With housing prices rising, many people want to invest in real estate to preserve asset value. However, the high threshold of real estate investment makes it difficult for individuals with insufficient funds to participate. Investing in real estate with friends becomes an option for some people. Although joint investment can diversify risks and share capital pressure, it also has some potential problems. This article will elaborate on the pros and cons of investing in real estate with friends.
more investment capital makes real estate investment easier
Investing in real estate often requires a large amount of capital. For individuals with limited funds, it is difficult to afford down payments and follow-up capital such as renovation costs on their own. Investing with friends can share the capital pressure, gather more funds for down payments, renovations or other expenses, and make it easier to invest in real estate that individuals cannot afford alone. For example, if 3 friends jointly invest in a property that costs 3 million yuan, they only need to contribute 1 million yuan each.
risk diversification avoids loss from single failed investment
Real estate investment has risks. If you invest all capital into one property and this deal fails for some reason, it can result in significant loss. Investing with friends allows capital to be put into multiple properties. If issues occur with one property, there are still other assets generating income. This diversifies risk rather than betting on a single property.
lack of trust may create conflicts in real estate investment agreements
Joint real estate investment relies heavily on trust between all participating members. But friends can have disagreements on issues like profit distribution, property management responsibilities, sale decisions etc. Without trust, legal joint investment agreements become very important for avoiding conflicts. But resorting frequently to contracts and lawyers also reflects lack of trust in the team.
unclear investment share and responsibilities may cause inequality
All members in a real estate investment team should have a clear understanding of how much each party has contributed to the purchase, renovation and management of properties. Otherwise disagreements may arise over issues like profit distribution. Responsibilities of each party over managing different aspects of the properties should also be made clear through agreements to avoid confusion.
illiquidity makes exit difficult without co-investor consent
Although friends come together to purchase real estate, their life situations may change at different times, leading some parties to want to cash out while others do not. But properties cannot be easily sold without agreements from all investors. The illiquidity of real estate investments makes smooth exit difficult without consent of co-investors who entered together initially.
In summary, while investing in real estate with friends can share capital pressure and diversify risk, lack of trust and unclear investment terms can also lead to conflicts. There are pros and cons to consider when entering into joint real estate purchases.