Buying real estate with multiple partners is a great way to get started in real estate investing, especially if you’re short on knowledge and/or capital. In fact, many people have built significant wealth this way. Although this strategy affords a great opportunity, there are, nevertheless, some notable risks involved. The best way to mitigate the risk is to be forearmed with the right knowledge about what you’re getting into. Read on, then, to discover the 4 things you should consider when buying real estate with multiple partners.
1. How Buying Real Estate With Partners Works
The first thing to consider is how buying real estate with multiple partners actually works. In simplest terms, a real estate partnership is just an investment strategy that combines the strengths of two or more investors for the purchasing and management of an investment property.
Such partnerships typically fall into one of two categories: active and passive. In an active partnership, all parties share equally the day-to-day responsibilities of property management. A passive partnership means that the passive partners are primarily investors through whom capital is raised and who have little involvement in management.
Real estate partnerships are also known as “pass-through” entities. This means that, unlike corporations, they aren’t required to pay corporate income tax or other entity-related taxes. Rather, the partners involved each pay individual income tax according to the amount of profit each earns.
Real estate partnerships are typically favored over other types of pass-through entities owing to the greater potential for a higher return on investment. The downside, though, is that there is usually more risk involved.
2. Pros of Buying Real Estate With Partners
When buying real estate with multiple partners, you should understand the pros of such an arrangement so that you can proceed accordingly.
- First, there’s often a higher return on investment than with other real estate investment strategies. Because there are multiple partners, capital is pooled, and that larger investment allows for purchases that afford a greater ROI.
- With multiple partners involved, there will be more knowledge, talent, and experience brought to the table. Typically, each partner brings something different, which results in a well-rounded team. In addition, the day-to-day workload of managing operations can be divided up among the partners, with each assuming roles and responsibilities better suited to her skills and experience.
- Another pro is payment flexibility. Each partner can choose how much capital she wants to invest and how she wants to receive funds. This gives you the option of using the venture primarily for, say, tax benefits or for cash flow purposes.
3. Cons of Buying Real Estate With Partners
And, of course, you should definitely consider the cons when buying real estate with multiple partners. The main ones are:
- Conflict potential – With multiple partners involved, there will always be tension and possible conflicts with respect to personalities and management styles.
- Unequal involvement – One of the major drawbacks of most partnerships involves the fact that most of the time each partner’s duties and responsibilities are not clearly defined in the partnership agreement, which makes the arrangement less effective than it could or should be. The practical result is that one or more partners take on more than a fair share of the responsibilities and contribute more than the other partners. The ultimate outcome is a perception of unfairness and frustration at not having a commensurate portion of the profits.
4. Finding the Right Partners
All of the foregoing should underscore the importance of finding and choosing the right partners when buying real estate with multiple partners. Real estate is, after all, pretty much a people business, so working with the right partners is a critical consideration. Here are some steps you should take toward that end:
- Carefully analyze the strengths and weaknesses of each potential partner.
- Discuss with each and every partner your business philosophy and investment goals to make sure they align with yours for a successful partnership.
- Choose partners who have an investment timeline and exit strategy similar to yours.
- Ask potential partners to provide documentation of past successful ventures and review yours with them.
YOUR MOST IMPORTANT REAL ESTATE PARTNER
And, perhaps most important, don’t fail to include the most important partner – that is, your agent. An agent experienced in the purchase of investment properties, especially when multiple partners are involved, can be a valuable asset and a definite boon to your business. A good agent can steer you around the pitfalls to greatly increase your chances of success. So if buying real estate with multiple partners is on your horizon, don’t hesitate to contact us today at 866-593-7012.