Want to invest in real estate, but you don’t want to go at it alone? Consider purchasing a rental property with a real estate partner. But before you do, let’s take a look at the benefits, drawbacks, and more, of having a co-investor by your side.
What is a Partnership in Real Estate?
A real estate partnership is an agreement between two real estate investors to combine their resources (i.e. money) to buy a property. In short, it’s when two people work together towards a single goal.
In a real estate partnership, the two investors can agree to partake in property management, or they can agree to raise capital for it, and let property management agents take over afterward. In a passive real estate partnership, neither of the investors are involved in the day-to-day demands of the property.
Active Real Estate Partnership
In this type of partnership, the parties agree to meet the day-to-day needs of their property. They both contribute the same amount of time and effort. For example, one partner could take care of repairs and maintenance, and the other partner could take care of tenant communication, rent collection, and more.
Passive Real Estate Partnership
Investors that want to diversify their portfolios can take advantage of passive partnerships to put their real estate investment on autopilot. In this partnership, the two investors raise capital to purchase the property, and then hire a third party such as a property management company to handle its day-to-day needs.
Furthermore, the partnerships can either be a Limited Liability Company (LLC), Limited Liability Partnership (LLP), or an S-Corporation. These are also known as pass-through entities. Compared to corporations, these entities do not need to pay corporate income tax. Rather, every investor reports their net income in their individual tax returns.
Why Consider a Real Estate Partnership?
There are several reasons why you may consider a real estate partnership for your South Florida investment. For starters, it’s a faster way to raise funds. Investors that would otherwise be unable to buy the property on their own can benefit from the ability to pool their funds with their partner.
Second, it lowers the risk as the liability is split between the two parties. In case the market takes a downturn, your loss will be lower than it would be if you were a sole owner.
And third, it allows investors to share their responsibilities with another investor who may be more experienced. If you don’t want to dip your toes into real estate because you don’t have the experience, partner with an expert who knows how the market works.
Be sure to partner with the right person, though. A well-versed investor will be able to provide you with immeasurable value. If they’ve been in the business for years, they probably have an established network of vendors that can conduct repairs, maintenance, and more at a competitive price. Plus they may already have a property management agency that they can count on. This will save you a lot of time. In other words, partners have the connections you need to make your investment work.
What are the Cons of Real Estate Partnership?
It’s inevitable for you and your co-investor to disagree at times. One of the downsides to a real estate partnership is that there’s a potential for tension. Conflict is unavoidable, but bear in mind that conflict that occurs too often can result in poor property management. This is especially true if you and your partner can’t get on the same page when it comes to your property management strategy.
Furthermore, there may be issues with your responsibilities. If duties aren’t delegated well, there will be a “blame game” down the road. And who will suffer from your conflict? Your tenants, who will undoubtedly want to move out in the end.
Problems may also arise when one partner contributes more. This can create disproportion in the partnership, and soon, the partner will feel that they’re in an unfair situation. They may demand more in terms of profit, as they believe that they should be rewarded for their efforts.
Finally, if one partner decides to leave, the other partner will have to pay more. If the exit was unexpected, it can be a huge financial burden for the remaining partner. In some cases, they may have to stop their rental operations to sell their property.
What are the Pros of Real Estate Partnerships?
The primary benefit of real estate partnerships is their profitability. It’s no secret that real estate partnerships guarantee a greater return on investment (ROI). This is because partners contribute a mere fraction of the property’s price, but are able to earn more in terms of rental income.
Second, partners bring more to the table. If you were to partner with an investor who has been in the business for years, they’ll be able to add value to your investment in the form of expertise. Plus, partners with diverse investment backgrounds can help you navigate new markets as you begin to diversify your own portfolio.
Third, real estate partnerships help you free up your time. By dividing the day-to-day tasks, you’ll be able to make time for family, side businesses, and more. You won’t be over-burdened by the responsibilities that you’d otherwise have to do on your own. You and your partner can even find a property management firm – that way, neither of you will have to devote your time to your investment!
Finally, they’re a way to enter the market without the capital. If there’s an opportunity that you want to grab, but you don’t have enough capital, you can combine your money with your partner’s. You’ll never have to say “no” to a once-in-a-lifetime opportunity.
If you can’t decide whether or not you should invest in real estate with a partner, consult the investment experts at Luxury Property Care. We’ll walk you through what to expect from this type of partnership, as well as explain what you can do to make your property work for you, should you decide to find a real estate partner.