Investing in real estate is a great way to add to your investment portfolio by securing a physical property that will net you returns in the future. Even so, the prospect of buying an investment property can be daunting for many people, which makes it much more appealing for a lot of first-time investors to go into their first deal with a partner. A partnership helps defray the cost of the investment, and it also provides a buffer for error by distributing responsibility across multiple parties, instead of just one. Still, there are a few aspects of partnerships in real estate investing that can be troublesome if both parties are not knowledgeable about potential pitfalls. Here are three aspects of real estate investing partnerships to be aware of before signing on the dotted line.
1) Who will supervise and pay for work on the property? Part of investing in real estate is often performing standard renovations to make sure that the property nets the highest amount of revenue when it gets put on the market. Before you put money down, have a frank discussion with your potential business partner about whose responsibility it will be to handle the work on the property – who is paying for it, who is supervising it, and who is completing the punch list once it has been completed. This conversation will help to inform both parties about their individual responsibilities, and it will save you an uncomfortable discussion later on if and when important details fall through the cracks.
2) How are you splitting equity? Presumably, the intention of investing in real estate is to increase its value and net greater returns on the property over time. It’s important to mutually agree on a split in equity before the property makes it to the market; if you wait until afterwards, you’ll automatically increase the likelihood that you’ll end up having an acrimonious, partnership-ending conflict over the split in equity later on, which could cost you not only a business partner, but also a significant amount of money.
3) What will you do if one party wants to leave the partnership? As with any business, it’s important to draw up a contract between both parties that clearly and irrefutably outlines what the terms of the agreement are and what will happen if one person decides that they no longer want to be involved in the ownership of the property. If you have a contract in place, then there will be no miscommunication about the roles and responsibilities of each person down the line, and there will be no conflict when one person decides to disengage, because you’ll already have a plan in place for this exact situation and others like it.
While it can be challenging to invest in real estate with a partner, it can also be infinitely more rewarding and significantly more lucrative. So, then, as long as you go into your business arrangement with open eyes and clear guidelines for the functions and division of labor for your business, you will set yourself – and your business partner – up for success in the rewarding world of real estate investing.