How to Structure a Real Estate Partnership: The Dos & Don’ts

Real estate partnerships can be an awesome way to get involved in the ecosystem of real estate investing. One of the main reasons is that you can leverage the resources of others to execute the property’s business plan properly, access better opportunities than you could on your own, and purchase more considerable assets than you could alone.

In this article, we’re going to cover the basics of how you can structure a real estate partnership, the different types of entities you can use, and how to pick the right partner.

Key Takeaways

Joint ventures are similar to partnerships but typically formed for a specific project or a limited time period.

What Is A Real Estate Partnership?

A real estate partnership is a business arrangement between two or more people who pool their resources together for real estate investing. The partners contribute their money, time, and expertise to the partnership and share in the profits or losses of the venture.

Real estate partnerships can be informal or formal, involving any real estate investment. Some examples of the real estate investment types that people use partnerships for are developing land, buying and flipping properties, owning and operating apartment communities or managing rental properties.

How to Structure a Real Estate Partnership

There are several ways to structure a real estate investment partnership, and the best one for you will depend on your goals, the nature of the investment, and the legal and tax implications.

Here are some options to consider:

• Informal Partnership: This is the most basic form of real estate partnership, and it can be as simple as two friends agreeing to buy a property together and split the profits. There’s no need to create a formal real estate partnership agreement or set up a separate entity, but it’s a good idea to put the terms of the partnership in writing to avoid misunderstandings down the road.

• General Partnership: In a general partnership, the partners are personally liable for the debts and obligations of the partnership. If the partnership goes bankrupt or is sued, the partners’ personal assets, such as their homes and bank accounts, could be at risk. A general partnership is easy to set up, but it may not be the best choice for large or complex real estate investments.

• Limited Partnership: In a real estate limited partnership , one or more general partners manage the partnership and are personally liable for its debts, and one or more limited partners contribute capital but don’t have any management role. Limited partners are only liable for the extent of their capital contributions. This can be a good option for a real estate investor wanting to get involved without taking on personal liability.
• Joint Venture: A joint venture is similar to a general partnership, but it’s typically formed for a specific project or a limited time period. Joint ventures can be set up informally or through a written agreement.

Real Estate Partnership Entities

In addition to the types of partnerships listed above, there are many legal entities that can be used to form a real estate partnership structure, including:

• Limited Liability Company (LLC): An LLC is a hybrid business structure that combines a corporation’s liability protection with a partnership’s tax benefits. LLCs are very popular for real estate partnerships because they offer security and flexibility for the partners.

• Limited Liability Partnership (LLP): An LLP is a partnership that provides liability protection for the partners. LLPs are typically used by professionals, like lawyers or accountants, who want their liability to be limited for the actions of their partners.
• Corporation: A corporation is a separate legal entity that shareholders can own. Corporations offer liability protection for the owners, but they also come with more complex legal and tax requirements.

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Things to Keep in Mind

There are several things to keep in mind when entering into a real estate partnership, and they are as follows:

1. Clearly define roles and responsibilities: It’s essential to define each partner’s roles and responsibilities in the partnership agreement. Ensuring the prevention of misunderstandings and bringing everyone is on the same page.
2. Set clear financial terms: Make sure you clearly understand how profits and losses will be split among the partners. This could be based on the amount of money each real estate partner has invested, the amount of time they have spent on the venture or some combination of the two.
3. Establish a decision-making process: It’s essential to agree on a decision-making process that works for everyone in the partnership. This could be through consensus, majority rule, or assigning certain decisions to specific partners.
4. Consider liability protection: Depending on the nature of the partnership and the investment, you may want to consider liability protection to protect your personal assets in case the partnership is sued or goes bankrupt.
5. Communicate openly and regularly: Communication is key in any partnership. Make sure you have regular check-ins and open communication to ensure everyone is on the same page and to address any issues or concerns that may arise.
6. Have an exit plan: It’s a good idea to have an exit plan in case one partner wants to leave the partnership or the partnership is dissolved. This could include provisions for buying out the departing partner’s share or selling the investment.
7. Seek legal and financial advice: It’s a good idea to seek legal and financial advice when setting up a real estate partnership to ensure that you understand the implications and to protect your interests.

Joint Venture vs Partnership Real Estate

Joint ventures are similar to partnerships but typically formed for a specific project or a limited time period. The critical difference between a joint venture and a partnership is that a joint venture is generally formed for a particular project.

In contrast, a partnership is a long-term real estate investment business arrangement. Joint ventures can be set up informally or through a written agreement, and they can involve any type of real estate investment.

Real Estate Partnership Splits

One of the most important things to consider when setting up a real estate partnership is how the profits and losses will be split among the partners. There are several ways to divide the profits, including:

• Equal splits: In an equal split, the profits are divided equally among the partners, regardless of their contribution to the partnership. This is the simplest and most straightforward approach, but it may be unfair if one partner puts in more time or money than the other.

• Proportional splits: In a proportional split, the profits are divided based on the partners’ contribution to the partnership. This could be based on the amount of money each partner has invested, the amount of time they have spent on the venture, or some combination of the two.
• Fixed splits: In a fixed split, the profits from cash flow are divided based on a predetermined percentage. For example, one partner might get 60% of the profits, and the other gets 40%. Fixed splits can be a good option if the real estate investment partners want to ensure that each person receives a specific share of the profits, regardless of their contribution.

How to Invest in Real Estate With a Partner?

If you’re considering investing in real estate with a partner, here are some steps to follow:

1. Determine your goals: Before looking for a partner, you must know what you want to achieve with your real estate investment. Do you want to flip properties, develop land, invest in rental properties, o invest in commercial real estate assets like multifamily? What are your financial goals? Having a clear vision will help you find the right partner and structure your partnership to align with your goals.
2. Find the right partner: Look for a partner who shares your vision and has complementary skills and resources. For example, if you have strong financial skills, you might look for a partner with solid marketing or construction skills. Finding someone you trust and get along with is essential, as you’ll be working closely together on the venture.
3. Create a partnership agreement: A partnership agreement is a written document that outlines the terms of the partnership, including the roles and responsibilities of the partners, the distribution of profits and losses, and what happens if one partner wants to leave the partnership. Having a clear, written agreement is important to avoid misunderstandings and disputes down the road.

Picking the Right Partner

Finding the right partner is crucial to the success of a real estate partnership.

Consider the following when picking a partner:

• Compatibility: Make sure you have similar goals and values regarding real estate investing. Being on the same page about things like risk tolerance, investment strategies, and long-term goals is essential.
• Expertise: Look for a partner with expertise in areas you may be lacking.
• Trustworthiness: Trust is essential in any partnership. Look for a partner who is honest, reliable, and transparent.

Frequently Asked Questions About Structuring Real Estate Partnerships

Yes, two or more people can buy an investment property together by forming various partnership agreements. You can do this by creating a joint venture for the partnership.

There is no one way to split profits in a real estate partnership. You can choose to split the profits in various ways, such as in equal split regardless of the partner’s capital contribution, proportionate to their capital contribution, or through fixed splits based on the role in the partnership.

How to Structure a Real Estate Partnership - Conclusion

Real estate partnerships can be a great way to enter the world of real estate investing, especially for those who are just starting out or don’t have the financial resources to do it alone. By carefully structuring your partnership, finding the right partner, and creating an explicit partnership agreement, you can increase your chances of success and minimize the risk of disputes or misunderstandings.

Ultimately, in the real estate business, the proper structure and partner will depend on your goals, the nature of the investment, and the legal and tax implications. By doing your due diligence and carefully considering these factors, you can set yourself up for a successful real estate partnership.

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