Rental Property Ownership: The Solo Investor vs. Partnerships

Are two heads better than one? When it comes to real estate rental investments, the answer isn’t always black and white. 

Your rental property ownership structure, whether it’s a sole proprietorship or a partnership, sets the foundation for your investment’s success and can impact your profit potential. But the decision to go solo or enter into a partnership also involves careful consideration to ensure that you’re making the right choice for your circumstances.

So how can you decide which type of property ownership is right for you? 

In this article, we shed some light on the pros and cons of being a solo investor versus going into a partnership. We’ll also share some questions you need to ask yourself to help you make that critical decision and take a look at different ownership structures as well.

Note: This article is intended to inform and raise awareness, it is not meant to serve in place of advice from legal or tax professionals. Please consult an attorney as well as a Certified Public Accountant (CPA) if you’re considering going into partnership or incorporating your company.

Pros and Cons of Being a Solo Real Estate Investor

We all know that being a landlord is tough, but that isn’t stopping the 41% of rental housing investors in the United States from going solo. Many people dream of gaining financial freedom through real estate and becoming their own boss, and as a sole proprietor, you’re 100% in control of your investment. But striking out on your own comes with its own set of challenges.

If you want to be a solo investor, here are some pros and cons to consider.

Advantages of Being a Solo Property Investor

• Complete Control: As a solo investor, you have the most control over your rental properties. You make all the decisions, from setting rental rates to property management strategies, without the need for consensus from partners. As long as your decisions are in compliance with federal, state, and local legislation, of course.

• Simplicity in Management: Managing properties independently can simplify the operational aspects. You don’t have to coordinate with others or navigate partnership agreements, which can streamline the process.

• Direct Profits: All profit generated from the properties goes directly to you, allowing you to have greater control over your financial outcomes.

• Flexibility: You can make changes or adjustments to your rental properties and investment strategy without needing to consult or negotiate with partners.

Learn more about being a landlord with 7 Myths About Landlords Debunked.

Disadvantages of Being a Solo Property Investor

• Limited Resources and Growth: Solo investors may face limitations when it comes to acquiring multiple properties due to financial constraints. Limited resources can slow down the growth of your rental property portfolio.

• Increased Personal Liability: Operating as a solo investor means that you may be personally liable for any legal issues or financial troubles related to your properties. Your personal assets could be at risk in the event of lawsuits or disputes. Note that this can typically be mitigated by structuring your company as an LLC instead of a sole proprietorship. Please consult with an accountant to learn more.

• Workload and Stress: You are responsible for property management, tenant relationships, and maintenance. This can be overwhelming and increase stress and workload, especially if you have multiple properties. Of course, this can be mitigated by outsourcing to a professional property manager.

• Risk of Burnout: Juggling various aspects of property ownership without support can lead to burnout over time. The demanding workload may become unsustainable for some solo investors.

• Limited Expertise: This option can work if you possess a broad skill set or are willing to acquire knowledge in various areas, such as property maintenance, market research, marketing, and legal matters. Limited expertise can pose challenges when handling complex issues. Of course, you could always outsource areas that you’re not familiar with as well.

If you’re a solo investor, you can mitigate risks by preparing in advance. Download your FREE guide on Risk Management for Landlords: Identifying and Mitigating Potential Hazards and Liabilities.

Pros and Cons of Real Estate Rental Partnerships

Real estate partnerships are collaborative arrangements between two or more individuals or entities to jointly own and manage rental properties. These partnerships typically involve putting together financial resources, skills, and expertise. With these pooled resources, investors may be able to acquire and operate rental properties more effectively and efficiently.

While all partnerships are structured differently, typically partners share both responsibilities and rewards, including profits and risks. Commitments are formalized through legal agreements that outline ownership percentages, decision-making processes, and exit strategies. Leverage is the name of the game when it comes to partnerships, and bringing together expertise and resources can help investors scale quickly. But there are downsides to partnerships, too.

Let’s look into the pros and cons.

Advantages of Rental Property Partnerships

• Pooled Resources: One of the primary advantages of partnerships is the ability to pool financial resources. Combining capital with one or more partners allows for more significant property acquisitions and diversification.

• Shared Responsibilities: Partnerships distribute the workload among multiple individuals or entities. This shared responsibility can ease the burden of property management, maintenance, and/or decision-making.

• Diverse Expertise: Partners often bring diverse skills, knowledge, and experiences to the table. This diversity can enhance property management and investment decision-making. Partners can bring in their expertise in areas such as finance, property maintenance, and tenant relations.

• Risk Mitigation: Risks associated with rental property investments can be shared among partners, reducing the individual risk each investor faces. This risk-sharing can provide a sense of security and peace of mind.

• Access to Financing: Partnerships may have improved access to financing options and loans, potentially securing more favorable terms and interest rates.

Are you new to real estate investing? Don’t make these mistakes: 12 Common Mistakes Made by New Real Estate Investors.

