’d own 25%. We would put down 5%. The ones I’m looking at are between 1000001.5 million. And most have four two bedroom, one bath units in the area that I’m looking for. I could probably rent them out for 2,500 to $3,000 each. My friend would live in one unit, his 25%, and I’d live in one unit.

Tony:Rough estimates put total monthly costs at around $9,000 per month. So each unit would need to pay 2250 to cover it. That’s how much me and my friend will pay. And the $500 per month I’d be saving on not renting anymore, along with the extra rent I bring in from the tenants will all go into fund to cover emergencies and vacancies. I start that fund with 40 k to put aside initially looking for your opinions. And for context, my friend is also my business partner in a business. I also own majority ownership. So this wouldn’t be our first contract we’ve written up together. Plus my majority ownership makes me feel better and I’m not leaving California because I love it here. Alright, so a couple of things to highlight from here. I just want to recap what he said. Great income, right? 200 plus KA year, 80,000 bucks saved up, has a VA loan looking to buy a fourplex, one to 1.5 million. Splitting this ownership with a partner, 75% to him, 25% to the partner. I think my first question is do you even need a partner? And this is coming from the two people that wrote the book on real estate partnerships, but I think based on what you’ve shared, I don’t fully understand the value of bringing in a partner on this deal. You’ve got the VA loan

Ashley:And Tony with the VA loan. I don’t think you can partner with anyone. I think with the VA loan it has to be a spouse and if it is a partner, there’s a bunch of forms and hoops you have to go through. But I think it has to be some circumstance where it’s like a life partner, not your friend that’s buying the house with you and your two buddies. I don’t think you could even partner on the property using the VA loan

Tony:Unless you and your firm want to get married just to buy this deal. I guess that’s always an option as well. But assuming that you don’t

Ashley:In Vegas at BP Con, there you go.

Tony:So that’s one option, right, is do you even need to partner? Because I don’t see anywhere in this question a strong motivating factor to actually partner. If he’s only putting up 25%, maybe just go get a threeplex instead of a fourplex. It might be the same amount of cash out of pocket, but now you own this deal by yourself. So I think that’s the first question for me, Ash is like, do you even need a partner on this deal?

Ashley:And too with the VA loan, you can do 0% down. He says we would put 5% down, but with the VA loans you could do 0%. So that might even make it more attractive for him. And obviously you’d have to run the numbers because that’d be a different mortgage payment to see what he would end up cash flowing if it did change to that. But I agree, I think that what is the reasoning for him getting a partner on this is that just because they both want to get started in real estate and this is like an opportunity for them to do it together, what I would do is I would buy your property with the VA loan, have your friend buy your property with their VA loan, both of you house hack it, and then do some kind of agreement. When you guys move out of that property, you guys could decide, okay, we’re going to put these two properties into an LLC now that we both co-own that their investment properties now when we’re not living there. And then you can continue to build your portfolio together if you want. But I definitely think that this person has the opportunity to go ahead and do it themselves.

Tony:Yeah, I mean because if we just look at the numbers here, we’ve got a fourplex. He said each unit would rent 2250. So I’m going to do some math here to make sure I get the right numbers right. So three times 2250 each unit, those three units will be bringing in about 6,700 bucks a month in total rent. He says rough estimates on cost would be around nine K. So even at that amount you’re still paying less in rent, you would be paying the additional 2250, so you’re still paying less than you were paying in rent, but for a property that you actually own. So does the deal make sense? I mean, yeah, if we’re just looking at how much are you spending for your living expenses, you would come out ahead both from an equity taxes, cash out of pocket on a monthly basis by doing this property. But if we put your friend back into one of those units, do the numbers still work out the same, right? I guess now he’s paying 2250, so maybe the net is still the same, but yeah, I guess I’m just not seeing the value of bringing this other person into the deal.

Ashley:Yeah, I agree. And he did say that they’re already existing partners, so there’s low risk there because they have this going on. So I do wonder, is it just a comfortable thing you want to take on the risk together? Because that was one of the reasons that I did my first deal. The challenge I really see with this is that going in on this deal is that this is going to be your primary residence. So I’m just going to say the VA loan is out. So say you do 5% conventional loan, which they have those. So he had put 5% in his scenario anyways, so you could go on that, you go on title. Each of you make sure that you are doing the steps that you need to take to actually protect yourself. So besides just an agreement stating you own 75 and he owns 25, as in are you going to get umbrella policies?

