Real estate investing is a proven way to achieve financial success and prosperity, but individual endeavors can be risky and daunting. The majority of legendary real estate investors have reached the top of the food chain by building profitable real estate partnerships.
When done right, partnership deals can lead to a vast range of new opportunities that otherwise may appear out of reach or impossible. In this article, we delve into real estate investment partnerships and provide you with the requisite investment guidance and tips.
Can You Have a Business Partner in Real Estate?
The answer is affirmative. A real estate investor or a group of partners can help you accomplish much more than you could on your own in the sphere of real estate investments, especially if you are a novice and don’t have enough experience or money.
There are different forms of real estate partnerships, each having its own strengths and weaknesses. A real estate partnership agreement can be devised in three structural formats, including:
Real Estate Limited Partnership (RELP)
If you have decided to enter the world of real estate investment and intend to find a partner to get started, one of the first options is RELP, which operates as a limited liability company.
With this type of real estate partnership, you can avoid the problems associated with being a landlord or the challenges you face with property management. In RELPs, people pool their available budget with other investment partners to buy a property and then make money by renting it out or selling it at a higher price. With RELP, you own a home and actively receive your share of the profits.
Because RELP is a private investment, you can’t trade your shares on the stock market. In this business structure, you can buy your shares at the beginning of the partnership. However, after this initial phase, ownership shares may be available for a limited time.
A real estate limited partnership can last for a relatively long term, typically spanning 7-12 years based on its primary targets. It has a business objective; to achieve that goal, it finds a property to buy and manage. In the next stage, the partners sell the property at a higher price. Gains are distributed, and then the partnership terminates.
A Real Estate Investment Trust (REIT)
A REIT has a similar structure; real estate investors pool their money and buy real estate assets. The value of the investment property and the number of investors in a REIT agreement are substantially higher than in an RELP.
If you don’t like economic risks, then self-storage REITs with their conservative balance sheets may be the right choice. When you buy storage space REITs shares, you can receive your profit split by leasing storage space to customers.
Typically, self-storage facilities tend to be inexpensive to design, build, maintain, and manage. They also have a rewarding tax compensation profile and are recession-resistant. Therefore, self-storage REITs are a low-risk option and have proven to be an excellent long-term investment.
In a REIT’s structure, particular prerequisites should be met, including:
At least three-quarters of a REIT’s capital should be invested in real estate or associated assets. These assets generate three-quarters of a REIT’s income, i.e., 75 percent of the revenue comes from mortgage payments, rent, and third-party management charges.
REITs have at least 100 shareholders and are structured as corporations. Due to the number of shareholders, many begin as a limited real estate partnership and then change to a REIT later.
Five or fewer shareholders can own at most 49 percent of a REIT’s shares. In other words, each investors’ ownership is capped off at 10 percent to make sure all parties comply with the rules. A REIT is obliged to pay out at least 90 percent of its taxable cash flow.
Real Estate Syndication
Syndications also have similar basic principles; a group of investors pool their money to buy a property or several assets. However, syndication doesn’t mean you and your friends can purchase any old investment property and then rent it out. In most cases, these real estate partnerships raise a 6-figure amount and buy a series of rental properties worth $1 million or more.
How Do I Find a Real Estate Partner?
Every aspect of our life journey requires the right partner. Real estate investing deals are no exception. You will spend a significant amount of time with your partner or partners; therefore, choose someone you like and get along with. Mutual understanding is the key to success.
The right partner will pave the way for the most suitable real estate investing opportunities. You can consider your friends, relatives, colleagues, a real estate agent, or someone else you trust to start your partnership. But it would be best if you focused on people who can figure out how to find and manage a real estate investment, have enough money to get involved in the real estate investing process, and are willing to be your partner. Bonus points if they have a good real estate investing track record of their own.
There are several ways to find effective real estate partners, including:
When looking for a real estate investment partnership, your private real estate network is the first option and a great way to get started. Make a list of possible partner candidates in your neighborhood. For instance, your real-estate-savvy neighbor. Contact them and present the idea of a real estate partnership and its benefits. If no one comes to mind on forming a real estate network, no problem. You can build your network from scratch. You can begin by attending local events where real estate agents and investors show up regularly.
Real Estate Investment Clubs
Try real estate investment clubs in your area. You can also find these clubs online; they are very practical for finding real estate partners. Do you have your contact information or a business card handy? You can launch your website or social media page and share data about your real estate portfolio. These will indeed introduce you as a professional when trying to reach out to potential real estate investment partners.
Social Media Platforms
Our interaction with others has changed dramatically with the phenomenon of social media. Suppose you’re not into real estate investment clubs? Don’t worry. Social media platforms, such as LinkedIn or Twitter, are already exploding with real estate investing pages in the last few years. You should be interactive and social there. Don’t be afraid of starting a conversation with your future potential partners. Be bold. Make sure to post comments asking about possible investors.
