The one about friendship
Money and friendship can be super messy - or the best thing to happen to you in a really long time. Here's how it went for us ...
I totally get that buying your first real estate is completely daunting - making it seem less daunting is the whole point of this newsletter after all. A good chunk of your savings, a subject matter you might not totally be familiar with plus the danger of undetected risk somewhere in the basement (quite literally) - the stuff that investment nightmares are made of.
When I took my first steps into the self-proclaimed (as in “I proclaimed”, the forest doesn’t speak) “dark investment forest”, though, there was no newsletter. Instead, I had a much better resource to tell me where to go. Map, motivator, muiding light (don’t you just love alliterations?): I bought a house with my best friend (I casually mentioned him here). The nonchalantly thrown in “don’t do this alone” is important enough to warrant its own instalment of this thing that pops into your inbox, though. Because, in all seriousness, if I was to pinpoint the one thing that made all the difference to our real estate success in my humble opinion - it’s the fact that weren’t in this alone.
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If you look at the three phases of a real estate purchase
Plus, emotions aside, two really good hard fact reasons for joining forces:
Capital: One of the very first reasons why we thought teaming up to buy property would not only be more fun but possibly a necessity was the question of capital. We simply didn’t think we would have enough cash laying around to buy anything beyond weekly groceries or a tool shed sized structure. In the end, that turned out to not be true because due to low interest rates it was preferable to fully finance the purchase price anyway, meaning less need for a downpayment. But even though you might have a good credit score on your own, banks will always prefer the security of two backers - and reward that double-whammy with better interest rates. Who doesn’t like a two for one-special, right?
Division of labor: Bit of a doozie really - together, you are more likely to get more done faster. And because real estate can be a lot of work, that is a good thing. There was a bit of a surprise though: While I would normally always structure work in a way that assigns all parties involved pretty stringent areas of expertise - in buying and managing real estate together we have actually gone a different route. Both of us being new to this world, our division of tasks and to dos has always been pretty fluid. Sure, we didn’t even inhabit a shared continent initially and my half-house was many time zones away which isn’t super conducive to sharing things 50:50 anyway … but even now, in much closer proximity, it turns out that discussing things as they come up and making joint decisions in the moment has proven to work really well for us. At the danger of sounding like a broken record … trust certainly plays a huge role - as does paying for some outsourced services like property management (which I am sure we are going to do a deep dive on in a future issue).
So while I might basically proclaim the end of this “important tips for buying real estate” newsletter by talking in depth about what I, five seconds ago, called the most important tip ever - well, here we go. Some things we learned when buying real estate with someone else:
Legal structure: Yep, we actually have a “company” together which was established for the sole reason of buying our house. I use air quotes as we chose the German GbR - a pretty easy solution - but there are other options, namely the ones below that we have found to make sense for similar setups to ours.
The Gesellschaft bürgerlichen Rechts is one of the least complicated and most unbureaucratic ways of setting up a legal structure, basically just binding humans together for the purpose of a mutually worked on project. Each individual in a GbR is liable to the full extent of their estate, which is the definition of a “Personengesellschaft”, an unincorporated firm. While the GbR is quintessentially German - similar structures exist elsewhere as well. For us, this worked perfectly as it gives us a vessel, so to speak, that formalizes things like taxation - but still has flexibility and not a ton of overhead that would probably kill, overwhelm or in the very least annoy the heck out of a small venture between friends.
I am not even going to start translating this meme-worthy German gem. Basically, the term describes how a thing (in real estate termes: a house or an apartment) is communally owned with each party in the community owning a fraction of the whole entity. If you don’t set up anything else this is going to be your default, which doesn’t have to be a bad thing. The main advantage of this structure is an even easier (and most likely cheaper) setup than a GbR because no contract is needed. Additionally, you can divvy up the whole in uneven fractions from the get go, say if you each want to pay a different amount towards the mortgage for example. Legally, it’s going to be much harder to have one member of the community yield decision making power over the entirety of the property (unless you have far reaching power of attorney, which means you would have read this whole thing and taken our advice to heart).