Ashley:So are you going to make sure you have some liability protection on both of you? Is there a plan that when you move out you’re going to put it into an LLC? Because having a partner and owning a company that’s like an LLC together and having a partnership is very different than co-owning things in your personal name, especially as you start to accumulate cash, accumulate wealth and things like that. So just make sure you talk to an attorney that if you do do that where you’re both owners of the property because there’s tenants in common or joint tenancy. So I would talk to an attorney on how to actually structure that.

Tony:Last thought I’d share on this question is we’re looking at house hacking, but we just interviewed James Kit who house hacked a bunch of duplexes to build his portfolio, but in addition to renting out one side who’s also renting out rooms within his unit and know you said these are two ones, but you’ve got an additional room in there, maybe could you rent that out to beef up the revenue that you’re generating on this unit? And additionally, the other two ones, maybe instead of renting out the whole thing, maybe you rent those out by the room. So just maybe other potential strategies to increase that rental revenue because you did save 2,500 to 3000 per unit, but maybe you could get that up to 32 50 or 3,500 by adding in the room rentals as well.

Ashley:We’re going to take a short break, but when we get back, we are going to discuss what happens when one tenant on a lease moves out, but the other one wants to stay. We’ll be right back. Okay, we are back with our next question and this one is asked by Kevin, who’s a small landlord owning just a handful of properties he has never faced this situation before. So tenants of a family of five are divorcing. We already passed the 12 month lease renewal date, and we are in the automatic month to month right now as the original lease stated, at the time the lease was due for renewal, I sent out a lease renewal to both of the husband and wife. The husband signed right away, but the wife didn’t. The wife didn’t comment and she didn’t reach out to me. So we ended up without a formal renewal of a 12 month lease, but started the automatic month-to-month lease extension, husband insisted to move the wife off the lease and get the lease renewed for another 12 months.

Ashley:But I don’t think I can do it without a formal, at least an email confirmation from the wife. And probably more officially like an addendum requires all parties to sign if we finally have the consent from the wife to take her off the lease. And the next question is if I still need to have the husband to reapply requalify for the new lease, while the husband made 90% of the income of the household, but the custody situation and negative impact by divorce are just as unknown, what are your thoughts? Okay, so the first thing we should probably touch on is getting the husband asking for the wife to be taken off the lease. So yes, you would need to do an addendum to the lease or do a new lease, but you would have to sign a new lease with just the husband or you could do an addendum where she asked to be removed from the lease.

Tony:And Ashley, let me ask a follow up question because they also say that they’re in California, right? Which we know is a very tenant friendly place. So obviously you don’t invest in California, but I’m curious if they’re on a month to month, could this landlord simply do a non-renewal of the current lease, which would negate both parties and then sign a new lease with the husband?

Ashley:I don’t know about California because I feel like from what I hear in California is that you can’t ever send a non-renewal unless you’re going to rehab the property or move in yourself for a family member. But I don’t know that for sure in New York State, yes, you could do that. You could send the notice and it’s depending on how long they live there for. So if they live there for less than a year, so it’s just the one year lease, which in this situation they’ve lived there over a year, so less than two years, then you have to give 60 days notice. So you would give the 60 days notice that the lease is ending and then you could sign the new lease with the husband. As far as Requalifying, I would look at, you’re not going to know probably right away what his obligations are from the divorce to actually get any additional information unless the divorce is finalized.

Ashley:You could ask him, is he now required to pay any child support or things like that that would affect the amount of income he’s getting. But if he is been a good tenant, they’ve always paid on time. I would not make him go through all the hoops of actually reapplying, again, redoing his credit, redoing the screening. I would just ask if there is any child support he pays, because honestly, you’re not going to be able to, even if you screen him, you’re not going to know if he’s paying out child support unless it’s taken out of his paychecks every week and you ask for new copies of his paycheck. So you could do that. You could ask for updated proof of income. I think you’re in a fine situation unless you’re looking for an excuse to get them out. In my experience, my opinion, I would keep them there, the guy there if he’s been a good tenant because you don’t know what will happen and come out of this and it could be everything stays the same and fine.

