Investing in real estate is a great way to earn passive income and quickly grow your wealth. Once a rental property starts to cash flow, you will start seeing significant returns. And if you choose to sell the property after a few years, you can use the proceeds from the sale via a 1031 exchange to invest in more real estate.
That being said, coming up with the initial capital to invest with can be difficult, especially in today’s seller’s market. Between realtor fees, closing costs, property taxes, home maintenance, and upkeep, the bill can quickly rack up.
To save on costs, many people opt to invest with a partner, someone who can share the cost and responsibilities of owning an investment property while taking some of the burden off themselves.
But how can you build a successful partnership? And how can you tell if someone is a good partner for you? Read on for five tips on how to set up an investment relationship.
1. Partnership entities
Legally, real estate partnerships can be created via a number of “pass-through” entities. Some of the most common are the Limited Liability Company (LLC), Limited Liability Partnership (LLP), and S-Corporation.
These entities provide legal protection and tax benefits for the partnership. For instance, if any claims arise against the business that the partnership conducts, the investors’ other business assets or personal belongings outside of the partnership cannot be seized.
2. Complementary skill sets
When looking for a partner, try to find someone with complementary skill sets to yours. Not everyone is good at everything. One person may be great on the administrative side of managing properties, such as bookkeeping, managing contracts, finding tenants, and knowing when to buy or sell a property. The other may be good at physical labor such as home renovation, making repairs, or maintaining the lawn.
The more skills a partnership collectively has, the more money can be saved in the long run. For instance, if neither of you knows how to install flooring, then you will have to pay an outside contractor to do it. Or if you both do not know how to negotiate with a seller whom you are trying to buy a home from, you’ll have to hire a realtor.
3. Access to new resources
Try to find a partner who has access to resources you might not have, such as capital to avoid property loans or an extensive network of potential renters or buyers. Resources can include a network of contractors, interior decorators, architects (if you’re building a new home), lenders, lawyers, or even access to real estate auctions.
A lot goes into investing in a property, and the more resources you have at your disposal, the better off you’ll be.
4. Clearly defined roles
The key to any successful partnership is having clear expectations about each other’s roles. Some things to think about as you are laying out responsibilities include:
- Short sales
- Construction management
- Property management
- Asset management
- Property purchases and sales
- Business development
As you are crafting your roles in the partnership, review your own strengths and weaknesses. Take on the things you are confident you can do or learn how to do quickly, and leave the rest to your partner.
Also, make sure you understand whether your partner will be passive or active in the management of the property. Some partners simply provide capital and leave the rest to the other partner, while others are jointly involved in all aspects of management. Understanding your roles before jumping into an investment can help avoid confusion.
5. Create an agreement
Investing in real estate, especially as a partnership, is a big legal undertaking. If your partner does not deliver on their end of the agreement (such as providing capital or making repairs), then you may be entitled to compensation. If you do not have a contract or written agreement in place before moving forward, however, it will be hard to prove that your partner did not keep to their end of the bargain.
At minimum, your agreement should lay out a clear explanation of each partner’s roles and responsibilities; a breakdown of each partner’s finances; an outline of how the partners’ assets will be protected; and a written commitment by each partner to the business.
Right now, it’s an exciting time to invest in real estate. Between historically low interest rates and a booming seller’s market, there is plenty of opportunity to make great returns. If you don’t have the capital or resources to invest on your own, consider finding a partner. Just make sure you’re both on the same page before you start!