The Pros And Cons Of Real Estate Investment Partnerships
Like any strategy, there are advantages and disadvantages to real estate investment partnerships. One of the keys to a successful partnership is finding the right person to work with. A partner who balances your strengths and weaknesses can help you avoid potential pitfalls that might arise. You can also improve your chances of success by understanding the pros and cons of these partnerships.
The Pros
Here are the main pros of real estate partnerships.
Larger Investment
As previously mentioned, partnerships offer a higher return than other types of real estate investments. This means that partners can have the opportunity to earn a higher return for the amount of capital they invest.
Work With Partners
Working with other professionals can have many benefits. For example, each partner brings something different to the table, so it can be helpful to create a well-rounded team that balances each other out in terms of capital, expertise and experience.
Having a diverse group of partners can also represent multiple perspectives and backgrounds when making key business decisions. In addition, dividing up the workload can be helpful for partners who want to be involved with the day-to-day operations or choose to focus more on long-term strategy development.
Payment Flexibility
Another benefit to a real estate investment partnership is payment flexibility. This means that partners can choose how much capital they want to invest. Partners can also decide how they want to receive their funds.
For example, one partner may want a majority of the tax benefits, while another partner might opt for receiving the free cash flow. Being a pass-through entity, there is also more liability. Income and losses are passed through each investor and claimed on their own personal income tax returns.
The Cons
Now, here are the main cons of real estate partnerships.
Potential For Conflict
Sometimes tension can brew if there are too many partners in an investment, each with different personalities and management styles. This can also result in a disproportionate level of involvement and could lead to regular arguments.
Disproportionate Level Of Involvement
One of the main reasons some partnerships are not effective is that the members don’t clearly define each partner’s duties and responsibilities in their partnership agreement. This can cause some partners to feel like they’re contributing more to the venture without receiving a fair share of capital in return.
Misaligned expectations and unclear boundaries can also create confusion, making it difficult to divide the investment's benefits equally among all investors. Not properly defining each partner's responsibilities may frustrate some of the more involved partners and make them feel as if their profit potential is being limited.
Early Termination
Finally, another drawback of a real estate partnership investment is if a project is unsuccessful, your partner might want to exit the agreement early. Investing in real estate, like other types of financial ventures, can be risky. If your investment fails to make a profit or you have a falling out with your partner, you might have to dissolve the partnership before you’re ready.
How To Form A Real Estate Partnership
Now that we’ve given you a detailed explanation of real estate partnerships and considered their pros and cons, it’s time for a step-by-step overview of how to form a real estate partnership. Let’s take a look at the specifics and learn more expert tips.
1. Take Inventory Of Your Combined Buying Power
When forming a real estate partnership, take an honest look at what you and your partners could contribute to the investment. Start with a brainstorming session to identify your and your partners’ strengths and weaknesses. Use this initial brainstorm to identify each of your roles and responsibilities for the investment.
At this stage, it’s also important to talk about what the investment needs are and how each partner can help. Make sure all the gaps are filled. When you’re done, talk about how you and your partners would price your skill sets and determine each partner's desired level of contribution and personal profit goals.
2. Develop A Real Estate Partnership Agreement
Next, start drafting an agreement. A real estate partnership agreement is a document that identifies the shared goals and mission of a partnership. It’s used to hold investors accountable and to outline clear roles and responsibilities while detailing legal protections in case something doesn’t go as planned.
When drafting the agreement, think about how you and your partners want to split the profits, work and investments.
3. Form A Corporate Entity
When you’re ready to form your business, seek advice from professionals. Start by reaching out to an attorney to handle the legal matters and documentation related to your real estate partnership.
Next, consult an accountant to help advise your partnership about financial matters and taxes.
4. Review, Revise And Reiterate Expectations
Once you establish the groundwork, go back and read over your real estate partnership agreement. Make sure each partner knows their roles, responsibilities and what is expected of them. To ensure success, everyone must have clear expectations about their duties from the start.
Taking time for this step at the beginning will help prevent problems down the line. But don’t expect perfection from your group. You may face some conflicts along the way, but the key to ensuring success and avoiding these problems is through open communication with your partners. If everyone knows what is expected of them and how they can best contribute to the group, there will be far fewer issues in the future.
