Investment StrategiesHow to Avoid Problems Arising from Real Estate Partnerships by Daniela Andreevska May 23, 2017February 3, 2019 by Daniela Andreevska May 23, 2017February 3, 2019While 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 AdvantagesPulling more financial resources and financing options togetherPossible to buy a larger and/or more luxurious income property which means more rental income and more profitabilityA great opportunity to diversify your investment portfolio quickly with shares in several investment propertiesFaster growthBringing together more experiences and expertise (hint – consider real estate partnerships with people who have skills and knowledge complementary to yours)Sharing risksMore heads to solve emerging challengesSharing 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 expertsRelated: Creating a Real Estate Investment Network: Who Do You Need?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 RisksDoing more work than other partners while receiving the same or smaller share of the profitsShared control over all decisionsDelays in decision-making processesInability to sell when you think it’s the right time to sellDifferent real estate investing goals among partners as a result of different life goalsSharing a real estate investing business with a control freakPossibility to cheat or being cheated (it’s just human nature, isn’t it?)MistrustBearing unneeded legal responsibility (in case one of the partners messes up)More complicated tax situationNow 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 Problems1. Prepare and sign a clear real estate partnerships agreementBefore 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 contributionsEach partner’s role in decision-makingEach partner’s share in controlEach partner’s contribution to additional costs (management, maintenance, looking for tenants, etc.)Each partner’s compensation and share of the profitsWhether to distribute profits (from rental income) or reinvest them in another income propertyRental strategy: traditional or AirbnbHow to deal with removal and withdrawal of partners if need arisesWhen 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 agreementUnless 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 trustWhile 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.Related: Is Working With Your Spouse in Real Estate Investing a Good or Bad Idea?4. Forge real estate partnerships with people in the same life situation and with the same life goalsWhile 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 awayNo 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 taxesTaxes 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.Related: Everything Real Estate Investors Should Know About Tax Season7. Set regular meetings with your partnersAgree 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 recordsWhile 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. Start Your Investment Property Search! START FREE TRIAL CostsFinancingPartnershipsRental IncomeRental StrategiesReturn on Investment 0FacebookTwitterGoogle +PinterestLinkedin Daniela AndreevskaDaniela is Marketing Director at Mashvisor. She has been writing about real estate investing for a number of years. Previously, she worked in economic policy research and fundraising. Daniela holds a Master degree in Middle East and Mediterranean Studies from King’s College London. Previous Post Who can buy a property in the United States? Next Post What is the difference between a housing bubble and inflation in US real estate? Related Posts Go for Rental Properties When You Want to Be Investing for Income How to Invest Money Wisely in Real Estate What Do I Have to Do to Own Passive Income Real Estate? 4 Simple Ways to Invest in Real Estate Without Buying Investment Property Methods to Boost Any Investment Property’s Airbnb Occupancy Rate Investment Property Expedition: Low Risk Investments in Real Estate What’s the Best Investment Strategy in Real Estate? 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