Thinking of teaming up? Maybe you should be.
A real estate partnership is a great way to step up your investment strategy. When structured properly –and with the right people, a strategic investment partnership offers a number of exciting advantages over going it alone.
For one thing, it enables you to share the load. It can also bring more funds to the table, gives you someone to discuss strategies with, and can help to expand your network –enabling you to supercharge your investment strategy and start scaling far more quickly than you’d be able to on your own.
But while it’s true that a good partnership could easily be the best thing to happen to your investment strategy, it’s also important to keep in mind that the reverse is true as well. An unbalanced or poorly constructed partnership can quickly spiral out of control. Problems also arise when there’s no clear strategy, things aren’t put down in writing, or when goals –or personalities are misaligned.
If you’re considering forming a partnership, here’s a look at a few benefits that come from teaming up, along with some tips for structuring your partnership properly, in a way that’ll help to set you up for long-term investing success.
Benefits of a Partnership
Partnering up with a fellow real estate investor can be a great way to advance your investment strategy.
Here’s a look at a few key benefits that come from forming strategic partnerships.
- More Experience
- More Skills
- Additional Capital
- Fewer Tasks
- Divided Risk
- A Wider Network
Let’s look at each of these quickly in turn.
- More Experience – This is especially true for younger investors who partner with a more experienced one. Partnering up with someone who has a wealth of experience could be a great way to learn the ropes and gain knowledge firsthand.
- More Skills – Having a partner means having access to a different set of skills that can help to complement your own. Generally, experts recommend finding a partner with different skills than your own, to fill any gaps in your investing strategy.
- Additional Capital – One key benefit of an investing partnership is that you’ll gain access to more resources. This can be anything from financial resources to knowledge and skills as well as networks. For instance, if one investor might be great at finding and securing a property but doesn’t have access to capital. The other investor might have the funds, but not the time. Teaming up can give both parties a successful outcome.
- Fewer Tasks – Let’s face it, investing comes with a lot of responsibilities and tasks, especially for one person. Partnering up can help to split the load and the responsibilities, relieving some of the pressure.
- Divided Risk – Another benefit of having a partner is that the risk will also get divided. Of course, this depends on how you’ve structured your partnership.
- A Wider Network – When you partner with another investor, you’ll gain access to their network as well; which means more opportunities to form valuable connections with professionals, including real estate agents; who can give you leads on potential investment properties that you may be interested in.
Common Types of Partnerships
How should you structure your partnership? That depends on what you’re lacking.
Be sure to look for someone who can fill the gaps in your investment strategy –and remember that in order for a partnership to be successful, each party must bring an equal amount of value to the table.
While each partnership is structured slightly differently, generally there are a couple of main arrangements that usually take place.
- 50/50 Arrangement
First up, the 50/50 arrangement. With this arrangement, each party invests equal capital and time in the venture. The rewards are shared equally as well. This is an ideal arrangement when both parties are similar in terms of what they’re able to bring to the table.
- Real Equity and “Sweat Equity” Arrangement
Another common scenario is a real equity and “sweat equity” arrangement –where one party does the bulk of the work and the other takes a more passive role. This type of arrangement is more common when one investor has the experience and capital, but not the time –where the other party has time, skills, and enthusiasm to make things happen –but not much capital. In these cases, the investment manager –or general partner (GP), handles most of the operations where the other party, the limited partner (LP) –puts in most of the capital. These arrangements can be structured as a 50/50 split, or even 70/30 –depending on who’s putting in the most resources. Another arrangement is where the LP is paid a preferred rate of return, and the GP keeps the remainder. In this case, the subsequent profit split escalates for the GP as profits increase.
Downsides of a Partnership
For all of their benefits, it’s important to keep in mind that partnerships are not without their risks, which is why it’s important to ensure that you cover all your bases if you’re looking to form one.
Here are a few potential issues that could arise:
- Smaller Profits at First – Since you will be sharing the profits, you’ll likely be taking less home, at least in the beginning. Still, as the saying goes, “50% of something is better than 100% of nothing.” The right partnership will enable you to grow your portfolio, allowing you to generate better returns than if you were operating alone.
- Tax Complications – Taxes will become more complicated when you partner up. It’s always a good idea to consult a tax attorney or CPA early on, to see how bringing a partner on board will impact you from a tax perspective.
