Real Estate Partnership-Top Pros and Cons Explained
With property prices soaring, buying land, house or building commercial buildings on your own can be nearly impossible. Not only do you need to have deep pockets, you also need the time and energy to manage the entire process from beginning to end.
If you assess most of the top companies, nearly all of them were formed when several people teaming up with to do bigger and better deals. But such partnerships are never easy. Commitment to work together is never something to be taken lightly. The team that you surround yourself with could easily make or break the potential of success and be either the best or worst decision you will ever make.
Here are some of the biggest pros and cons of a partnering up to help ensure the one you get into will be as powerful as possible:
Advantages of a real estate partnership
Shared Responsibilities: Partners always bring something extra to the table, such as capital, connections, project experience, or professional expertise such as legal or financing. Partnering with someone who has more experience can help you minimize your mistakes and money losses.
Extra Benefits: If you are the more experienced investor in the partnership, you could contribute your expertise and time in exchange for a portion of the proceeds. For example, real estate agents make great partners because they can access real estate deals before they are public. Real estate agents also have access to networks that include homeowners, sellers and other investors, which can be helpful when you are looking for good investments and possible partners.
Less Engagement: Whether you are a part-time investor or doing it full time, you’re probably busy. A real estate partnership can be the perfect investment vehicle if you are looking for a passive investment.
Access to a network: Personalities of each partner can combine to a greater level of credibility in meetings with lenders, prospective tenants, and additional investors.
Cons of a real estate partnership
Sharing profits: Profits of the investment such as monthly income, profits from the sale, and tax benefits must be shared among the partners, limiting the potential profits for any one investor. When starting, outline very clearly how the money is going to be divided.
Personality conflicts. These can occur due to different investment and management styles, or partnership agreements that don’t clearly define who is responsible for doing what, where, and when
Disagreements: Poorly written partnership agreements can also result in a good investment going bad if responsibilities aren’t clearly agreed on. Strains in a real estate partnership can also occur if one partner feels they are doing a disproportionate share of the work without getting an equal share of the returns
Risk of capital call: The need for partners to contribute additional funds can occur if a project isn’t performing to expectations, or if one member wants to exit early and demands to be bought out by the other partners
Lack of liquidity: By investing in a real estate partnership it typically means your money is locked up in a long-term investment. This means that you may not be able to sell the property when you want to. This can be problematic if you need the money or want to reinvest it somewhere else.
No guarantee: While many people believe investing in real estate is safer than the stock market there is no guarantee you will earn a profit or even get your money back from your initial investment. Like the stock market, real estate markets fluctuate, and renovation costs can go over budget, which could impact your financial returns.
Forming a real estate partnership and buying property together can be a great way to scale up your own portfolio and take your real estate business to the next level. If a partnership is going to help you get your income and investment goals to the next level, go for it.
Surround yourself with the people you aspire to become and you will find partnership opportunities everywhere. Just don’t pursue every deal you see. Do your own due diligence depending on the amount of money involved.