Ask Paul: Can we invest in units without ruining our friendship?
Dear Paul,
I am looking at buying a small block of units in north Queensland with three friends as an investment.
I was wondering if you could advise on different options to structure the finances for such an investment? - Scott
Well, Scott, you did give me a chuckle with your question, not because it is silly, but because I have been there.
Many moons ago, along with six great mates from university, we dreamed of a ski lodge. So, we all chipped in and in 1983 bought a rundown old house about 45 minutes from Falls Creek, in Victoria, for the grand sum of $21,000. We knocked it down, but never got our act together to build.
It seemed like a great idea at the time, but we were overly ambitious and did not have a logical plan to build our ski lodge. Realistically, we do not have the money, either. About seven years later we sold the vacant block for $12,000 - not our finest investment.
What we did right was to have a detailed, written and signed agreement drawn up between us. As a result, ongoing costs were fairly divided and sale proceeds fairly split, and we are still great mates today. We regularly have a laugh about the "ski lodge that never happened".
So that is my key thought for you. Don't do what we did.
Have a logical plan for buying, do your research, find out what running costs will be, and make a plan for what you do if you have vacancies and your rent falls. In particular, how does one person get out? What if a minority or majority want to sell? What is your timeframe?
The critical issue here is not breaking up your friendship. One of the few things I can guarantee is your and your friends' situations will change through age, work, relationships, kids and health. So, you need a very clearly agreed and signed document that covers all of this. This will protect your friendship.
It should also cover how much cash you each put in, how much you need to borrow and then how you plan to repay the loan. My advice would be to take this document to your bank and a mortgage broker and see what options are available to you.
I think a block of apartments in north Queensland makes far more investment sense than our dream of a ski lodge, but be realistic, plan and document carefully and, in particular, agree on how one or more of you can exit the investment.
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