Group Real Estate Investing

Group investing, or purchasing investment real estate with one or more additional people, can often be a great way to get started in the market or to buy a more expensive property than you could normally afford alone. Each investor contributes a part of the required down payment and shares proportionately in the property's expenses and profits. But there are potential pitfalls to consider, especially when the partners are family members or friends (both of which have been known to not mix well with money issues). If you're considering this route, it's advisable to hire an attorney to help you establish a partnership or create a corporation with written rules to keep possible future difficulties to a minimum.

When buying investment property with a group, one of the most important considerations is to be certain that all mortgages incurred contain a non-recourse clause. Without this provision, the personal property of every member of the group could be at risk in the event of a mortgage default. Under such a clause, if a default occurs the lender waives all personal liability on the part of the borrower or borrowers, limiting the lender's recourse to foreclosure and acquisition of the real estate. Each borrower's personal property and income are legally out of the lender's reach.

Because most real estate investments have historically been generally profitable, there are a number of lenders (even in today's marketplace) who – if they obtain a share of the potential profits – will circumvent some of the usual rules and guidelines of mortgage lending. In home purchases, this type of financing is known as a shared-appreciation mortgage, or SAM. For investment and commercial projects, it's usually called participation financing. The financing arrangement can often mean little or no required down payment and significantly reduced interest rates, but it will certainly connote a drastic cut in your realized profits because you'll have to share them with the lender.

The shared-appreciation mortgage is typically used for single-family home and condominium purchases. This loan agreement allows the lender to secure an interest in the potential appreciation of the collateral property over a stated period of time. For example, a lender might reduce the buyer's down-payment requirement to one- or two percent of the property's appraised value and the interest rate to a full point below current market rates in exchange for a twenty-five percent share of the property's increased value over a five-year period. Ownership of the property is recorded in the buyer's name only, but the loan agreement specifies the lender's share of the future appreciation. Unless the property is sold during the term of the agreement (there are usually strict rules that govern this possibility), the borrower is generally required to either sell or refinance the property at a predetermined time (during the final year of the agreement, for example) in order to pay off the lender's share.

The participation mortgage is simply a partnership arrangement between the buyer and lender. Under this agreement, the lender usually allows a higher loan-to-value ratio (in other words, the buyer needs less of a down payment – perhaps none at all) and a lower interest rate, taking in return an ownership share of the property. This share may be as little as five percent or as high as fifty percent, and under some circumstances even more.

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