Companions & Relatives
A Persian proverb says, “A thousand friends are still too few”; your circle of confidants and companions is one of the most important places to look for potential partners since there is a good chance that one of them is already in the real estate business. Talk to your friends and family members, and let them know that you are looking for real estate partners.
Can Two Real Estate Agents Form a Partnership?
Many real estate experts believe that two heads are better than one and consider partnerships to be highly beneficial. It can enhance their expertise, resources, and experience, as well as significantly boosting their profit and business success. After all, finding the right partner could be the best decision you ever make.
If you are a real estate agent and are considering the idea of a partnership, there are a few things you should keep in mind to avoid potential issues in the future, such as:
Drafting a Partnership Agreement
As mentioned earlier, there are various structures for real estate partnerships. Regardless of the system you choose, always devise and sign a partnership agreement. With a proper partnership agreement, you can clarify and stipulate everything successfully.
A detailed partnership deal spells out every investor’s role, tax responsibilities, and how profits will be split, as well as outlining a straightforward plan for dispute resolution.
Lack of transparency can trigger problems and significantly shorten the life of a partnership. If one of the partners wishes to go his/her own way, dies, etc., a partnership agreement protects the rights of all parties.
Only sign a partnership agreement if it’s the most viable option. Carelessly over-signing can cause a poorly structured partnership to crumble in short order.
Obtaining Legal Advice
If you are determined to enter into a real estate partnership agreement, it is a good idea to hire legal experts. They can advise you on summarizing the key points and how to draft an agreement that is fair, judicious, and thorough. Hiring a legal professional will incur additional costs, but this is worth every penny as it solidifies your rights and profitability.
Sharing Details & Schedule Review Sessions
Complete transparency leads to a successful real estate partnership. It is crucial to have constant evaluations and check-ins on the status of the endeavor and ascertain everyone is still on the same page and moving properly toward the intended target/objective. Frequent communication builds trust between partners.
Weekly or monthly meetings to review objectives and critical decisions are highly recommended. If there are concerns, it is vital to address them as they arise. Practical communication about problems will help you avoid more significant and damaging challenges in the future.
Remembering Not to Rush
Set your goals carefully, and then consider whether a real estate partnership can benefit you. Always make a wise decision consistent with accurate calculations (and sometimes your inner instincts), and avoid immediate excitement and impulsiveness when it comes to a real estate investment partnership. Consider alternative avenues before taking the plunge.
How to Dissolve a Real Estate Partnership
More heads can sometimes translate into more headaches if each real estate partner thinks and acts for him/herself and the investors only look for their own profit. Therefore, any successful business structure should envision a big red eject button, i.e., an exit or dissolution strategy. This also applies to real estate partnership agreements.
The functions of a clear dissolution strategy in a real estate partnership agreement are more than just disambiguating conditional clauses beginning with what-if phrases. It provides certainty for all investors involved. It ensures a fair conclusion when the partnership expires.
A Practical Dissolution Strategy
A practical dissolution strategy should elucidate the required process when one partner wants out of the agreement. In other words: If one partner decides to exit, there should be a mechanism for severance that addresses the financial concerns of the other partners.
Another critical issue to consider is each party’s fate if the business goes bankrupt or is sold to someone else. To avoid disagreements and disputes, partners should be clear in advance about how they will proceed. Partners may have different views on handling issues related to expenses or the division of assets generated in a partnership.
The right tax advisor has the expertise to design a practical dissolution strategy. With a dissolution strategy, you can have certainty about the finances even if the arrangement dissolves. The dissolution plan for your real estate partnership should be comprehensive enough to handle all the details of winding up as the business grows (such as through merging). It should also address how one partner can buy out the other’s interest.
It must outline details in the event of death and/or disability (mental, physical, financial, etc.) of one of the partners. How will the business operate if a partner ends up dead? Who will inherit the deceased partner’s interest in the partnership? Can the new partner remain in the arrangement? You should find precise answers to all of these questions in your partnership dissolution plan.
The Bottom Line
If you have been thinking about investing, real estate is the most lucrative choice. Partnering with another real estate investor is an efficient way to enhance and further develop your resources, experience, money, and expertise.
You can start the partnering process with your friends, family members, angel investors, investment club members, and even your property manager. To have a profitable investment partnership, you may want to choose a suitable investment structure, set specific goals, and then find a reliable partner.
You should draft a real estate partnership agreement after consulting with a real estate attorney. Transparency is key to avoiding conflicts. Hence, all aspects and details should be covered in your real estate transactions. The exit strategy is an integral part of a real estate investment agreement. It should be comprehensive and explain all requisite data related to a partnership or real estate deal’s dissolution.
Do you still have questions? No problem! We’re experienced in the self-storage sector of real estate, and we’re happy to assist you every step of the way and share our knowledge and experience with you. Just give us a call, and we’ll help make your self-storage investment dreams come true.