Disadvantages of Rental Property Partnerships

• Conflicts: Partnerships can lead to disagreements and conflicts over various aspects of property management, including property selection, finances, and day-to-day operations. 

• Shared Profits: Partnerships involve sharing profits, which means that individual investors receive a portion of the income generated by the properties. A shared profit distribution could mean less money if the rentals don’t earn enough income.

• Decision-Making Challenges: Decisions often require consensus or agreement among partners, which can slow down the decision-making process and sometimes lead to disagreements.

• Legal Complexities: Forming a partnership often involves legal complexities, including the creation of partnership agreements. Legal assistance is often needed to ensure everything is structured correctly.

• Dependency on Partners: Your investment success may be influenced by the actions and financial stability of your partners. If a partner faces financial difficulties or disagrees on critical decisions, it can affect the entire partnership.

Investment Partnership vs. Going Solo

Now that we’ve covered some of the pros and cons of going solo and working with partners, it’s time to think about which option would fit your investment goals and your personal situation.

To help you evaluate, here’s a checklist with some examples of questions you should ask yourself:

• Goal Setting: Define your investment objectives clearly. Are you aiming for wealth accumulation, steady rental income, or long-term appreciation?

• Capital Assessment: Calculate your available capital for property investments. Consider other expenses like down payments and renovation costs, too. Can you afford to go solo without compromising your financial health?

• Risk Assessment: Evaluate your risk tolerance and financial stability. Are you comfortable taking on the entire financial responsibility of property ownership as a solo investor, or would sharing the risk in a partnership be more suitable?

• Self-Analysis: Analyze your strengths and weaknesses in the realm of investing and property management. This includes marketing, bookkeeping, property maintenance, and tenant management. Are you equipped to handle all aspects independently, or would a partner complement your skill set? Will you need to outsource certain tasks and would this cut into your profit margin, making it better to have someone else on board?

• Partner Compatibility: If you are considering a partnership, assess prospective partners carefully. Consider factors such as shared values, long-term goals, and trustworthiness. Are your personal and professional values aligned?

• Location Matters: Consider the geographic location of your rental properties. Are there specific market conditions or regulations that make one ownership structure more advantageous in that area?

• Market Research: Conduct thorough research on the current state of the local real estate market. Assess factors like property demand, rental rates, and market trends to see whether a sole proprietorship or a partnership would be more suitable.

Check out the Renters Warehouse Market Research Center to look up real estate market trends in your target area.

• Exit Strategy: Don’t forget to think about your exit strategy. Do you envision selling properties individually or as a portfolio? Does your chosen ownership structure align with your exit plan?

• Legal Guidance: Understand the legal aspects of your chosen ownership structure. Consult with legal professionals to ensure you’re fully informed about the legal complexities.

• Tax Analysis: Consult with a tax professional to understand the tax implications of your decision. Different ownership structures may have varying tax advantages or obligations.

Choosing an Ownership Structure for Rental Property

Now that you’ve taken a look at the pros and cons of going it alone versus partnerships, it’s time to consider how you may want to structure your real estate investment company. Ownership structure refers to the legal arrangement through which individuals or partners may own, manage, and share responsibility for rental properties. 

Here are some of the most common examples of rental property ownership structures:

1. Sole Proprietorship: This is the simplest ownership structure, where a single individual owns and manages the rental property. The owner has complete control but also bears all financial and legal responsibilities.

2. Partnership: Partnerships involve two or more individuals or entities jointly owning and managing rental properties. There are various types of partnerships, including general partnerships (GPs) and limited partnerships (LPs), each with its own level of management involvement and liability.

3. Limited Liability Company (LLC): An LLC is a flexible ownership structure that combines limited liability with various management options. LLC members can choose whether they want to actively manage the rental properties or act as passive investors. The LLC offers liability protection, and members’ personal assets are generally shielded from business debts and obligations.

4. C-Corporation: Some investors choose to own rental properties through a C-corporation. While it offers a level of liability protection, it can result in double taxation, as the corporation is taxed on rental income, and shareholders are taxed on dividends.

5. S-Corporation: S-corporations provide liability protection and pass-through taxation, where rental income and expenses are reported on the owners’ individual tax returns. However, there are restrictions on the number and types of shareholders.

At the end of the day, choosing a partnership or sticking to being a solo investor is a personal decision that depends on your circumstances and goals – as well as available opportunities. It also depends on your personality and the other party/parties involved, and how well you’re able to work together. It’s worth taking the time to consider which option is best for your needs before moving forward, so be sure to conduct careful research first. You’ll also want to consider consulting with legal and tax professionals to gain a clear understanding of how a partnership, and different ownership structures, may impact you.

With the right approach, rental property investing can help you to find financial freedom. Are you looking for a hassle-free way to rent out your property? Renters Warehouse can help. Take the first step today with our FREE Rental Home Price Analysis.