“Never go into business with friends.”
Hands up if you have heard that statement before.
My right hand is reaching for the sky, which is hard to do whilst still typing.
I heard it, however, about twenty years ago, and I ignored it and went into a business venture with a former work colleague.
We all have to learn our own lessons. Eighteen months later, tens of thousands of dollars in debt and a fledgling business to run and grow I learned a big one.
Selfish and unscrupulous acts can be and are carried out by those who we think have our best interests in mind, people who are considered close to us – trusted friends, colleagues and even relatives.
Sadly, I have seen many business ventures fail because two or more friends or acquaintances saw an opportunity and invested time, effort, money and energy into it, only to see the venture crash because there was no structure of leadership in place, culminating in distrust, poor communication and a complete breakdown of all components within the business.
Why am I sharing the lessons I learned about business partnerships and relationships when I should be talking about one of the many facets of Real Estate?
Investors, people who buy property and derive an income from the rent paid by tenants, need to understand that they are actually buying a type of business.
They invest their capital into an asset which produces cash-flow, leading to profit or ultimately growth in the value of the asset over time (capital growth).
The cash-flow comes from the payment of rent by the tenant. The tenant has obligations under the lease to ensure the asset (property) is looked after and returned to the owner, when the tenant vacates, in the good order in which the property was presented when first occupied by the tenant PLUS pay the nominated rent on time.
A fairly simple business arrangement you would assume.
In the majority of cases this arrangement is honoured by the tenant and owner alike.
BUT… here is the lesson!
Those investors (business owners) who allow friends, relatives or acquaintances to lease their asset (property) – usually at ‘mates rates’ and without any proper management of the property are almost certain to come a cropper.
Not always, but in my twenty plus years in business and real estate, the ‘investor/lease to someone known them without proper management’ scenario fails dismally in four out of five cases.
This is almost the same ratio as friend/acquaintance business partnerships.
I have seen examples of ‘renting to friend’ situations that have become an investor’s worst nightmare. Trashed homes, thousands of dollars in unpaid rent, total disintegration of the initial relationship.
Because from the get-go the trust factor is too high and shortcuts are taken in regards to documentation, clear spelling out of responsibilities, offering or asking for discounted rent and a lack of will to properly manage and maintain the property with regular inspections. In short – there is no defined structure of who is who in the zoo.
Like a failing business, there is no clear leadership or direction. All required tasks are ad-hoc or non-existent and as the situation deteriorates, no one is willing to stand up and rectify what is about to break or is broken.
If you decide to buy a property for investment purposes, and intend to install someone you know as your tenant, make sure of a few basic undertakings:
- Always sign an official lease with clear dates and expectations inserted
- Take a full four week bond and lodge it with the rental authority in your state
- Ensure the tenant pays true market value for rent each week
- If the rent falls only one week behind, bring it the tenant’s attention and ask for immediate payment
- Carry out three monthly inspections and bring any issues that concern you to the tenant’s notice for immediate rectification
- If the tenant reports any maintenance issue that needs fixing, do it as soon as possible.
If you are investing, treat it like a business from the very beginning. Being too kind to someone close to you who wants to ‘share’ your asset can lead to an experience you thought you might only see on A Current Affair.