An investment partnership is a great strategy to make money in real estate. Buying investment property with partners involves two or more individuals coming together to pool their expertise, money, and other resources to invest in condos, single family homes, apartments, or multifamily homes.
- Active partnership – In this real estate partnership structure, all the partners are involved actively in the day-to-day running of the business. For example, one partner could be in charge of financing, while another oversees property management. The key with such property partnerships is to allow each partner to operate in their areas of strength.
- Passive partnership – Property partnerships can be a great way to raise capital for a real estate investment. In this kind of arrangement, there is one partner doing the work and another providing the capital. The partners then agree on how the profits will be split.
The Benefits of Forming a Real Estate Property Partnership
Here are some of the benefits of being in a real estate investment partnership:
- Raise capital – Whether you are a new or established real estate investor, you may not have much money for getting started or expanding your portfolio. Being in property partnerships allows you to contribute the little you have and earn a percentage from the returns. Even if you don’t have anything, you could raise money through passive investors.
- Contribute your expertise – If you have specific skills in real estate, you could contribute your time and expertise in exchange for a percentage of the proceeds. Let’s say you have some experience in rental property management. You can partner with a new real estate investor to help find tenants, prepare lease documents, conduct maintenance, and handle evictions.
- Teamwork – No one is good at everything. Active property partnerships allow you to focus on your strengths and leave other tasks to your partners. For example, you could handle the marketing and showing of the rental property, while another partner takes care of administrative tasks such as drafting the property lease or getting licenses. Dividing responsibilities makes it easier to get things done and cuts down the cost of outsourcing.
- Learn from others – Real estate investment partnerships provide an excellent opportunity for mentorship, especially for beginner real estate investors. You can learn a lot from partners that have vast experience in business or real estate.
How to Form a Partnership in Real Estate: 6 Steps
So, how do you form a partnership in real estate?
1. Conduct a self-evaluation
Many real estate investors spend a lot of time studying their potential partners, and little or no time evaluating themselves. An honest self-evaluation will reveal your strengths and those areas where you are lacking. When you know what you are capable of, you will then know for sure what to look for in property partnerships. You can enlist the help of a good friend when assessing your strengths and weaknesses.
2. Find a real estate partner
A real estate investing partner should be someone who brings something new to the table. Look for partners that meet a specific need and fill a distinct void. In addition, they should be people that share your objectives for real estate investing. You can partner with friends, family members, angel investors, or members of an investment club. You could even partner with community developers or local governments. However, be sure to do your due diligence before getting into any property partnerships.
Learn more about this step by reading: How to Find Real Estate Investors for a Profitable Partnership.
3. Define roles and expectations
Before entering into property partnerships, it is crucial to clarify what is expected of each real estate partner and what specific role they will play. Who will be in charge of marketing? Who will handle finances? Who will manage the investment property? When roles and expectations are made clear, you will know who to hold accountable in case something goes wrong.
4. Choose a name
If you decide to form a legal entity such as an S-Corp, LLC, or LLP, you will need to choose a name for your business. The company name should be unique, memorable, easy to spell, and easy to pronounce. Do some due diligence to ensure the name doesn’t infringe on any trademarks or copyrights. You should also check if the business name can be used to register a .com domain name. Business name generators such as namelix.com, biznamewiz.com, and businessnamegenerator.com will give you plenty of ideas to choose from.
5. Set goals
Goal-setting is very important for successful real estate partnerships. Here are some of the questions you need to ask when setting goals for property partnerships:
- How much money should you raise?
- How diversified will your investment property portfolio be?
- How long will you hold the property for?
- Where do you want to be in 2, 5, 10, or 20 years?
6. Draft a real estate partnership agreement
A real estate investment partnership agreement is a legal document that clearly outlines the mission and goals of the business. It also mentions what is expected of each partner in terms of finances, skills, and time commitment. The agreement also states the tax responsibilities, and profit and loss allocations for each partner. Finally, the property partnerships agreement outlines what will happen if one partner leaves, dies, or is declared bankrupt. The more elaborate the agreement is, the easier it will be to handle disputes that arise.
Once you’ve formed a property partnership, the next step is to find investment properties for sale. How do partnerships buy rental property? Mashvisor’s real estate heatmap and investment property calculator will come in very handy for locating profitable cash flow properties. You can analyze different neighborhoods and income properties using metrics such as cap rate, rental income, cash on cash return, and Airbnb occupancy rate.
When done properly, buying investment property with partners can be a profitable source for active income or passive income. Just be sure you’re teaming up with the right people and that you go after the right real estate deals. After all, your partnership should help you achieve the best return on investment possible.