With the average income of real estate investors in most states reaching above $100,000 each year, it’s no wonder so many are flocking to make such investments of their own. But how do you get started when you don’t know much about the real estate market? Or how do you reach the next level if you’ve been investing for a while?
Real estate investment partnerships can help both new and seasoned investors take their investment portfolio to the next level – and if done correctly, reduce the risk of certain investments. Continue reading to find out if a real estate partnership is right for you, how to form one if it is, and what financing options are available to you.
Table of Contents:
What Are Real Estate Investment Partnerships?
Two or more investors form a real estate investment partnership when they decide to pool financial capital and real estate knowledge to either lease, develop, or purchase investment properties together. You should know the different types of partnerships and what your role would be when investing in real estate with a partner.
Real estate partnerships are ideal for anyone lacking enough capital to purchase a property on their own. Additionally, if you’re new to real estate investing or have gaps in your real estate investing knowledge, such a partnership can help protect your capital while you learn the ropes yourself.
How To Form Real Estate Investment Partnerships
Forming a successful partnership shouldn’t be taken lightly. Skipping steps in the process may leave you and your partners vulnerable to losing large amounts of money. Before anything else, you first have to understand what type of partnership is right for you. In the process, you may come to realize that a real estate investment partnership isn’t in your best interest at all.
Once you’ve determined what type of partnership you’d benefit the most from, you’ll need to find other investors looking to fill the roles you’re missing. You’ll then create a real estate partnership agreement and set up measures to protect your investment if something does go south.
1. Know What Type of Partnership You’re Looking For
Different types of partnerships come with varying levels of responsibility and returns on your investment. If you don’t first understand the type of partnership you’re looking for, you may join one that leaves you with more responsibility than you have time for or little say in how your funds are used.
For example, a general partner vs limited partner real estate agreement would either give you part ownership of the investment property, or simply require your funds for capital and then you benefit from any profit made. For more details on different partnership types, review the chart below.
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Common Types of Real Estate Partnerships
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General Partnership
Real Estate:
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Limited Partnership
Real Estate:
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Active Partnership:
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Passive Partnership:
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Each partner involved is responsible for day-to-day management and decision-making. As such, each shares a relatively equal amount of responsibility.
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One general partner handles day-to-day management, while all others involved are referred to as limited partners who supply needed capital and hold less responsibility.
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A group of investors directly purchase real estate property and are involved in day-to-day decision-making and management.
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Passive, direct investments include purchasing a property and hiring a property manager. While passive, indirect investments involve placing funds in a syndication.
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Part of understanding the type of real estate agreement you’re looking for includes knowing the types of real estate you’re wanting to invest in. Some investors only invest in multifamily real estate, while others prefer fix and flip properties or commercial real estate investments. Knowing your preference can make it easier to find a suitable partner.
2. Find a Real Estate Investor to Partner With
The best way to find a compatible partner is by networking with those in the space you want to break into. You can do this by going to real estate conferences, talking with other investors in your circle about people in their network, and joining professional real estate investor groups.
Not doing your due diligence before investing in real estate with a partner could leave you vulnerable to losing a large sum of money. To make sure you find a partner whose goals fit yours, make a list of all the things you want to get out of your investment.
What to look for in a partner:
- Skills that complement yours: Start by making a list of your relevant skills and skills you’ll likely need in order to grow your real estate business. You’ll then look for investors who have the skills you’d like to develop yourself.
- Risk tolerance: Having a similar risk tolerance will allow for greater cooperation and understanding within your partnership.
- Long-term financial goals: These goals will tell you what direction your potential partner is headed, and if your vision fits theirs.
- Past experience: Similar to knowing what skills to look for, knowing your potential partner’s past experience will help you see what you can learn from them, as well as how they handle difficult situations.
- Good credit history: An investor with a high credit rating is less risky than one that has struggled to maintain a rating over 600. Additionally, high credit ratings are vital for obtaining the type of financing you may need for large projects.
It’s unlikely that you’ll agree with every method or philosophy your partners have. However, if you all come to a mutual understanding on what you want to see happen in your partnership, it can still be successful.
3. Create a Real Estate Partnership Agreement
Real estate partnership agreements should outline anything that may cause confusion or misunderstandings in the future. Although the idea of entering a partnership is to enhance your current portfolio and build your skills, unexpected circumstances will likely arise. To avoid any adverse effects on your investment, create a partnership agreement before signing away any of your financial capital.
Partnership agreements are legally binding documents that should be reviewed or created by an attorney. They outline the terms of the agreement by each party, the distribution of capital assets, what records will be kept, any administrative responsibilities held by each party, and more.
To download a free sample of a real estate partnership agreement, visit the US Legal website.
4. Set Up Methods for Protection
After creating and signing an agreement on responsibilities and outcomes, challenges will likely still arise. To protect your assets further, consider forming an official partnership, such as a Limited Liability Corporation (LLC) or a Limited Liability Partnership (LLP).
Limited Liability Corporation: LLCs protect individual investors by shifting responsibility off of the investor and onto the entity itself. If there is a lawsuit or settlement of some kind, the LLC protects its members from personal liability. Additionally, LLC members are offered additional tax benefits, and if the LLC qualifies, it can be taxed as an S corp.
Limited Liability Partnership: While no legal documentation is required to form regular real estate investment partnerships, legal action is required to form an LLP. Similar to an LLC, forming an LLP protects individual members of the entity. Were one partner to get sued in a typical partnership and not have the means to pay the lawsuit, assets from the other partners can be used to satisfy the outstanding balance. An LLP, however, ensures that each partner is responsible for their own actions.
In real estate, and in any business venture, protecting your assets also includes understanding how you will be taxed, and how you can legally limit your tax liability to increase your profitability. Becoming an LLC or LLP can offer great tax benefits compared to an informal partnership.
Benefits of Real Estate Investment Partnerships
Creating a real estate partnership as a new investor can bring a host of benefits. But it’s not just new investors that reap these benefits – even seasoned investors may find that building a partnership can strengthen their investment portfolio more rapidly than investing solo could. To see some of the specific benefits of investing in real estate with a partner, look through the points below.
- More financing options: As a single investor, you’re limited to your own financial capital and the amount of financing you get approved for. With other investors, your financing options expand, opening the window to larger projects.
- Limited partners share less risk: Real estate investing is a risky business, but partnering with another investor can decrease the amount of risk you would otherwise take on alone.
- Greater opportunity: Every investor has their own network of people they hear from about new opportunities in the real estate world. Partnering with another investor opens doors to investments you wouldn’t have otherwise been introduced to, and private investors you may not have otherwise met.
- Wider share of knowledge and experience: Your knowledge and experience is limited to the number and types of investments you’ve made. Partnering on a project can broaden your resources and understanding of the real estate market and real estate investing as a business.
