Ready to Partner Up? Read This First
There are lots of great things about partnering with another investor to buy rental property. There’s less risk because another person is shouldering some of the burden, you have someone to bounce ideas off of, and there’s someone else to handle some of the workload associated with your investment.
However, there are definitely a few things to consider before you enter into a partnership with anyone. After talking with some of my investor pals who’ve been down this road, here are a few of things they wish they would’ve known before they partnered up.
You’re going to make less money
To be fair, any investor with a functioning brain knows they’re not going to make as much as they would if they were investing solo and reaping 100% of the profits. You get a percentage and they get a percentage; it’s that simple. But many of the people I talked to said they were surprised at just how big of an impact this had on their pocketbook – especially when it came time to sell the property. My point is this: be conservative in your income/profit projections so you’re not surprised later on.
You’re going to have to compromise – a lot
Any partnership, whether it’s business or personal, requires compromise in order to be successful. When there’s money involved, though, you may discover that you have to compromise even more, and that what you decide on carries much more weight. Everything from the location of the investment to the exterior paint color must be agreed upon by you and your partner, and you’re bound to have a difference of opinion somewhere along the line. Hence, compromise. Be ready for it.
You find out who someone really is
When there’s money on the line, people reveal their true natures. This often comes as a surprise, especially if you were friends before you were partners. Many a friendship has been destroyed by a partnership that turned sour, so be prepared for this. The best thing you can do is to make sure you have a solid written agreement in place from the start. Both partners need to understand and agree to the terms, and if one isn’t holding up their end of the bargain (which happens all too often), then there needs to be plan in place for dealing with it. You also need to go into the partnership knowing that, by the end of it, there’s a very real chance you may not be friendly with this person anymore.
It’s not as easy to leave a partnership as you may think
So what happens when you want out? One of two things: you either sell the property and each take what’s rightfully yours, or the partner who is leaving sells their shares to the other. You can’t just walk away, even if you’re operating at a loss. There’s a legal mess you have to untangle if you want out, and you have to do it the right way, otherwise you could be faced with a lawsuit.
Partnerships aren’t all bad, and I don’t mean to make it sound like they are. But there are some things you need to be aware of going into one. It’s a much different business model than if you were operating solo, and familiarizing yourself with the pros and cons will help ensure that you don’t get stuck in a bad partnership and suffer a major loss because of it.