Investing in real estate on your own can be challenging, especially when you’re first getting started.
I know because I’ve been there.
To make things easier, many real estate investors decide to form partnerships and work together.
Why do so?
Partnering up allows investors to share expertise and combine financial resources, allowing them to find more lucrative investments in the long run.
If you are considering entering into a real estate partnership, it is very important to create an agreement in writing first.
A real estate partnership agreement ensures that both parties are on the same page before you get started.
Most importantly, creating a written agreement can also help you avoid legal disputes in the future.
Let’s break down what a real estate partnership agreement is, how to create one, and key mistakes to avoid.
What is a Real Estate Partnership Agreement?
A real estate partnership agreement is a written document that outlines the terms of an upcoming real estate deal among two or more parties.
For example, two real estate professionals might sign an agreement before working together on a co-wholesaling business.
In a real estate partnership, both parties involved use their expertise, contacts, and capital to invest in property. Then, when the deal is complete, they split the profits.
Advantages of Forming a Real Estate Partnership
The biggest advantage of working in a real estate partnership is that the two parties can combine their skills and financial resources.
For example, you might not have the funds to purchase a property on your own, but splitting the cost with another real estate investor makes it more accessible.
Working in a partnership also means you can split the workload according to your strengths and weaknesses.
For example, one partner might have more real estate contacts and is stronger at networking, while the other has more experience with taxes and legal paperwork.
Disadvantages of Forming a Real Estate Partnership
While forming a real estate partnership has many benefits, there are also plenty of potential downsides to be aware of.
Most notably, you’ll need to split the profits from each of your deals with a partner, which means they won’t be as lucrative as if you had handled the deal entirely on your own.
To ensure that the partnership goes smoothly, you’ll need to split responsibilities and finances fairly.
If you don’t put an agreement in place ahead of time, you could end up dealing with frustrating or uncomfortable conflict, rather than enjoying a lucrative investment.
Elements of a Real Estate Partnership Agreement
So, what should your real estate partnership agreement include? Here’s what I’ve included in mine throughout my real estate career.
- Partnership details: The agreement should include both partners’ names, the start date of the partnership, your location, and the name of your business if you have one.
- Financial status: Go into detail about each partner’s financial status, including their expected contributions to the partnership, their current credit rating, and any relevant debts they currently carry.
- Profit allocation: Specify how all profits from the deal will be allocated. In many cases, partnerships opt to split profits 50/50. However, there are some instances where you might opt to split profits unevenly based on your contributions.
- Roles and responsibilities: Break down the roles and responsibilities of each partner, including when you will work and what tasks you will be expected to complete.
- Termination clause: Identify circumstances in which the partnership would be terminated, as well as how resources would be allocated in the event of a termination.
Real Estate Partnership Agreement Template
If you’re not sure how to create a real estate partnership agreement, a template can help you get started. There are templates available online from PandaDoc, TemplateLab, and Legal Templates.
What Are The Tax Benefits of a Real Estate Partnership Agreement?
For tax purposes, most real estate partnerships are pass-through entities.
This means that each partner pays taxes on their own, rather than the business paying corporate taxes. In most cases, taxes are relatively straightforward for all parties involved.
As a general partner, you will pay individual income taxes on your share of the profits from your real estate dealings. You will be taxed at self-employment rates.
If you exit the partnership, you will need to pay capital gains taxes on the sales of your properties. Consider working with a tax professional for more personalized support and advice.
3 Mistakes to Avoid When Doing a Real Estate Partnership Agreement
Many investors jump eagerly into real estate partnerships, only to find that mistakes hold them back from building a successful investment portfolio.
Here are the mistakes I’ve seen with a real estate partnership agreement time and time again – and how to avoid them.
1. Not Getting Financial Details in Writing
Many real estate investors fail to get the important financial details of their partnership in writing, especially if they have already built trust with the other party.
However, this can put you at risk of legal problems later on if there is a disagreement between the partners. Always get an agreement in writing that you can refer back to if you need to solve a dispute.
2. Not Aligning on Long-Term Goals
If you’re excited about a possible upcoming deal, you might jump into a partnership without thinking about the long-term consequences first. Before starting a new partnership, take the time to make sure you’re aligned on your long term goals and vision for the partnership.
3. Making Emotional Investment Decisions
It’s easy to get swept up in the excitement of a new real estate partnership. However, this often pushes investors to make decisions emotionally, rather than using logic.
For example, if you’re close with your real estate partner, you might offer to split the profits 50/50, even if one partner is doing significantly more work than the other. This could cause conflict down the road, even if you’re happy with the arrangement now.
Instead, take time to think clearly about the agreement and negotiate something that works for both of you. Trust me: having hard conversations at the beginning of the partnership can prevent challenges later on.
The Bottom Line: Real Estate Partnership Agreement
By working in a partnership, you can invest in exciting new real estate properties that you wouldn’t be able to access on your own.
I recommend to always have a written agreement when working in a real estate partnership to prevent conflict and legal challenges later on.
