Owning an investment property may appear to be an excellent investment, however, when it is time to get to work, the risk and related effort of managing the property often surpasses the profit.
Luckily, real estate partnerships can help you reduce the risk and share the required efforts and hard work with a partner.
So in this article, you will learn about how a real estate partnership works, as well as some of the advantages and disadvantages of investing with others. This would help you decide if a real estate partnership is suitable for you.
What is a Real Estate Investment Partnership?
A Real Estate Investment Partnership is a legally binding agreement between two or more people to run a real estate investment business together.
It entails the combination of capital and expertise by partners or investors to purchase, develop, sell or lease investment property.
A Real estate investment partnership otherwise known as a real estate limited partnership (RELP) can demand both members to serve actively in the running of the business as equals. This is one of the various forms that a real estate investment group takes.
Typically, a real estate partnership is more likely to have a general partner who takes on greater duty and liability in exchange for a larger portion of the profits.
The other members only serve as passive or limited partners.
A company, an experienced property manager, or a real estate development firm is usually the general partner. Limited partners are outside investors that offer capital in exchange for a return on their investment.
Active vs Passive Partnerships
Real estate partnership agreements can be tailored in an almost infinite number of ways to satisfy the specific demands of a particular real estate investment.
However, for the most part, real estate investment partners can be divided into two categories:
Active Partnerships
Active real estate partnerships are those in which each partner actively participates in the investment daily.
Although every member of a partnership can be active, it is more common for one to operate as the general partner and the other members to act as limited or passive partners.
Roles of a General Partner
- In charge of the investment
- The real estate partnership is formed by the general partner
- Obtains funding and completes the sale
- In exchange for the added work and risk, the general partner usually receives roughly 30% of the cash flows and equity.
- Finds a deal and performs due diligence on it.
The active partners can boost the property value by working together to keep the cash flow secured and the investment property in good shape.
Passive Partnerships
Passive real estate partnerships are commonly created to obtain finance or to capitalize on one partner’s specific skill set that the other partners lack.
Many people nowadays, for example, are looking for strategies to diversify their retirement account beyond standard investments like stocks and bonds. They desire to invest in real estate but lack the time, experience, or market understanding to do it.
Opting for a passive real estate partnership can allow for an experienced real estate investor to source funds from passive partners, grow the firm, and handle the day-to-day management of property as well.
The income and equity are then distributed according to the real estate partnership agreement’s precise conditions.
Is Real Estate Investment Partnership a Good Idea?
Real estate investment partnerships have both advantages and disadvantages.
Finding the best partner to work with is possibly one of the most important aspects of a successful real estate investment partnership. Investors should select a partner that complements their own strengths and balances their weaknesses.
Below are some of the advantages and disadvantages of partnering up to help you decide if real estate investment is worth it:
Work with Partners
Several perks come with working alongside other professionals. Each partner, for example, brings something unique to the table, so assembling a well-rounded team that complements each other in terms of capital, knowledge, and experience might be beneficial.
When making important business decisions, having a broad group of partners can reflect many perspectives and backgrounds.
Furthermore, dividing the burden might be beneficial for partners who want to be active in day-to-day operations or who prefer to concentrate on long-term strategy creation.
Payment Flexibility
Payment flexibility is another advantage of a real estate investment partnership. This means that partners can decide how much money they wish to put into the business.
Partners have the option of receiving their payments in a variety of ways. For example, one partner may prefer to receive the majority of the tax benefits while the other prefers the free cash flow.
This is because it is a pass-through corporation, there is more liability, as income and losses are passed through to each investor and claimed on their individual income tax returns.
Lowering the Risk
Another financial advantage of a real estate partnership is the possibility to financially split the risk.
While this isn’t always possible, spreading out the risk makes real estate investing a lot easier.
Disadvantages of a Real Estate Investment Partnership
Presence of Illiquidity
When you invest in a real estate partnership, your money is often locked up in a long-term investment.
This means you might not be able to sell the investment property when you wish. If you need the money or wish to reinvest it elsewhere, this can be a problem.
Conflicts
Diverse investing and management styles, as well as partnership agreements that do not clearly state who is responsible for what, where, and when, can lead to conflicts.
In a real estate partnership, conflicts can arise if one partner believes they are performing a disproportionate amount of effort without receiving an equitable share of the profits.
Capital Calls
A project or refurbishment going over budget is one of the most significant risks in any real estate partnership.
In many circumstances, you will be required to make additional contributions to offset unexpected additional expenditures.
This can lead to unanticipated stress and friction in your partnership, so ensure you are prepared and that you are operating an open communication with your partners.