Imagine that two or more people decide to pool their resources and invest in real estate. This is the essence of a real estate partnership, which is a legal company formed to finance projects, divide risks, and leverage each partner’s talents and abilities. If you want to invest with a real estate partner, consult with a financial expert to better understand the risks and benefits.

A real estate partnership is a collaborative business arrangement where two or more individuals or entities pool their resources and expertise to invest in and manage real estate properties. These types of partnerships are a common structure for real estate investments, allowing participants to combine capital and skills for larger and potentially more profitable real estate opportunities.

Typically, each partner’s contribution may involve financial investments, property management expertise, market knowledge, or a combination of each.

Partners in a real estate partnership typically agree on the terms of their partnership through a legal document called a partnership agreement. This agreement outlines the role, responsibilities and the distribution of profits and losses for each partner.

Partners may choose to operate the partnership as a general partnership, where all partners share management and liability equally, or as a limited partnership, where some partners have limited involvement and liability while others have active roles.

The partnership agreement is important, as it defines the rules and expectations of the partnership and can help prevent misunderstandings or disputes.

There are several reasons to form a real estate partnership, but four common ones include:

• Capital pooling: Real estate partnerships allow individuals or entities to combine their financial resources, making it easier to access larger and potentially more profitable real estate investments. Pooling capital from multiple partners can open doors to properties or projects that may be financially out of reach for an individual investor.
• Risk mitigation: Real estate investments come with risks, such as market fluctuations, property management challenges and unexpected expenses. By forming a partnership, partners can share these risks and responsibilities, reducing the individual burden and potential financial exposure. Diversifying investments across different properties or locations within the partnership can further spread risk.
• Expertise and skills: Partnerships often bring together individuals with different skill sets and expertise, such as property management, real estate market knowledge, legal expertise, or construction know-how. Combining these skills can enhance the partnership’s ability to identify, acquire, manage and improve properties, which could ultimately lead to better investment outcomes.
• Tax benefits: Real estate partnerships can offer tax advantages, such as the ability to pass through income and losses to individual partners, which can lead to lower tax liabilities. Additionally, certain partnership structures, like limited liability partnerships (LLPs) or limited liability companies (LLCs), provide flexibility in tax planning and management. Partners should consult with tax professionals to understand the specific tax benefits of their chosen partnership structure.

There are many types of real estate partnerships that you may want to explore. Each has its own unique benefits and risks, depending on your investment situation. Here are four common legal structures:

• General partnerships: These are usually ideal for small projects due to the unlimited liability each partner carries for the partnership’s debts.

• Limited partnership (LP): Here, we find one or more general partners and one or more limited partners. Limited partners are shielded from personal liability exposure for the partnership’s debts, a major advantage that attracts many investors.

• Limited liability partnership (LLP): This type of partnership is where all partners enjoy limited liability protection. This type of partnership is enticing for large-scale investments where the financial risk is more significant.

• Real estate limited partnership (RELP): A more specific form of an LP, this partnership involves partners investing in real estate projects, with general partners managing the property and limited partners providing capital.

What are the Pros and Cons of Property Investment Partnerships?

As a real estate investor, we’re sure you’ve met someone who has advised or even offered you to join real estate investment partnerships. In such a case, the first question that arises is whether or not this is a good idea. That is exactly what we will be discussing in this blog.

Real estate investment partnerships could be quite profitable. They could provide significant benefits for both you and your partner/s. However, before proceeding, you should consider the other viewpoint. Investing in real estate with a partner can be beneficial if it is carefully planned and handled. Otherwise, the repercussions could be terrible for all involved.

So, let us dig into the pros of real estate investment partnerships first, and then go straight to talk about the cons of such partnerships.

Pros

• More resources

Real estate investment partnerships can bring together different resources. By that we do not only mean financial resources, but also knowledge and skills. Sometimes, a real estate investor might have the background knowledge and the skills to invest in real estate. However, he/she might not have the financial resources. In this case, investing with a partner who has the money to invest is the ideal option.

Read Also: Is Mobile Home Investing Profitable?

Another example is someone who has great deals but lacks the finances or does not qualify for a loan. But keep in mind that the lack of resources does not always mean that investors only lack money to invest. It could be the opposite. Someone who has the finances but does not have what it takes in terms of knowledge about real estate. So, they would be looking for someone to partner up with who could provide them with what they lack.

• Division of risks

Just like any other business, real estate investing is prone to risks. Sure enough, when getting into real estate investment partnerships, these risks are divided among all parties. Real estate partners only handle risks according to their shares. So, instead of you handling the risks alone, you get to split them with your partners. This makes it easier for the parties to take further action to improve and grow their business.

• Split tasks and accountability

Investing in real estate is associated with many tasks: From property management through financial records to managing tenants or renters and many other tasks. These could be hard for one person to manage, especially, if he/she has multiple investment properties in his/her profile. So partnering up is of great help in this case. Real estate partners could divide their tasks so that each party is responsible for something specific.

On the other hand, real estate investment partnerships also mean shared accountability amongst partners. They all hold accountability for their decisions and therefore their actions. It is always a good idea to have extra sets of eyes watching the real estate investment business and making sure that all tasks are accomplished according to plans. It could also help with double-checking the analysis of the investment business. Some mistakes could lead to disastrous consequences for all parties, so double-checking is a great aspect of real estate investment partnerships.

• Expanded network

As you might know already, the real estate investing business is all about networking and making connections. So, real estate investment partnerships provide you with the chance to expand your circle of connections. They allow all parties to bring together their networks and connections, therefore, expanding their business opportunities.

