As an investor, there are many ways to partner with others to maximize profits. The key elements of any real Estate investment are the seller, the buyer, the property, the source of funds, and when you are flipping, the end buyer. As the buyer (investor), your role is pulling all of these resources together into a specific deal. However, you don’t have to always do that all by yourself. Formal and informal partnerships can leverage your investment business.
Basic Partnership Considerations
Real estate investment partnerships can be very complex or very simple. One of the most simple ones is an interest only loan. As an investor, you bring in a funding partner by agreeing to an interest rate, the length of the loan, and the security (usually a first mortgage on the property). Outside funding could come from your own network if you have a history of successful investments. However, you have many other sources worth considering. The home mortgage industry has evolved to include an almost endless source of funding. A little searching on your part will reveal everything from crowdfunding to individuals investing their 401k retirement accounts. Some are silent partners and others want a more active role.
A more complicated funding partnership can be a profit sharing arrangement. Writing a contract for a profit sharing arrangement can be more complicated and has many variables. You may chose to write up a contract for a single property that details the specifics about how the profits will be shared. Or you could enter into a Limited Liability Company that oversees multiple investment properties and again details how the profits will be shared.
Partnerships certainly don’t have to be 50-50 split. If, as the primary investor, you’re doing most of the legwork, you’re entitled to a higher percentage of the profits. You’re doing all of the research to find deeply discounted properties, negotiating the sales terms, overseeing the remodeling, and finding an end buyer. You may even be putting down earnest money and/or providing part of the purchase money. Under some or all of these scenarios, you’d certainly be entitled to a higher percentage of the profits.
Advantages to Bringing In a Funding Partner
Reasons why you want a funding partner:
- To bring other’s “skin in the deal” to lower your business risk.
- Enables you to spread your own resources across more deals to increase overall profits.
- Enables you to finance and complete more complex and more expensive deals with higher profit margins.
- Brings in experienced people to share knowledge and ideas.
- Increase your success and share it with others.
Issues to be concerned about:
- Clearly detailing agreements about how profits or interest will be paid.
- Don’t give up too much control of the deals.
- Be cognizant of extra reporting requirements, especially tax related.
- New partners trying to take too much control.
Good times to consider partners:
- Before you start looking for your next investment property.
- When partnering is more attractive than other financing options.
- As a method to reduce the cost of leveraging your own money.
- As a way to boost the confidence of future investors for bigger deals.
- When you have well-established investors and need a quick source of cash.
- When you’re already in multiple deals and are short on cash but another great deal comes along.
- When taking on a new, creative investment deal that your investor has more experience with.
The most common problem that comes with partnering on real estate deals are the legal aspects. It’s highly recommended that you check out the credentials of new investors as much as they check out yours. Also, have a tightly written contract, partnership agreement, or LLC agreement written and attach it to the title of the property to prevent a money partner from taking out another mortgage or selling the property out from under you.
Please comment about your real estate investment partnering experiences.
Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for 10 years. He also draws upon 30 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest. With the Pacific Ocean a couple of miles in the opposite direction.
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