One of the outstanding questions in real estate investing is whether one should go on his/her own or seek to form a partnership with other investors. Indeed, real estate partnerships can offer great advantages if planned and executed properly, but they can turn into a big pain if poorly designed and implemented. While on the one hand real estate partnerships can help you make lots of money in real estate investing, they can also turn into a reason for losing money. So, any investor should go very carefully about entering into a partnership.
Before diving into the many things which could get wrong in a partnership in the real estate investing business, let’s take a quick look at the possible benefits, in order to know why anyone would even consider such an option.
The Benefits of Real Estate Partnerships
- You are bringing lots of resources and expertise together: financial resources, knowledge, experience, time, etc.
- A real estate investor can diversify his/her investment portfolio faster, even if only with shares in properties
- A real estate investor can afford (a share in) a larger investment property which is usually more profitable than a smaller rental property
- You can grow faster, at least in terms of number of properties
- Risks are shared, which is important in any investment business
- Tasks are distributed among the members of real estate partnerships, which is very helpful, especially if you don’t feel particularly strong in closing deals or property management, let’s say
- Real estate investors have access to a bigger real estate network, and networking is cruelly important in real estate investing
So far so good. However, things are not always guaranteed to go well and smoothly when several investors decide to work together in real estate partnerships. Actually so many things can go wrong. Let’s have a look at the main ones:
The Traps of Real Estate Partnerships
1. Smaller profits
Let’s face it. Anyone goes for real estate investing for one main reason: to make money by buying an investment property and renting it out to tenants. Well, when you own only a share of the actual rental property, it means that you will have access to only a share of the rental income. So if you buy investment properties through real estate investment partnerships, you will make less money that if you own them on your own.
2. Delays in making decisions
Decision-making is an integral part of the real estate investing process, and making decisions at the right time could become the difference between being a successful and an unsuccessful investor. However, when there are more people involved in the process, this can complicate things and delay the actual decision that has to be made. For example, when it’s the time to close a deal on an income property, one of your partners can be too busy with his/her 9-to-5 work to get involved in the decision-making. Or you might end up partnering with someone who is just hesitant by nature and finds it hard to make decisions. And it’s only too bad if you figure this out after you’ve already bought a common buy-and-hold investment property and are stuck with this partner for the next 20 years.
3. Personality differences
Although real estate investing is a business, you cannot exclude the “human nature” factor from it. And when you enter into real estate partnerships, there is “more” human nature in the business, simply because there are more humans in the form of partners. Usually there is no way to know how it is to work and/or partner with someone before trying it out in practice. Even if you go for real estate partnerships with your friends whom you’ve known for 30 years, remember that you’ve only known them as friends, not as business partners. After you buy and try to manage a shared income property, your old friend could turn out to be a control freak who wants to have the final say in any aspect of the business – from choosing the location and type of investment property (a single-family home or a condo); through determining the rental strategy (traditional or Airbnb), selecting the tenants and managing the rental property; to deciding when and how to sell your common property. Alternatively, your partner might end up being a lazy bum who expects you to do all the work while benefiting from the profits.
4. Suspicion and mistrust
Another aspect of human nature which shows up in any business, including real estate investments, is the fact that people tend to be suspicious and mistrusting with other people. This can cause troubles in your real estate partnerships in one of two ways, especially when the business is not doing well for some totally different reason, such as a low market, for example. First, you might partner with other investors who suspect that you cheat and can start making problems out of everything. Second, you might be the one who is suspicious and spends too much time and energy on making sure that you are not being cheated rather than on thinking how to improve your profitability.
5. Mixing up friendship and business
Related to trap #3 above, if you enter real estate partnerships with your friends or relatives, it gets tricky to keep your friendship separate from your business. On the one hand, if you are good-natured, you might feel tempted to make unnecessary concessions for the benefit of your partner/relative because of your personal relationship, which will in turn hurt your own profitability. On the other hand, any problem within the partnership – as small as it might be – could ruin your personal relationship with the partner forever. So, be careful whom you choose to do real estate investing with.
6. Bearing unnecessary legal responsibility
Real estate partnerships can take many different forms, with various legal repercussions on the many partners. Nonetheless, regardless of the specific nature of your partnership, you will have to bear some legal responsibility for your partner(s). If one person messes up something, everyone else will be held accountable too. Depending on how big the misconduct is, things can get quite serious.
7. Complicating tax issues
Sharing the ownership of an income property makes the tax-related paper work significantly more complicated and more expensive. You will have to be prepared to spend long time periods in filling your forms when tax season comes, or you will have to factor in the cost of hiring an accountant to do it for you and your partners into the budget of managing a property.
In sum, the moral of the story is that while real estate partnerships can be a great way of scaling up your real estate investing business, they might bring many expected – and unexpected – traps. Before you decide to enter into one, consider the potential problems and try to tackle them in advance. Once you are ready to buy an investment property with or without partners, make sure to check out Mashvisor’s website for thousands of available properties across the US.