While many real estate investors prefer to go on their own, real estate partnerships can be a great way of boosting your business. You must have heard the phrase “Two heads are better than one.” So imagine the potential benefits of three or four or even more heads thinking together how to make money in real estate investing. Now, however, two (or three or four) heads can also cause more troubles than a single head, especially if each one of them is thinking in its own way and considering only its own gains. That is to say, real estate partnerships can result in a great deal of problems. Fortunately for real estate investors, most – or even all – of these problems are solvable and even avoidable with some good planning and strong agreements from the beginning.
Before we start with the negative stuff, let’s have a look at the benefits of real estate partnerships to see whether it’s at all worth going into one:
Most Common Real Estate Partnerships Advantages
- Pulling more financial resources and financing options together
- Possible to buy a larger and/or more luxurious income property which means more rental income and more profitability
- A great opportunity to diversify your investment portfolio quickly with shares in several investment properties
- Faster growth
- Bringing together more experiences and expertise (hint – consider real estate partnerships with people who have skills and knowledge complementary to yours)
- Sharing risks
- More heads to solve emerging challenges
- Sharing duties such as finding a rental property, property management, looking for and dealing with tenants, maintenance, etc.
- Access to a larger real estate network of professionals and experts
Well, it seems like there is no reason for a potential or existing real estate investor to not want to be a part of real estate partnerships, after reading about all these benefits. But as said before, real estate partnerships can – and indeed often do – turn into a real nightmare, especially when one invests with the wrong people or does not settle all possible issues from the start. Let’s take a look at the potential challenges under such an arrangement:
Potential Real Estate Partnerships Risks
- Doing more work than other partners while receiving the same or smaller share of the profits
- Shared control over all decisions
- Delays in decision-making processes
- Inability to sell when you think it’s the right time to sell
- Different real estate investing goals among partners as a result of different life goals
- Sharing a real estate investing business with a control freak
- Possibility to cheat or being cheated (it’s just human nature, isn’t it?)
- Bearing unneeded legal responsibility (in case one of the partners messes up)
- More complicated tax situation
Now that you’ve considered all these complications which could arise from buying an investment property with someone else, you are probably thinking – Why on earth would I ever want to enter real estate partnerships? Well, remember the advantages listed above.
What is important to is that while real estate partnerships can lead to a lot of problems, all of these traps are avoidable with some good planning. Let’s see how to a real estate investor can prevent the emergence of such problems before even entering into real estate partnerships:
Tips on How to Avoid Real Estate Partnerships Problems
1. Prepare and sign a clear real estate partnerships agreement
Before you start your common real estate investing business, get all your partners together and draft a binding agreement or contract which you all agree on. Make sure to provide for all circumstances and needs including:
- Each partner’s financial contributions and in what form (cash, mortgage)
- Each partner’s roles, tasks, duties, and contributions
- Each partner’s role in decision-making
- Each partner’s share in control
- Each partner’s contribution to additional costs (management, maintenance, looking for tenants, etc.)
- Each partner’s compensation and share of the profits
- Whether to distribute profits (from rental income) or reinvest them in another income property
- Rental strategy: traditional or Airbnb
- How to deal with removal and withdrawal of partners if need arises
- When to sell the rental property, what to do with the money (distribute or reinvest), and in what proportion to redistribute the money (if that’s what you decide)
Even if you are entering real estate partnerships with close friends or relatives, the more you clarify things from the beginning, the less likely you are to face problems later on. Be as specific as possible in your written agreement. Make sure that all partners sign the agreement so that it is legally binding.
2. Get legal assistance in deciding on the crucial matters and drafting the agreement
Unless you have legal experts in the real estate partnerships which you form (which could be a very good idea), hire a legal professional to help you settle on the main issues and draft the agreement in a fair but also binding manner. This additional cost will be worth every cent as it will assure your commitments and your profitability.
3. Enter real estate partnerships with people you can trust
While it is impossible to know the business personality of someone before actually working with them, you should always aim to attract reliable partners. Look into your previous real estate partnerships; consider people from your real estate investment network; think about relatives, even your spouse; look around for colleagues from your 9-to-5 job.
4. Forge real estate partnerships with people in the same life situation and with the same life goals
While you are just buying an investment property together – rather than getting married – it is always better to invest with people who are at the same stage in life, with the same life goals, and with the same financial motivations and values. For example, it makes sense to buy a common income property with someone who just like you wants some rental income to help get his/her kids through college and then sell in 20-30 years in order to secure his/her retirement. At the same time, it doesn’t sound like a smart real estate investing decision to share an income property with someone who is 22, single, with no children, just getting out of college when you yourself are 45, married, with 2 children, in the middle of your career.
5. When a problem arises, take the time to discuss it and solve it right away
No matter how good your initial real estate partnerships agreement is, challenges can always arise, including circumstances well beyond the scope of the agreement. For instance, if markets start going down, you cannot find tenants, and you start losing money from your investment property, get all partners together as soon as possible and discuss openly how to go about this situation. Do that immediately to avoid things getting worse. Similarly, if you feel like one of you partners has been slacking on his/her responsibilities, talk about the matter immediately.
6. Get an accountant to do your taxes
Taxes get more complicated in case of real estate partnerships, so make sure to hire a professional account during tax season. That is, unless you already have one in the partnership.
7. Set regular meetings with your partners
Agree on fixed times (the first Monday of each month or the second Tuesday of each quarter, for example) for all partners to come together and see how their real estate investing business is doing. This will also be the perfect time to discuss any new issues within the real estate partnerships.
8. Keep excellent accounting records
While writing down each and every dollar that goes in and out is crucially important in any real estate investing business, it is even more needed when it comes to real estate partnerships. That’s the only way to make sure that everyone is covering their agreed upon cost shares and receiving their due profits.
Hopefully the tips above make you feel better about going for real estate partnerships because they really offer opportunities beyond the reach of individual investors. Once you’ve decided on the composition of your partnership, the type of property you are looking for (a single-family home, a condo, or a multi-family property), and the location, you can use Mashvisor to search through thousands of available properties across the US with the most important figures – property price, estimated rental income, CoC return, cap rate, occupancy rate – for both traditional and Airbnb renting.