For many investors, real estate investment opportunities seem out of reach due to a lack of financing, experience or market expertise. The good news is that you can still invest in real estate with the help of a partner.
Joint ventures enable investors to make deals that they would be otherwise unable to secure on their own. Partners bring additional resources and knowledge to the table that can ensure the success of a real estate investment opportunity.
However, partnerships don’t always have positive outcomes. Some partners experience major losses and fallout due to some common missteps. The good news is, you can avoid these mistakes by following a few key tips and pieces of advice for real estate partnerships.
Invest with someone you know and trust
While a joint venture partnership is centered around business, it requires a significant amount of trust on the part of the partners. Working with someone who you already know and have a trust relationship with can help you feel more secure in your real estate deals. It also helps you avoid the risk of working with a total stranger.
Limit the number of partners
You might be tempted to bring in several partners to a single deal in order to minimize the amount of cash you have to put in upfront for an investment. But, deals with too many partners come with additional risk.
The more people that are involved in a deal, the more complicated it becomes. Not only do you have to juggle the complicated relationships between various partners, you also have to deal with a lower return, since the profits are split up among so many different people. You should limit your joint venture partnership deals to two partners for a three-way split of the property and the profits.
Define expectations and draw up terms
No matter how you choose to structure your partnership, you need to have clearly-defined expectations and terms before you enter into any real estate deal. Even if you already have a relationship with the person you are partnering with, it’s still important to have a written agreement that outlines all of the relevant information about the venture. All involved partners should carefully review the terms of the agreement and sign a written copy for all partners to keep on file.
Structure the partnership the right way
There are a variety of different ways that you can structure a real estate deal depending on your specific needs, preferences and goals. No single structure is right for everyone, so you need to evaluate the relevant circumstances and consider the different types of partnership structures you can choose from. Here are a few of the most popular types of partnership structures:
•50/50: The 50/50 partnership structure is considered the traditional model for joint venture investing. With this structure, both partners have a 50 percent stake in a property and, typically, they both contribute equal capital and work into the investment. In some cases, a 50/50 partnership gives each partner equal ownership of a property with one partner investing more financing into the property and the other investing management and sweat equity into the venture.
•60/40: With a 60/40 structure, one partner makes a bigger investment than the other in exchange for a bigger share of the equity. The 60 percent partner might put up a larger capital investment or they might put additional work into the property on top of their financial investment to earn a larger equity stake. This split still gives each investor a large share of ownership in the property, but one partner is given more ownership and takes on greater responsibilities.
•75/25: In a 75/25 split, one investor puts in more capital for a larger percentage of property ownership. This arrangement isn’t always ideal for investors and is often used when one partner is unable to secure financing on their own and they need a partner to get the investment financed.
These aren’t the only ways to structure a partnership. Depending on how many partners you have and what the contributions are, you could end up with any combination of ownership—from 62/38 to 10/55/35!
Always have a contingency plan
No matter how much time you put into structuring and preparing for your partnership, you need to have a contingency plan in the event that circumstances change or something goes wrong. You should think through different scenarios that might come up with an investment and make a plan to help you minimize loss and get yourself back on track to meet your goals and salvage your investment.
Monika Jazyk, Rachel Oliver and Gillian Irving are the “The Mothers Of Real Estate” aka MORE. With almost 30 years combined experience and over $100M in deals across multiple strategies, new investors have been turning to MORE for comprehensive real estate fundamentals training since 2016. For MORE information and to register for the online course, click here.