Real estate investing takes dedication, patience, reliability, and financial know-how. Doing the job yourself might reduce the need for vetting (as long as you know your strengths), but it also increases the financial risk. Taking on the task with a partner reduces the financial burden but poses a host of new difficulties. Investments gone wrong can ruin friendships and bankrupt families. We’re here to help you make the right decisions, select the right partner, and maximize your return on investment.
When two or more real estate professionals or entrepreneurs get together to accomplish a mutually beneficial goal, they form a real estate partnership. This structure determines how a business performs day-to-day activities and how it is taxed at the end of the year. A real estate partnership generally has a defined focus, whether multi-family homes, commercial buildings, or individual residences.
First and foremost, you need to think about the type of real estate you want to invest in and what your partnership offers. What are the investment requirements? What are the income splits? What terms will you come to? Who are your potential partners? Research can help, but the real-life experience is invaluable. If you are new to investing, having a partner who can show you the ropes will give you an instant boost.
Once you find a potential partner or partners, you can start to talk about terms. For example, you may have a single-family home that you and your partner wish to invest in. One party may front the cash for a down payment while the other takes out the mortgage and covers maintenance (one party fronting more money while the other takes on more risk). Alternatively, both costs can be split 50/50. Generally, unless one partner is investing more or taking on substantial risk, net loss and profits are split, including in the event of a sale. In this case, the equity split should include any refinances or appreciation.
It’s often lucrative to team with a professional property management company. They minimize hassle and help with investment decisions. Here are a few ways a partner can help:
With the good comes the bad, and not every partnership is a walk in the park. Here are a few pitfalls to look out for and be aware of:
A long-term friend doesn’t always make the best investment partner. Simultaneously, an investment guru who has a different risk tolerance or management style may ultimately result in a soured partnership. Ideally, you’ll have a friend with whom you’ve gone in on lesser business-related ventures or investments and had success. They will show a pattern of reliability and willingness toward flexibility, fairness, and overall profit for everyone.
Think about your worst-case scenario. Now imagine if your potential partner would be level-headed or if they’d lose their patience at the first sign of trouble. When it comes to a partnership, greed isn’t always good. Make sure the partnership is mutually beneficial before you put pen to paper, and talk it through with friends and family for a second opinion.