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This Old House - Do-it-Yourself

Ins and Outs of Real Estate Partnerships

Written by Posted On Thursday, 14 December 2017 08:54

As a real estate investor, you are only one part of the deal. There is the buyer (you), but there is also the seller, the property, the funding source, and potentially the end buyer if you are flipping a property. Your job as the investor is to put all of these elements together to create the right deal. Although you can do this alone, you don’t have to. There will be times when you choose to create a partnership to leverage your real estate investment business.

Ways to Create Partnership

There are many different ways to bring a partner into a real estate deal. Let’s look for a moment at a few of them.

Interest-Only Loan Partnership: In this type of partnership, you bring on a partner that has the funds for the investment. You come to terms on an interest rate and loan length, typically using the property as security. During the length of the loan, you pay monthly interest only, with the principal paid at the end of the loan term. In this scenario, partners tend to take on a backer-only role, providing nothing more than the funds. However, some partners prefer to take a more active role in the management of the properties.

Where can you find funding partners? The best place to start is with your own network. This works especially well if you already have a proven track record in real estate. Other sources include crowdfunding, companies looking to invest 401K funds and more.

Profit-Sharing Partnership: In this type of partnership, the partner you choose will share in the profits of the investment property or properties. The partner may be providing funds, but they could also be providing management, construction, or negotiating skills. Typically, if you choose to partner with someone across several properties, you should consider creating a Limited Liability Company. No matter what, make sure your contract is written by a professional that understands real estate law.

When creating a profit-sharing partnership, the split does not have to be 50/50. How you split will depend on what each partner does and how their skill sets affect the ROI of the investment property. As you determine the split, look at who is doing the following activities:

· Researching properties to find the deal

· Negotiating offers

· Renovating or overseeing the renovation process

· Finding end buyer

· Putting down earnest money

· Providing funding for the project

Once you know each partner’s role in the project, then you can determine the percentage of profits for each partner.

Why Would You Want a Funding Partner?

There are many reasons to bring on a funding partner. Here are just a few of the most common:

· Reduces your personal risk by bringing in someone else to share in the risk

· Uses other people’s money so that you can use your own resources across a wider range of deals

· Gives you the ability to put together more expensive deals that will bring in a higher ROI

· Provides you with a partner that has more experience in real estate investing than you have on your own

Not every deal must have a partner. However, there are certainly times when having a partner makes sense. You should consider partnering with someone when you have found a great deal, but you do not have the cash or experience to see it through.

Common Issues With Partnerships

The most common issues with partnerships have to do with the legal issues surrounding such a union. To avoid partnership pitfalls, be sure to write you contract or LLC agreement using a real estate lawyer, and then attach this agreement to the title of every property included in the partnership agreement.

As you write your contract, consider the following:

· State clearly how the profits will be split and how any interest will be paid

· Detail how control of the deals will work stating who will do what and how it will be done

Also, be sure that you understand the reporting requirements for any partnership deal so that your taxes are not a nightmare at the end of the year.

If you see a deal that you can’t do alone, you should definitely consider a partnership, whether for funds, experience, or both. If you’d like more information on partnerships or are seeking a partner for a specific deal, give me a call. I’d love to find a way to help.

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John Trautman

John Trautman has spent his entire adult life in real estate. Purchasing his first property at 23, he learned the process of flipping and real estate holding from the ground up. Real estate continue to be his passion while he spent eight years as an account executive and later a vice President for Washington Mutual in the mortgage division. Holding the position of President’s Council and several years of President’s Club, he learned the lending business from the mortgage office perspective and lender perspective. Throughout his life he has also been a small business owner, commercial real estate holder, property designer, and house flipper.

During the downturn, John followed the deal to Detroit, Michigan, where he invested in single family rentals and multi-family dwellings. Once his returns were realized, he moved quickly to Arizona to invest in another distressed market.

His passion for making a deal and real estate has lead him to create a hands-on real estate investment mentoring club called Real Estate Knowledge Institute

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