Purchasing Property With a Partner

Real estate investing takes dedication, patience, reliability, and financial know-how. Doing the job yourself might reduce the need for vetting (as long as you know your strengths), but it also increases the financial risk. Taking on the task with a partner reduces the financial burden but poses a host of new difficulties. Investments gone wrong can ruin friendships and bankrupt families. We’re here to help you make the right decisions, select the right partner, and maximize your return on investment.

What Is a Real Estate Partnership?

When two or more real estate professionals or entrepreneurs get together to accomplish a mutually beneficial goal, they form a real estate partnership. This structure determines how a business performs day-to-day activities and how it is taxed at the end of the year. A real estate partnership generally has a defined focus, whether multi-family homes, commercial buildings, or individual residences.

How Can I Get Started?

First and foremost, you need to think about the type of real estate you want to invest in and what your partnership offers. What are the investment requirements? What are the income splits? What terms will you come to? Who are your potential partners? Research can help, but the real-life experience is invaluable. If you are new to investing, having a partner who can show you the ropes will give you an instant boost.

Once you find a potential partner or partners, you can start to talk about terms. For example, you may have a single-family home that you and your partner wish to invest in. One party may front the cash for a down payment while the other takes out the mortgage and covers maintenance (one party fronting more money while the other takes on more risk). Alternatively, both costs can be split 50/50. Generally, unless one partner is investing more or taking on substantial risk, net loss and profits are split, including in the event of a sale. In this case, the equity split should include any refinances or appreciation.

What Are the Benefits of a Real Estate Partnership?

It’s often lucrative to team with a professional property management company. They minimize hassle and help with investment decisions. Here are a few ways a partner can help:

• Partners can provide a different viewpoint and valuable real estate experience.
• A well-funded partner can bring more capital or a strong network to the partnership.
• A partnership allows for mitigated risk and divided losses along with profits.
• Potential lenders view experienced real estate partners as more likely to succeed and will approve more loans.
• A partnership reduces the overall workload on each party and allows individuals to play to their strengths and mitigate weaknesses.

What Are the Drawbacks of a Real Estate Partnership?

With the good comes the bad, and not every partnership is a walk in the park. Here are a few pitfalls to look out for and be aware of:

• Both credit scores play a role with the lender, so one bad score can drag the others down.
• An exit can be difficult. Both of your names may be on the mortgage, so a sale or refinance is necessary if one party wants to walk away. An agreement should detail an exit-plan and cover what happens if a partner is deceased to prevent problems.
• If one party doesn’t cover their responsibility, both parties pay the price. If both names are on the mortgage, but one doesn’t pay their share, both credit scores are dinged.
• Lenders are less likely to give you additional loans due to an increased debt-to-income ratio. Even if you’re only paying half, a lender sees a responsibility toward the entire mortgage each month.
• Total profits are cut in half.
• Different management styles can lead to a butting of heads, and investment gone wrong can ruin an otherwise great friendship.

Choose Your Partner Wisely

A long-term friend doesn’t always make the best investment partner. Simultaneously, an investment guru who has a different risk tolerance or management style may ultimately result in a soured partnership. Ideally, you’ll have a friend with whom you’ve gone in on lesser business-related ventures or investments and had success. They will show a pattern of reliability and willingness toward flexibility, fairness, and overall profit for everyone.

Think about your worst-case scenario. Now imagine if your potential partner would be level-headed or if they’d lose their patience at the first sign of trouble. When it comes to a partnership, greed isn’t always good. Make sure the partnership is mutually beneficial before you put pen to paper, and talk it through with friends and family for a second opinion.