- Loss of Control – For those who like to stay in the driver’s seat all the time, bringing a partner on board could present a challenge. You’ll no longer be making decisions on your own, but will need to discuss things with your partner first. Make sure you’re happy to work well with others before you consider teaming up.
How to Structure Your Partnership for Success
How should you structure your partnership? Here’s a look at a few things that you can do to set yourself up for success.
- Find the Right Person to Partner With
First things first, make sure you find the right person to partner with. This isn’t just about finding someone with cash, in most cases, it’s more about finding someone who’s compatible with you and who brings skills to the table that you may not have yourself. Of course, it’s also important to ensure that your end goals match up and that you’re similar in terms of risk aversion.
- Establish Clear Objectives
You’ll also want to ensure that you set clear objectives from the start –and make sure you both have the same fundamental goals. For instance, you’ll want to be clear on what type of returns you’d like each property to generate, which markets you’ll invest in, what type of properties you’ll buy, what kind of down payments you’ll make, and how long you plan to hold the properties for. Make sure you’re on the same page, and have the same mindset.
- Create a Partnership Agreement
While many investors may feel that it’s fine to operate on a handshake agreement, especially if they know the other party, the truth is, it’s far better to establish a solid partnership agreement from the start. It may seem like an unnecessary formality, but having an agreement helps to establish expectations from the start. It’ll also help to keep everyone on the same page. In the long-run, it’ll also prove to be invaluable should you find that the partnership just isn’t working, giving you an easier way to go your separate ways.
This agreement should include designating which party is responsible for which tasks, and how the investments will be structured.
Other key areas that should be covered in an agreement include:
- Responsibilities: who is responsible for what?
- What are the goals for the investments?
- Who will hold the title?
- How will decisions be made? (What happens if you’re in disagreement?)
- Tax issues (Who takes the tax deductions, who prepares the tax forms?
- How often will you communicate?
- Insurance issues
You’ll also want to include a break down on roles, responsibilities, capital contributions, and of course, how you’ll be sharing the profits.
It should also include an exit strategy, should something happen that prevents one party from fulfilling their part of the agreement, along with other terms like a buy-out clause specifying that the other party will have the right of first refusal.
- Consult an Attorney
It’s always a good idea to consult an attorney for help when forming a partnership. Even if you draft up your agreement yourself, consider enlisting an attorney to look it over, making sure everything lines up, and that the terms are enforceable.
An attorney will also be able to advise you on structuring your company. You’ll want to run through the options to see which one is the best fit for you. For example, should you create a Limited Liability Company (LLC)? Or should you form a Real Estate Limited Partnership (RELP), Real Estate Investment Trust (REIT), General Partnership, or Real Estate Syndicate? Different entities will have different rules regarding how you’re impacted from a liability perspective, and how you’re taxed.
- Communicate Regularly
Once your partnership is formed you’ll want to stay in close contact with each other. Communicate regularly, every day, if possible. It’s important to keep up to date on what’s happening with your partner, and how their tasks are going.
- Keep a Big-Picture Perspective
In other words, try not to sweat the small stuff. Keep your big-picture goals in mind, and remember that different people have different ways of doing things, that’s not always a bad thing.
On the fence about a partnership? At the end of the day, you’ll want to carefully consider whether it’s the best choice for you. If you’re uncertain –ask yourself why you want to form a partnership in the first place. What tangible benefit are you hoping to gain? If you’re not sure or unclear in any way –then hold off on forming one. If it’s a good arrangement, then you should be absolutely clear on the benefits; they’ll immediately come to mind.
Confident that it’s the right approach for you? Then you’ll want to think about taking the next step. While forming a successful partnership does require a significant initial outlay of time, many investors find that the benefits far outweigh any challenges that arise along the way. By taking the time to find the right partner, and establishing a clear agreement, you’ll be able to get yourself off to a solid start –setting yourself up for success, helping you to avoid many common pitfalls, and enabling you to take advantage of all the benefits that a partnership offers.
Thinking of adding to your investment portfolio? Be sure to check out our FREE guidebook: So, You Want to Grow Your Investment Portfolio? It’s packed full of helpful tips that’ll help you to get started
Back to Posts