Cons of Investing in Real Estate With a Partner
It’s also important to be aware of the downsides of investing in real estate with a partner, such as:
Split Profits
While investing in real estate with a partner may limit your risk, it also reduces your profits. You’ll have to share any earnings from the property with all involved partners. Splitting earnings may mean it takes longer to earn a profit. Outlining the financial expectations of the asset, including who pays for what and where expenses come from, can help avoid discrepancies. Forming a limited liability company (LLC) can help you set specific duties and financial goals, ensuring everyone involved in the investment is on the same page.
Conflicting Ideas
Disagreements are always a possibility when working with other investors. Setting up a strategic plan for handling conflicting ideas ahead of time can help you create a partnership that works. It’s also a good idea to go into a shared investment with the understanding that you may not always be able to have the final say. You may have to compromise and be willing to accept others’ ideas, which could ultimately affect the profitability of your asset.
A great way to handle potential conflict is to outline a strategy for handling disagreements. For example, some partnerships may require a vote. Others may designate one investor to make final decisions.
Personal Conflict
Conflicting opinions and disagreements are also possible when working with a partner. If you and your partner cannot compromise or negotiate, it could affect your personal relationship. For this reason, it’s essential to choose your partners carefully. Evaluate how well you worked with partners on previous projects before agreeing to new ones.
Unequal Involvement
You may find that you and your partner are not aligned regarding involvement in the asset’s management. If one person spends more time in the business’s day-to-day management than the other, but both share equal profits, it can lead to disagreements. In addition, if your partner backs out, you could be left with a financial burden you didn’t plan for.
Tax Obligations
Taxes may look slightly different when investing in real estate with a partner versus as the sole investor. If you own a real estate asset on your own, you’ll report income and expenses on your usual individual tax return (Form 1040). However, with a partnership, each investor will file an entity-level tax return (Form 1065) that reports each investor’s income. This process can make filing taxes and claiming deductions slightly more confusing. It’s usually a good idea to consult with a tax professional or financial advisor when investing in real estate, whether as a sole proprietor or in a partnership.
Tips for a Successful Real Estate Partnership
If you decide that a real estate partnership is the right strategy for you, consider the following tips:
Define clear roles and responsibilities: Setting clear roles and responsibilities can help avoid disagreements. Anticipate potential conflict areas and outline how you’ll handle them if they arise.
Discuss finances: Creating a financial plan that includes detailed information on who contributes what, where the funds come from, how expenses are paid, and how you share and pay profits is crucial.
Legalize the agreement: It’s essential to legalize the partnership. The most common real estate partnership entities are LLCs, limited liability partnerships (LLPs), and S corporations. Discuss your agreement with a tax professional and a lawyer to ensure that you’re protecting your best interests.
Understand your strengths and weaknesses: Understanding your strengths and weaknesses can help you choose a partner with the needed experience and skills.
Choose your partner carefully: Think carefully about what you need most in a partner. You might want a partner with previous real estate experience or someone with a background in construction. Make sure your partner adds value to the business venture.
Investing in real estate with a partner offers many benefits, including shared risk and diverse skills and experience. However, it’s important to be aware of the potential downsides of a partnership, including conflict, disagreements, and shared profits. It can be helpful to discuss your real estate goals with a financial advisor to determine whether seeking a partner would benefit you.
At Anderson Advisors, we’ll show you the best strategies for investing in real estate. We’ll help you explore your options and finalize your plan, whether you form a partnership or invest on your own. Contact us today for a real estate investment consultation.