Pros & Cons: Real Estate Investing Partnerships

Real estate investing partnerships can bring like-minded real estate investors together to do some of their favorite things–invest in real estate and build wealth. 

When I purchased my first real estate investment property, I chose to work with a partner for several reasons. First, I saw the benefit of dividing responsibilities and expenses. Second, I thought it was better to embark on a new adventure with someone else rather than alone. 

Real estate investing partnerships are when two or more people come together to pool their money, resources and more to invest in real estate. Partnerships can be simple agreements between two people or complicated structured deals with different partners contributing different levels of capital and resources. Partnerships can be formed as companies, such as an LLC or C Corporation, or a simple agreement between two or more people.

Now we will talk about some of the pros and cons of real estate investing partnerships so you can decide if a real estate partnership is best for you. 

Advantages of Real Estate Investing Partnerships

You know what they say, “The more the merrier.” 

This saying is true for partnerships, too. Within a partnership, you can have access to ideas other than your own. Plus, you get a mix of skills and experience, and you have an opportunity to split the work of managing your real estate venture. The best part is you don’t have to plan your business venture alone. Working with a team will ensure the project is well planned and as successful as possible. 

Money, Knowledge, or Experience – What is everyone bringing?

If you are a new real estate investor, partnering with someone who has more experience can help you minimize your mistakes and money losses. For a partnership to thrive, all parties should contribute something to the project such as financial support, knowledge or experience.

Money, Cash, Credit

A partnership can include each partner contributing equal amounts of money to the deal. However, not all partnerships involve everyone bringing money to the table or splitting costs equally. For example, if you have limited funds, you may contribute to the closing costs or down payment in exchange for a percentage of equity in the deal. 

Another alternative is to contribute your credit for financing. If you have strong credit, you can help finance the deal for a portion of the income that comes later from the investment. Just be careful because putting your credit on the line also makes you responsible if the deal doesn’t work out. With some banks and private lenders, they may require all partners to be on the loan so that everyone is legally responsible for the loan regardless of what happens.

Experience and Expertise

If you are the more experienced investor in the partnership, you could contribute your expertise and time in exchange for a portion of the proceeds. For example, real estate agents make great partners because they can access real estate deals before they are public, negotiate the sale, and save money on the closing costs as the agent. Realtors also have access to networks that include homeowners, sellers and other investors, which can be helpful when you are looking for good investments and possible partners. 

If you are the more experienced investor, you could help a newbie navigate the challenges that arise during the real estate deal by working with contractors, collecting rent from tenants or finding other investors to participate in the deal. Contributing your time and expertise in exchange for profits could be a good deal for you.

Dividing and Conquering Responsibilities

Whether you are a part-time investor or doing it full time, you’re probably busy. A partnership allows you to divide and conquer the important tasks related to your investment property. You and your partner(s) can also choose to outsource some tasks, too. 

If you and your partners decide to self-manage a property, one person could handle the administrative tasks such as getting the rental license or drafting the property lease. Another partner could take care of showing and marketing the property. Someone else could take the lead on managing the property expenses, including bills, property taxes or maintenance. 

On the other hand, if you opt to hire a property manager, your property manager would collect rent, handle after midnight repairs and take calls from the tenant. Whether you self-manage or hire a property manager, you and your partner(s) should decide how to handle the costs, including the fees for the property manager, general contractor or any other property expenses. 

In most cases, these costs will come from the income generated by the property. But if you incur expenses before the property makes any money, it’s important to determine who is responsible for what. What you contribute might be based on each person’s equity or the agreement you made before you established the partnership.  

Strengths and Skills

Each partner’s responsibilities should be based on their skills and strengths. If you have a knack for repairs or strong relationships with contractors, you could be the one to handle all repairs. If your partner has a strong accounting background, maybe they’ll do the bookkeeping, taxes or routine purchases. In the event one partner is a real estate agent or broker, he or she could take the lead on finding investment properties and negotiating the purchases. 

Good partnerships have transparency with all of the partners, allowing everyone to know what is happening in the partnership. For example, even if you aren’t the bookkeeper, you should know the ins and outs of the money involved in your real estate partnership. 

Either way, together you can also make decisions about hiring contractors, property managers, or more. With more than one person, you can have access to several opinions for investment questions or problems that arise. The best part is, you can bounce ideas off each other and troubleshoot issues as a team.  

Disadvantages of Real Estate Investing Partnerships

With any team, there may be disagreements. So it’s key to brainstorm ahead of time what issues could come up and prepare for them accordingly. If you go into a venture with partners, make a plan in advance for some of the things I highlight below. Remember, planning for what might happen doesn’t mean it will. 

