Partnerships
In a real estate partnership, two or more individuals form a shared business enterprise to buy, manage, and sell properties.
A partnership lets you leverage your way into properties that are larger, more expensive, and potentially more profitable than you could afford as a sole proprietor. Partnerships promise other benefits, too. If you are not well informed about certain areas of real estate investing, you can partner with people from whom you can learn. Your partners will benefit from your expertise, too. This is one reason why real estate partnerships are often made up of people with complementary experience (see Case Study You Can Profit), such as a construction professional, a lending expert, and a skilled property manager.
Of course, there are dangers in partnerships. If one partner wants to sell a building and the other partners do not agree, frictions arise. If one partner wants to invest money to fix up a building or invest in additional properties, conflicts can start. Finally, if one partner decides to leave the business, difficult negotiations often take place about how he or she should be compensated.
The best prevention is to know a great deal about your partners before entering into a partnership and to hire an attorney to spell out your partnership agreement. This legal agreement should cover how one partner can buy his or her way out of the partnership since that is the time when conflict often arises.
DO THIS!
Have a frank and open conversation with any potential partners. Talk about:
• how much they intend to invest each year in new properties and in fixing up those you already own.
• what their long-term plans for real estate activity are.
Does their agenda match yours?
See A Rock-Solid Way to Minimize Risk
Another area of potential conflict concerns the terms under which you and your partners will sell your business if that becomes a possibility in the future. Suppose, for example, that your partner wants to sell her half of your business to a big real estate development firm and you want to keep your half. How would such a deal be structured? How would each of your halves be given a dollar value? Such questions point up the necessity of structuring a partnership with the help of a smart attorney.
Beyond the legal issues of partnership, it is also important to know your partners’ long-term goals for their real estate investments. Do they intend to hold buildings for years, or sell them quickly after their values increase by a small percentage? Do they want to fix up rental units in your properties or invest as little as possible? The more you discuss such questions with potential partners, the more you minimize the possibility of significant friction later.
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