Pros and Cons of Real Estate Investment Partnerships
A Real Estate Investment Partnership is a legally binding agreement to operate a business together in the real estate investment industry. Partnerships have advantages and disadvantages that must be considered when you’re determining if you actually need a real estate partner.
If you proceed you should consider who your partner should be and how you should structure your real estate investment partnership agreement.
Working with a partner can be the best decision you can make, or it can result in your worst nightmare if you do not choose wisely. It is up to you to decide whether to go it alone or enter into a partnership agreement with someone. Read on to learn if partnering is the right move for your real estate investment strategy.
Do I Need a Real Estate Partner?
The only reason to partner with someone is if they bring something to the transaction that you do not have. You need to do an honest, critical self-evaluation to determine where your strengths and weaknesses are, and what strengths you need in a partner.
For some, this means a partner will bring money needed for a transaction, for others, the partner brings a new set of skills. A partner that is in a similar financial situation AND has the same skills as you is really not bringing anything you need to the transaction.
It is the introduction of complementary skills or assets that makes a partner valuable in the real estate investment world.
For example, if you lack the financials that a lender requires, finding an investor with strong financials brings something to the transaction that you don’t already have. Similarly, if you have the financials, but are a novice to rehabbing, a rehabber with significant experience and track record of successful flips is a great partner to team up with.
Who Should My Partner Be?
Once you determine that your investment strategy improves with the addition of a partner, the next step is to find the right partner (other than examining what they bring to the transaction).
Take your time and do your research. Foremost, you should only partner with a person that you trust 100%. You and your partner will be co-signing onto obligations of significant size and impact, so if you have any doubts as to whether your potential partner is trustworthy, move on and find another partner.
Your partner should also be someone with the same real estate investment strategy. If you are doing a rehab project that you intend to flip for one time profit, make sure that your partner is not looking for a project to hold as a rental for a monthly income stream.
What Should a Real Estate Partnership Agreement Include?
A good real estate partnership agreement will spell out in detail what is expected from each partner. It should explicitly state financial expectations, division of labor specifics, and expected time commitments from each partner. The partnership agreement should also spell out profit and loss allocations, tax responsibilities and who has the right to make decisions and bind the partnership to legal contracts.
Lastly, it should specify how the partnership will end, including what would happen if one partner needs to leave the partnership at some point before the property is disposed of, what would happen upon the death or bankruptcy of one of the partners, how the property will be valued prior to sale, etc.
The clearer and more specific the written agreement is about all of these details, the less likely it will be that disputes arise.