The reason I am even bringing up the Bruchteilsgemeinschaft after singing the GbR’s praises for a page and a half is that sometimes banks CAN be a little prickly in granting loans to companies, including GbRs. In this case, a Bruchteilsgemeinschaft can be an easy fix - if you are willing to forgo more complicated contractual terms which wouldn’t be possible in this setup. One other thing to consider: for unmarried couples, there’s a slight chance that all of the sudden you find yourself trapped in a situation where you owe gift tax if one party pays more than the other. Something to be aware of - and best checked with your trusted financial and/or tax advisor (given we are just people on the internet who can’t give you individual tax advice).
If the Bruchteilsgemeinschaft is the baby-cousin of the GbR - the Immobilien GmbH is its teenage brother, the one with the cracking voice and straggler facial hair. It has its downsides like higher operating costs (as you need to do a yearly balance sheet for example) as well as a few rules that the entity needs to follow (like: the company is solely allowed to manage assets. Operations like repairs or construction have to be outsourced, meaning your GmbH can’t hold the property and offer window cleaning at the same time for example). If that’s the case, though, this (almost fully) grown-up version of a legal structure has distinct advantages (which is why we are considering it): Especially if you are buying to hold a property there’s a tax break - profit is taxed with “Körperschaftssteuer” which is much lower than your regular income tax - a difference that can be more than 30% in your tax payment. This tax advantage has to be funneled towards the loan payments as well as to build reserves, though. Don’t even think about profit distribution, otherwise you’ll lose the tax cut to 25% of final tax, melting those savings like ice in the sunshine.
Contract: Speaking of a small venture between friends - it’s my firm conviction that if you decide to do money-business with friends or family (which is icky enough of a topic that some might advise to stay away at all costs), you better formalize it through a contract. Yes you need to trust each other and you kinda hope that the contract never gets needed or tested or, god forbid, challenged in a courtroom setting … but it seems downright reckless to juggle this much money and responsibility and not at least try and write things up? We did a pretty basic GbR contract - similar template here. While, legally speaking, you could do a non-German version if that makes your life easier, be aware that you will have to include the GbR contract with the documentation your bank requires to secure a loan. And they will definitely be asking for a German version. A GbR contract does not need to be notarized by the way and can be amended easily by both parties. Which brings me to another thing that we kinda learned the hard way …
General power of attorney: No matter how well you structure your contract (nothing we particularly excelled at), there’s a legal document that you might end up needing even more. Granted, our situation is further complicated by the fact that we don’t live in the same city (and didn’t even live on the same continent when we started all this) - but one of the best decisions we made, I believe, was to grant each other the general power of attorney. I am with you, this seems like a HUGE step. Which is probably why we initially didn’t think about it at all and then, for a long time, tried to get by with individual documents granting each other authority for singular transactions - only to time and time again run into issues, deadlines and general hassle that you don’t need if you want to move things forward. Eventually, we just ended up going to the notary to certify that we each have the power and authority to make decisions and sign documents on behalf of the both of us. This document absolutely does need to be notarized so it makes sense to get this done once and pretty broadly, especially since you pay a fee that is a percentage of the transaction volume. Sigh. Nothing like cementing your mutual trust by handing over the keys to your proverbial castle …
Taxes and money: Both of us have access to the company’s bank accounts. I mean, I just told you that, in theory, we could empty each other’s private accounts in a totally legit way - so having our company’s finances in view probably doesn’t seem like a big deal. Another thing we did that’s highly recommended: hire a tax consultant that takes care of the company’s annual financial statement. Given the legal form of the GbR this actually just means that you are handed a document that details earnings and losses which both of us enter into our individual income tax declaration. Easy enough.
Does it feel like not tackling real estate on your own potentially adds a few complications in the beginning? Sure! You might not have to worry about any of the above if it’s me, myself and I (the you-version). In the long run, though (and at the danger of repeating myself) I firmly believe in the power of teams, real estate not being an exception. If you are lucky enough to find that person you trust and vibe with - go all in, it will make your life easier (and more fun). Life and money decisions equally deserve a bright muiding light!
Next time, on Rente aus Stein: Learn all about the infamous 5-P-Rule and how to really get started if you are thinking about real estate.
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We are not lawyers (sadly) and as such can’t give you legal and/or tax advise. We are simply telling our story in the hope that it’s inspiring to you.