Splitting the Profits

In a partnership, you get to split the costs but you have to split the proceeds, too. That might mean it takes more time or larger deals before you can meet your income goals. Outline how the money is going to be divided very clearly before any dollars exchange hands. 

If you don’t, you could find you and your partner fighting over money, which can get expensive if lawyers or courts have to get involved. It’s best to have legally binding paperwork in place that defines the terms and make sure all partners sign the agreement. 

Consider establishing a business entity such as a Limited Liability Company (LLC) to protect all parties in the investment deal. Whether you invest with a friend, family member, or an investor you just met, always establish an agreement that outlines the deal, each person’s responsibilities, and profit splits. 

Put everything you and your partners agree into writing. I cannot emphasize this enough! Not all business deals go bad but sometimes conflicts or disagreements arise. And when they do, you’ll be grateful for the agreement you wrote when everyone was smiling and happy, compared to now when you’re angry and lawyering up.

Outline what tasks require everyone’s attention, a vote, or if one person can make the decision on behalf of the partnership. When you have the right paperwork in place, when things go wrong, you have a set of rules and procedures already in place to resolve any issues. This is invaluable when rational thinking goes out the door.

Money talks can be difficult, but if you cannot talk about finances with your partner(s), maybe you shouldn’t be in business together. Everyone needs to be transparent in what they can and cannot afford to do. If you agree to split all expenses 50/50, then everyone has to be able to pay their part, no excuses. 

When a contractor needs to get paid, they don’t want to hear that you or your partner doesn’t have the money. Consider opening up a joint account for the company where everyone contributes up front, giving you easy access to the funds. A company bank account that everyone can access also adds transparency with everyone in how the funds are being managed and used.

Costs to Set Up a Partnership

Setting up a new business entity has its costs, but it’s worth it. In addition to state fees, you may need a lawyer to draft an operating agreement, and you may use a service, like IncFile or LegalZoom, to submit your paperwork with additional fees. Seek an attorney’s advice when it comes to the right entity (e.g., LLC, LLP, C-Corp) for you.

If you want to make money like a business, you need to operate like one. Creating a business entity is just another cost of doing business and an expense you can definitely write off.

Since your partnership may be isolated to one or cover several different investment deals, you may need to create a separate business entity for each of your partnerships. Never mix funds or accounting across your different ventures or with your personal funds. You don’t want to expose the assets in your other businesses (or your personal assets!) to any financial disputes if any issues occur. 

Most importantly, the costs might be a small price to pay if you are going to make much more together as a successful partnership. Remember, setting up the right business structure protects all partners and should not be taken lightly. Consult an attorney if you need help. 

Clash of the Titans 

There may be a time when you and your partner don’t agree. If you were working alone, your opinion could be the final say. However, when you are working with other people, it’s not that simple. Just like you benefit from your partner’s network or expertise, you have to be prepared to deal with their opinions and views, which might not match yours.

If both of you feel strongly about something, and cannot find a way forward, you may need to bring in a third party, friend or investor to help come to a resolution. This is when having a signed  agreement can help. There should be paths to resolution spelled out in your agreement.

In the event you cannot find common ground, you may have to end the partnership and figure out a way to split the assets (money in the bank, the property, etc.) and liabilities (the mortgage) in a way that works for everyone. Fortunately for you, you established paperwork that spelled everything out in writing, so the split won’t be hard to figure out. 

How to Find a Real Estate Partner

Look around you, you are probably surrounded by tons of possible real estate partners. You can partner with family members, folks in a meetup group or angel investors. If you are serious about getting into real estate investing partnerships, research programs and initiatives in your area. There may be local investment clubs or try searching online forums, like Bigger Pockets, to find potential partners. 

As with all things in real estate investing, do your homework. Get to know any potential partner you want to invest with. Understand where they all stand financially. Make sure you can work together as a team. Ensure that everyone has the same goals in mind and understands the risks. Be wary of anything that sounds too good to be true or anyone who doesn’t want to be transparent with you. There are plenty of other potential partners out there.

You might also be able to partner with local governments or community developers. However, those groups may want to see previous real estate experience or cash flow that you can bring to the table, so be prepared for more scrutiny before a government program or developer partners up. 

If you surround yourself with the people you aspire to become–like other real estate investors, you will find partnership opportunities everywhere. Just don’t pursue every deal you see. Do your own due diligence, especially when big sums of money are involved. 

Get Out There and Go!

Now it’s time to get to work. Stop dreaming about becoming a real estate investor and be one. If a partnership is going to help you get your income and investment goals to the next level, go for it. If anything, the partnership experience will deepen your knowledge and love for real estate investing. Or you’ll learn what you don’t like and consider other ways to build wealth if you discover real estate investing partnerships are not the best path for you.