If you have been thinking about investing in real estate, one question that might have – or at least should have – crossed your mind is whether you can and/or should dive into this new adventure all on your own or you need a partner.
Real estate partnerships – if done properly – are a great way to extract the maximum benefit from your investment. Of course, they can turn into a nightmare if not planned and executed well. Thus, before you decide to embark not only on a real estate investment but also on a real estate partnership, you should think carefully whom you partner with and why. To help you in the process, here we discuss the advantages and disadvantages of real estate partnerships, what makes a good partner, and how you should organize the partnerships.
What Are the Advantages of Real Estate Partnerships?
1. Pooling Together Resources: There is a point to entering a real estate partnership only if the partners bring to the table complementary qualities. If all partners bring in the same assets, most probably it is better to go on your own. The basic things which you need for a real estate investment are:
- Money
- A good property
- Experience
- Knowledge of real estate investing in general as well as of the local market
- Time
- A network
So, if let’s say, you have come across this wonderful rental property but have no cash, it might be very beneficial to seek a partner who can bring in the necessary money for the appropriate share in the business. On the contrary, you might be sitting on piles of money and have no clue how or no time to invest them in real estate. Then again, it might be advantageous to find someone who is capable of and willing to do the work for you and split the profit. Also, if you are relatively new to the world of real estate investing, you should consider a real estate partnership with an experienced investor who will bring in the necessary knowledge, skills, and even possibly network to make a successful investment. In this case, your partner will be your mentor in the process of learning about dealing with rental properties and being a landlord.
Related: Buying Investment Properties With No Money
2. Affording a Larger Investment Property: OK, we’ve just said that you should never enter into a real estate partnership with people who bring in the same assets as you. Well, this is not entirely true when we talk about money. That is, it is sometimes necessary to find a partner so that you can afford a certain property. Let’s say you have $10,000 in the bank, so that’s all you can put as a down payment. If you find another trustworthy person willing to put $10,000 as well, you will be able to afford a property that is twice more expensive (and can thus hopefully bring twice the profits).
3. Diversifying Your Investment Portfolio: Just like with investing in stocks, in real estate investments it is better to have a more diversified portfolio to make more profit and avoid some risks. Well, if you buy rental properties through real estate partnerships, you will be able to buy more of them (in case your partners bring money into the deal).
4. Have a Second Opinion: Depending on how you and your partner(s) split the work based on your qualities and experience, you will each be expected to perform certain tasks. Nonetheless, you will all have to agree on the major decisions such as how much you can afford, which property to buy, how to manage it, what tenants to have, etc. This means that you will have double (or more if you enter with more partners) the analysis that you would have if you invest on your own. Since you start your real estate partnership with intelligent, responsible people, it should be beneficial to hear another (professional) opinion.
5. Sharing Risks: If you invest through a real estate partnership, you will not have to carry the whole burden of the deal on your own shoulders. Real estate investing is risky, like any other form of investing, so it is good to split the risks.
6. Task Division: If you work with partners, you will not have to do every single thing, and remember – real estate investing is not easy even for experienced investors. It will feel very relieving (if you have the right partner) to split the necessary work with someone.
7. Bigger Network: Entering a real estate partnership will automatically extend your real estate investing network as your partners’ networks will join in with yours. You will have more people to rely on for advice, help, and work.
8. Accountability: Let’s face it. As much as we would like to be, most of us are not too well organized and might fall behind in documenting our real estate business. But if you have to divide the expenses and profits with someone else, you will be forced to stay on track and be very accountable, which will in turn be beneficial for your business.
What Are the Disadvantages of Real Estate Partnerships?
Well, if it not necessarily all roses when it comes to real estate partnerships. In the worst scenarios, they might turn into real nightmares. Here are some potential shortcomings you should keep in mind:
1. Poor Planning and Structuring: If you and your partners are bringing in exactly the same assets to the real estate partnership and/or if you don’t spell out clearly who is doing and getting what, your partnership is very likely to fail miserably.
2. Being Cheated: There is a risk in any partnership you enter, even with what you consider the most trustworthy person. People are greedy and lazy, so they might try to trick you into giving them more of the profit or forcing you to do more work.
3. Unexpected Liability: You might end up being held liable for things you did not expect, and you might even be sued if responsibilities and liabilities are not clearly divided and written down.
4. Guilt: If you are the one doing most of the actual work (choosing the property, managing it, dealing with tenants, etc.), you might get blamed for factors beyond your control if things don’t go as expected.
How Do You Start and Manage Successful Real Estate Partnerships?
1. Common Objectives and Expectations: First and foremost, make sure you and your partners agree on the basics and share the same goals and expectations in terms of:
- The size/value and kind of the property
- The timeframe
- The strategy: buy and hold or fix and flip
- The amount of expected cashflow
Related: Top Six Real Estate Investment Strategies
2. Divide the Responsibilities: Make it absolutely clear who is bringing what into this real estate partnership and is doing what work.
3. Agree on the Profit-Sharing: Based on who brings what in, agree who will take what out. If one partner puts down all the money and the other does all the work, maybe it is fair to split the profit in half.
4. Plan for the End: Everything can happen to you and/or your partners, so plan an exit strategy before you even do the investment. Agree on the conditions beforehand.
5. Be Fair and Honest: Don’t try to cheat on your partner by doing less work or stealing some of the profit. In real estate investing, networking is crucial. You don’t want to ruin your reputation for future deals and partnerships.
6. Communicate Regularly: It is not necessary to talk on daily basis, but both you and your partners should be aware of what is going on with your common investment. If your partner brought in the money, while you are managing the property, tell them well in advance about expected future needs to maintain the property, tell them when a tenant leaves, ask for their approval on a new tenant, tell them if finances are looking bad or if you expect a large profit this year.
7. Sign a Contract: A real estate partnership is a business and should be treated as such, so sign a contract with your partners which clearly specifies each one’s responsibilities and benefits.
Related: Should You Form an LLC for Your Investment Property?
Real estate partnerships have given many investors the opportunity to make much more money over the course of a few years than they would have been able to if they invested on your own. However, they have given headaches and even driven bankrupt many people who might have done just fine on their own. So, don’t by no means be scared away from a real estate partnership, but do think it out and plan it well to make it as profitable for you and your partners as possible.
Whether you’ve decided to go for a real estate partnership or invest on your own, check out Mashvisor for important analytics on US cities and neighborhoods as well as specific properties for traditional renting and Airbnb.