Real Estate Investing with Partners
9 Critical Considerations Before Investing with Partners in Real Estate in Michigan
“Finding good partners is the key to success in anything: in business, in marriage and, especially, in investing.”
What Does it Mean to Invest in Real Estate with a Partner?
All real estate investing involves a partnership of some sort.
Even if you buy land for cash you are partnering with the government to provide the infrastructure around your property and to protect your property ownership rights so you will pay taxes for this partnership. In fact, the government is always the first lien holder if you fail to pay the taxes on the property in this partnership. The government gets your property to pay the taxes before anyone else gets paid.
Other partnerships in real estate may include:
• Partnering with a lender—either private or a bank. If you fail to pay your lender, the lender can foreclose on the property to get paid.
• Partnering with someone on a property who brings experience and money and you are both active partners together.
• Partnering with someone that just beings money.
• Pooling passive investors together to invest their money in a syndication partnership for a larger investment like an apartment complex.
There are many critical considerations before deciding on partnering, what type of partnership or if partnering is even necessary when investing in real estate in Michigan.
What Should you Consider Before Investing with a Partner in Real Estate?
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Partners can accelerate the growth of opportunities, share knowledge but can also create more complexity and problems if partners are not aligned on their goals and management styles.
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Partners should compliment each other in skill or available resources or both.
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If the potential partner does not bring something to the table to add to your knowledge and skills or resources consider if this is a good partner candidate.
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Make sure they share the same investment goals as you do.
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Make sure all parties are comfortable with the clearly defined contributions and potential returns in the partnership.
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This can be simply writing down what both parties can agree to and have an attorney or attorneys for each party review and put into a legal partnership agreement.
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Just write down what you can agree on and let attorneys handle the legal part of the partnership.
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Make sure you do your due diligence on your prospective partner to know who you are thinking about doing business with.
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Review if the goals of the partnership are on track and if the roles defined for each partner are still working to support the goals of the partnership.
What are the Advantages of Investing with Partners in Real Estate?
• A partner brings skills and experience that you don’t have to accelerate your growth and investing opportunities.
• Partners brings capital that you don’t have to do the deal or bigger deals.
• Having partners that compliment your skills and have equivalent experience and resources can help when seeking funding from lenders.
• Payment flexibility in terms of partners deciding when and how much to invest in the opportunity as well how they want to receive their returns depending on individual needs.
• Partnerships allow roles to be separated so the work is shared.
What are the Disadvantages of Investing with Partners in Real Estate?
• One of the obvious potential drawbacks of a partnership is the possibility for conflict.
• Another disadvantage of a partnership is you lose some control or share of profit from the investment.
• Also, partners may feel that one of the partners is not doing as much in the partnership and the work or responsibilities are falling to one partner when they were to share responsibilities and profits.
• Real estate partners may find they have different management styles over time that are not compatible.
• Partnerships can place strains on an otherwise healthy friendship or relationship.
What are the Types of Real Estate Investing Partnerships?
Active Partnerships
All partners are involved in running the day to day responsibilities of the business and ideally from their place of strength.
Passive Partnerships
This is a great way to raise capital for an investment where one partner puts up the money (passive partner) and the other partner handles the day to day operations and revenue is split to all partners.
If your are investing in smaller real estate transactions ask yourself if you need a partner at all.
If you decide you need a partner, then consider having a loan partner first where you pay someone or the bank for the use of their money instead of a share of profits.
Examples of loan partners:
• Private lenders like another investor, friend or family.
• Crowdfunding sites like groundfloor.us
• Traditional bank or lender
• Hard money lender-private lender with higher rates and fees.
Examples of partnering on a small, single real estate investment:
• If you need money to do the deal consider a loan partner first and then consider taking on a passive investor who contributes money in return for a share of revenue and appreciation if a loan partner is not an option.
• If you are doing an investment that you don’t have as much experience with like a fix-and-flip which can be costly if you make mistakes, consider bringing on a more experienced active partner for a share of the profits.
Example of partnering on a larger real estate investment like an apartment complex:
• You may need to bring in more capital and pool resources from passive investors through a syndication with the investors being LPs (Limited Partners) and you and your team GPs or General Partners that actively run the investment. Investors in this type of opportunity need to be accredited investors and structured legally with an attorney.
• You may need to bring in other active partners or GPs that compliment your skills and ability to handle different parts of the investment management like investor relations, property management and property development.
What Should be Included in a Partnership Agreement?
• Determine each partners contributions in terms of expertise, resources and time.
• Determine how profit and loses will be shared.
• Decide which partners will have the authority to make decisions and which partners are passive partners.
• Select GPs who will be responsible for management duties and legally liable for the company’s success.
• Determine partnership rules that handle things like the death of a partner or withdrawal from the partnership.
• Establish ways to resolve disputes and change management partners if needed.
How Can a Real Estate Professional add Value Investing with Partners?
A real estate professional will know the different types of partnerships available and when it might be time to consider using a partnership in your real estate investing career.
They will also know other professionals like attorneys that can help with drafting legal agreements for partnerships.
What are the Critical Considerations Before Investing with Partners in Real Estate in Michigan
All real estate investing involves some sort of partnership even if it is just with the government. There are two basic types of partnerships (1) active where all parties are involved in running the investment and (2) passive where a partner provides capital in return for a share of profits. All partners should be evaluated carefully to see if they are a good fit and potentially a good partner. You want to know who you are getting into business with. A real estate professional will know the different types of partnerships available and when it may benefit your investing career. Finally, all partnership agreements should be reviewed and drafted by an attorney.
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Disclaimer:
Always speak to your CPA, investment advisor and attorney before making any investment decisions. Past performance does not guarantee future returns. Arbor Advising seeks to educate and does not endorse any specific product, service or investment.