Ashley:You don’t have to deal with the turnover or he does stop paying. He can’t pay and then you have to evict him. But that I think is up to your discretion if you want to take that risk or not. So maybe asking for an updated proof of income could kind of ease your mind that he can still afford it. Maybe ask about the child support if he’ll now be paying child support and he’ll be harder for him to afford the payments. But also too in California, what are your options for actually getting the person out? So can you do the non-renewal and they have to move out? What does the process look like to evict someone to, and is it not worth it risking that? But if you got another tenant in place in a year, they could be getting a divorce too. So I mean, there’s all different types of things that could happen.

Tony:I think the last piece of advice is just to talk to an attorney that really understands California tenant landlord laws, because that’s going to really be the limiting factor on how much flexibility you have in this situation. So go talk to an attorney and I think that’ll answer a lot of these questions as well.

Ashley:Yeah, and I would just be most careful about how you remove the wife and either getting her permission or doing it the way Tony recommended because she could come back and say that she still has tendency there and claim that she is still on the lease, still living there. So okay, we’re going to take a short break, but then we have a question from an investor who stayed as a guest and an Airbnb and has some feedback on how host should be offering out their listing. We’ll be right back. Okay, welcome back from our short break. Our last question here is from Jules. Interesting experience as a guest. I’m an investor and I booked a place five months ago for an event this month with two parking spaces. In fact, I messaged a couple of other hosts with descriptions that were unclear, but this listing specifically listed to parking spaces, the listing has been updated, there are other changes, and the parking is now listed as free parking, including guest pass.

Ashley:I reached out to the host and they responded that the second spot is shared with another condo. First come first serve parking spots are literally $100, and that doesn’t include overnight. When I requested VRBO check the earlier listing, they responded that they don’t keep a record and wanted me to show them a screenshot of the original listing for proof. Maybe I am an idiot, but I didn’t think I needed to take a picture of the listing. I booked the confirmation email links to updated listing. Tony. I specifically picked this question because I was like, wow, I never thought of that on the guest side or the host side. So as the guest side, how do you protect yourself so the host can’t go and make changes before your arrival? Things you are depending on and on the host side, how do you actually make changes to your listings but it not impact guests who have already booked?

Tony:I’ll give you a real example. So oftentimes when we create a new listing, we’ll duplicate an old listing, especially if it’s in the same market, just because the way we lay things out. If we’re talking about the city, it’s the same city. So we did this, and this was probably two summers ago now, where we duplicated one of our existing listings for a new listing that we were launching and this new listing, it was a beautiful property. We had just finished the renovation professionally designed, but we were still waiting on the hot tub to get delivered. There was a delay in the shipping. So we said, Hey, we’ll just launch it then we’ll add the listing, we’ll add the hot tub after we’re live. When we duplicated that old listing, it still had the box in the amenities section checked for hot tub. So even though nowhere in the photos that we mentioned the hot tub, even though no rare in the description of the listing that we mentioned, hot tub, the box for hot tub was still checked under amenities.

Tony:So the very first guest gets there, very first guest, and they’re like, Hey, place looks fantastic. Where’s the hot tub? And we’re like, oh, we’re so sorry for the confusion, but there is no hot tub. And they sent us a listing and said, you said that you have a hot tub here. So we immediately go in, we update the listing now so that the hot tub is no longer mentioned. But what we did in that situation was we went to that guest and we said, Hey, you’re right. Our bad. We messed up. We’ll refund a percentage of your stay because this is a major minute that you booked and it wasn’t there. We take full responsibility. We then reached out to the other guests that were incoming and said, Hey, mistake was made on our end. Hot tub is not yet ready. You have an option.

Tony:You can either cancel your listing, we will give you a full refund, or you can say, and we’ll give you a small partial refund for the inconvenience. So that is how we handled it. We felt that was the right thing to do by our guests. It sounds like what this host did was they were notified of this mistake on their listing and didn’t offer anything to the guest in exchange. And luckily it was booked vrbo because if this was Airbnb, they for sure would’ve been penalized in some way, shape or form from Airbnb. Do I agree with him? Not at all, because it’s almost the opposite of how we handle it in our own situation.

Ashley:Well, thank you guys so much for listening to this week’s of rookie reply. I’m Ashley Hughes, Tony, and we’ll see you guys on the next episode.