In this article, I will share what is real estate partnership, how to build a strong and secure partnership, the pros and cons of it, and the legal side of forming a partnership in the simplest form. But first, you need to know why forming a partnership is necessary to succeed in the real estate business. Here is a list.
- It leverages the other person’s knowledge and unique view on the growth of the business.
- It protects your other assets by forming an LLC.
- You can easily invest in larger, more complex investments that would be out of reach of a single man.
The reason can be more than these three, but these are the primary reason people businesses do a real estate partnership agreement. But what exactly is it?
What is a Real Estate Partnership?
A real estate partnership is a legal business entity designed to invest in a big property project. They are formed for buying and selling properties, but we also have rental property partnerships. It is a legal entity, you must talk with a certified attorney about how to form it, as I am not the expert.
But these partnerships have three main types you must know and which one can give you all the benefits you need. Let’s understand the LLC first.
Table of Contents
1. Limited Liability Company (LLC)
It is one of the best forms of partnership you can form. Investors come together to purchase real estate through an LLC that sperate that new purchase from their personal assets. If that LLC faces a legal problem, your other LLC and your personal asset will remain safe.
It’s an asset protection strategy people use to create a big wall in front of legal disputes. People are not that good nowadays. They are looking for an opportunity to take you down. You must form an LLC if you want to protect your future.
2. Limited Partnership (LP)
The second one is a Limited partnership. As the name says, it limits the liability of the partners. But there must be one partner who is responsible for everyone that happens to the company and its daily management of it. It’s not that secure like LLC, but for an individual investor, it does the work. LLC is created for big companies. But for beginners, the LP can work.
3. The S-Corporation
You can form an S-corp, but it’s not ideal for real estate investment as it has many problems and a low asset protection strategy. An S-corp limits the required employment taxes required to be paid. The difference between these three is that the liability of every member and LLC helps you in every way.
How to Setup a Partnership Agreement?
Hire an attorney, and he will set up the legal procedure for your real estate partnership. But you also need to follow the below steps to make sure you are choosing the best man for the job, or else that partner will scam you.
1. Find a Good Partner
You can identify a partner from your personal friend circle or a recommendation from a friend and family member with experience in the field. Discuss your business goals, criteria, and the timeline for a deal and see what he thinks. And when selecting a partner, look for these qualities.
- A man who is trustworthy and honest.
- He has a good track record in the business.
- He loves the property business and is very passionate about it.
- His view of doing business matches your’s view.
- That man values relationships over money.
Find a partner or a team member who has these traits, and he will prove to be a good partner. A good background check is necessary before you form a partnership.
Read, also: How to build a real estate team
2. Create a Clean Agreement
A partnership must operate under a valid agreement. If you don’t set up a clean agreement, the state may impose default rules for you, which may not be helpful to your firm. You can create any partnership like LLP, LLC, and SP, but to your own benefit, create a clean and strong agreement.
3. Set Rules for Partnership Splits
The actual split you decide on can become complex. Hire a financial professional to create clean splitting rules for each partner. The general partner will take a larger percentage compared to the normal partner. Here you must understand how you will be paid.
Pros of a Partnership
- Partnerships can help you reduce your property taxes much more than a normal personal-based investment.
- It is easier to protect and diversify all of your assets in a different partnership instead of one or two.
- A partnership will help acquire more money from different investors, which allows you to buy larger and more complex properties than a single investor can think of.
- It is a great source of learning for new investors as they will see how professional investors handle the partnership.
Cons of a Partnership
- Creating different LLCs for different investments will cost you more money.
- All the profits the investment makes, need to be shared with other partners, which may reduce your personal ROI.
- More money contribution may require if the investment does not perform as expected.
- Mismanagement of the responsibilities of each partner can lead to conflict.
Last Words
So this is how you build safe and secure real estate partnerships by following the legal and ethical rules. Hire an attorney to help set up an LLC for you. So that, you can protect your investments better and make more money. And team up with the person who fits the best, not who you like the most. Use logic, not emotion. You will succeed early.