Cons

• Less profit

When working with a partner in real estate, you have to understand that you will not be making the same amount of money as you would if you were alone. There are many different types of real estate investment partnerships. You must know what kind of partnership you get into in order to know how much you will be making.

There are 50/50 partnerships, which means you will be making 50% of the overall cash flow. You could even get into a 30/70 partnership, in which you get 30% of the cash flow. You might make even less if there is more than just one partner. So, you have to be ready for that; otherwise, you should invest alone.

• Dealing with taxes

With real estate investment properties, dealing with taxes might get more complicated. In other words, when investing in real estate alone, you take 100% responsibility for paying taxes. On the other hand, in real estate investment partnerships, it might get more complicated in terms of splitting the tax responsibilities amongst the real estate partners when the time for paying taxes comes. Therefore, this is another aspect that adds to the list of things to consider when investing in real estate with a partner.

• Controlling the business

Well, when investing in real estate solo, you get to control all matters that have to do with your investment property. You get to control the property, the finances, and the plans and goals that are set for the business. Moreover, you get to make decisions without having to consult others. However, the problem with real estate investment partnerships is that you simply can’t do that. You do not have the right to control the business or take decisions on your own. You have to talk to your real estate partners and discuss every single step with them.

This, of course, leads to another downside of real estate investment partnerships: disagreeing. You might have the best ideas to improve your real estate investment business. However, if your partners do not approve of it, you can’t say anything and, most importantly, you can’t do anything about it.

• Leaving the partnership

Leaving a partnership is a nightmare for some real estate investors. If suddenly one of the parties decides to leave the partnership, it could lead to some damage for the other parties. You might be forced to sell the investment property in order to split the shares. That is, of course, unless you have the money to buy the leaving partner’s shares and save the business.

After considering the benefits and drawbacks of real estate investment partnerships, you are left with a decision. We are unable to make a decision for you in this circumstance. It all depends on your situation. However, no matter what decision you make, you should always have a backup plan in case something goes wrong.

In general, if you find a trustworthy real estate partner who has something to offer that you do not, you should consider partnering with him/her. You never know what chances will present themselves, leading to huge success in real estate investing for you and your partners.

How do you Determine Ownership of a Partnership?

How much is everyone investing in the company?

Say you need $100,000 of startup money to get the business operational. If you have three partners–for example, one who is in charge of finances, one who will head up the business dealings, and one who will manage marketing–with each partner pitching in $33,333, then an even split of ownership is probably a good place to start.

However, if two partners put in $50,000 of their own money into starting up the company and the third partner won’t invest any capital but will handle setting everything up and getting the company going, how do you split the stock? Even thirds might work in this case, but the third person who is doing all the work will likely feel like his efforts are undervalued after a time. 

Both time and capital are valuable investments. You need both to start and maintain a functioning company, but you need to decide what fair compensation is for the amount of risk each person is taking. With new companies, it’s hard to tell from the start what the returns will be like.

How critical is each person’s role to the success of the company?

From our previous example, we had a CEO type, CFO, and CMO as our three partners. Are all of these equally critical to the business? Will each of these people be working the same long nights and putting in the same amount of effort from the get-go to get the company going? Unless you have already worked with your partners before, it’s going to be hard to tell how much of an impact they’re going to have. It also may be completely different in a different environment. 

It’s a tough call, but this is the bit where partner disagreements often arise. Over time, one partner end up doing more work and picking up tasks that other partners are leaving behind. This partner can become resentful and feel as though they aren’t being compensated enough for their efforts. 

It’s not an uncommon problem that arises down the road, so rather than focusing on redistributing shares, focus on working together as a team to make the pie bigger. This way, everyone will share in the growing profits.

What happens if you want a new partner down the road?

Will founding partners have more equity than newcomers? If so, how will you decide how much equity they get? Will existing partners give up an equal number of shares, or will it be based on percentage? These are all things you need to lay out at the start in your partnership agreement to avoid conflicts down the line. 

What happens if a partner wants to leave?

Will the other partners buy them out? Will you let them keep their shares, but simply not have voting options? If you do need to buy out a member, you’ll need to properly assess the value of the business in order to calculate the current value of that partner’s shares. You can hire a business valuation service to assign an estimated value to your company. This will make it easier to figure out how much their portion is worth.

Drawing up the Partnership Agreement

Once you’ve discussed all of these details with your partners, you’ll need to codify it in a partnership agreement document. Since this is the founding document of your company, similar to an LLC’s Operating Agreement or a corporation’s bylaws, you’re going to want to consult a legal expert. When drafted properly, this document can save you and your partners from many unpleasant disagreements in the future. 

With new small businesses, budgets can be tight and legal advice is notoriously expensive. BizCounsel is a great place for small businesses to find a lawyer that fits their needs and budget. Starting up a business involves a lot of paperwork, with various contracts and licenses often required. Having an expert who can review everything with a professional set of eyes can help ensure you’re setting everything up properly and help you avoid costly mistakes.

You’ll need to establish a total number of shares and then divide those up among the partners. Keep in mind the shares represent not only the ownership but also the profits and losses of the company (unless your agreement specifies otherwise). 

Once the agreement is drafted, with all the other sections about how the business is to be run, the partners need to sign it and have it notarized. Depending on your sector and state, you may need to provide the state with a copy of this agreement. 

Final Thoughts

Real estate partnerships can provide many benefits, but they also present distinct obstacles. As a result, potential investors must assess their financial objectives and risk tolerance, as well as the experience and credibility of possible partners. You may also want to seek legal and professional tax assistance to better understand the obligations of your partnership.