Real estate investing is inherently collaborative. Every investor, no matter how seasoned or successful, needs a team of professionals in order to buy, rehab, and rent out a property. For a lot of investors, it makes sense to team up in order to increase their buying power and tap into each other’s skill sets and connections.
Of course, when it comes to forming a real estate partnership, you’ll want to put it in writing, even if it’s a partnership with someone you trust. A real estate partnership agreement will lay out all of the terms of your partnership. Also, putting everything in writing will force the partners to make decisions about issues they hadn’t considered.
Active vs. Passive Real Estate Partnership Agreements
There are two different types of real estate investing: active and passive. In an active real estate partnership agreement, each partner contributes their own labor to the project. While each partner may do different things, they each put in approximately equal amounts of direct labor.
In a passive real estate partnership agreement, the roles of the partners tend to be unequal. One party may contribute more financially, while the other party may contribute more to the sweat equity of the property.
The Must-Haves in Every Partnership Agreement
While partnership agreements will vary, there are four different items that are critical to put in writing.
- The roles and responsibilities of each partner
There is no shortage of tasks with real estate investing, especially with active investors. Some of the roles that need to be delegated include acquisitions, finances, construction management, property management. You can also specify which duties you’ll share. This is a great way of getting clear on what each partner will be doing.
- Financial
One of the main incentives for partnering is being able to pool more financial resources together. Typically, by the time you’re ready to put your agreement in writing, all parties should have a clear understanding of what each partner’s financial obligations will be and how profits will be divided. If these issues have been sidestepped, forming an agreement will help make it clear exactly what each person’s stake in the investment is.
- Commitment Level
In addition to establishing what duties each person will be responsible for, it’s also a good idea to talk about how many hours each partner will be contributing to this. This can be a challenging conversation, as many entrepreneurs get into real estate so that they can set their own schedule. But getting specific about how much time each party can contribute will also reveal whether you have unrealistic expectations. For example, if a partner is promising to handle property management, marketing, and maintenance, but they’ll only have five hours per week to get all of this done, that will help the partners work together on a more feasible plan. You should also have conversations about any vacations you plan on taking, what your outside obligations are, and whether there are certain days of the week that either party is unavailable.
- Asset protection
While the market has been exceptionally robust, real estate investing is not a risk-averse. As investors, you need to think about protecting your personal assets. A real estate partnership agreement should specify what type of business entity you have formed in order to protect your personal assets. When you’re choosing the type of entity, you’ll want to consider which type of entity, typically an LLC, will help ease your tax liability the most.
Conclusion
The creation of a real estate partnership agreement is an important process. It will get partners to ask questions and discuss potential situations that may have been glossed over. It’s also useful to think of the agreement as something that will be amended over time. After all, your needs are likely to change as your business grows, so you wouldn’t want to make a long-term commitment to an agreement that you’ve outgrown.
