So you’ve found a real estate investment, and have some partners who are interested, but don’t know how to structure the partnership?
You’ve landed in the right place.
We’ll cover how to structure your real estate investment partnership (REIP) so you’ll have all the information you need to make your partnership successful.
But first, why is real estate worth forming a partnership for? Well there are a ton of great reasons.
- It’s safe: Real estate is a real asset, so there are many uses for it, such as living in it!
- Cash flow: You can rent, lease, STR (short-term rental), and flip real estate to create another income stream.
- Flip it: If you don’t want to actively manage real estate, you can always buy, flip and sell.
- It appreciates: In general, real estate typically appreciates in value because of the land it sits on.
- Leverage it: You can pull money out to improve or buy more real estate.
Now that you know some great reasons for investing in real estate, let’s dive into why you should form a real estate investment partnership and how to structure it.
Reasons to Form a Real Estate Investment Partnership
There are many reasons why you should form a real estate investment partnership.
- Pool capital with others to get into larger deals that you wouldn’t otherwise have access to
- Instead of assuming all the risk investing as an individual, spread the risk amongst a group of people.
- Pass through a partnership entity instead of muddying your personal finances with your investment finances.
- Learn and grow together! Forming a partnership with others provides experiential learning so you and your group can level-up together.
Active and Passive Real Estate Investment Partnerships
Let’s start by discussing what a real estate investment partnership is and what it looks like.
In a real estate investment partnership, two or more people come together to purchase an investment property. The players in this type of partnership can be either active (directly involved with managing the property) or passive (contributing only cash).
- Active real estate partnerships: each member of the partnership is actively working on the project on a daily basis For example, three investors purchase a rental property where the partners are taking care of property management tasks, maintenance, and repairs.
- Passive real estate partnerships: typically formed to pool and raise capital to leverage the skill set of one partner that the other partners don’t have. For example, a few high earning W-2 professionals that don’t have time to actively invest, leverage a real estate investor’s skill set.
Related Read: Real Estate Investment Partnership vs. REIT: 4 Key Differences
Real Estate Investment Partnerships Pass-Through Entity
A real estate investment partnership is a pass-through entity. Since your business relationship doesn’t qualify as a corporation, you’ll be able to avoid paying corporate income taxes through this structure.
You’ll need to pay taxes on any profits you earn from the property as an individual, which means you’ll be open to more personal liability using this structure. You can mitigate this risk by forming a corporate entity like an LLC for your partnership.
How to Structure Your Real Estate Investment Partnership
You can form a REIP using the following steps. Before forming a real estate investment partnership, it’s a good idea to involve a trusted professional who is familiar with partnerships, such as a real estate attorney, financial advisor, or Tribevest to help avoid any issues.
- Choose your partner(s)
- Align on a budget
- File your LLC and Open a Business Bank Account
- Create a Real Estate Partnership Agreement or Operating agreement to align responsibilities, duties, and more
- Create communication channels to ensure continued alignment
- Pool resources and purchase your investment property!
It’s important to note that any investors at any level can leverage this type of group structure as long as they are willing to go through the six steps outlined above. We’ll dive deeper into this structure next.
Related Read: Buying an Investment Property With a Friend: 5 Key Considerations
Choose Your Partners
Investing together is much different than grabbing dinner and drinks. You’ll want to make sure you trust the people you’re investing with. It’s important to choose partners who have bought into the idea of forming a real estate investment partnership and you are aligned on a mission.
Understanding your potential partners investment track record and their previous and current deals will help with any red flags when it comes to the investing part of the partnership. Leveraging partners that have particular knowledge in real estate, investment strategies or networks and communities can help.
Of course you should get along and trust each other, so personality is also important when choosing your partners.
Align on a Budget
Once you choose your partners, it’s important to align on a budget. How much is each partner willing to contribute? Is it a lump sum, bi-weekly or monthly contribution? Understanding what everyone’s budget is will help your partnership stay focused on your investment goals and what is realistic.
If you already have a deal in mind, what is the total amount required for the investment? Determine what the cash inflow is. What is the return on investment? What are the expenses? Answering these questions in advance will help ensure there are no surprises down the road when it comes to budget and finances.
Create a Real Estate Partnership Agreement
A real estate partnership agreement or operating agreement will outline your financial and functional decisions. This includes the powers, rights, duties, liabilities, and obligations of all the members. This is a contractual agreement that brings clarity to the rules and operations of the partnership.
It is considered best practice to have an agreement and all members of your partnership must sign it so it becomes ratified. This will protect the status of your partnership, especially in times of conflict, to ensure the business will carry on even if there are issues. It also helps mitigate any personal liability.
The agreement should outline ownership, new member process, responsibilities, duties and powers of members and managers (member-managed or manager-managed) profit and loss allocation, meetings and voting, management, buyout and buy-sell provisions.
This is the part where it may be best to consult an attorney or legal counsel to draft the agreement or use Tribevest who will provide a template and collect signatures within the platform.
File your LLC and Open a Business Bank Account
To make things official for you and your partners, you’ll want to file an LLC. There are a number of services like LegalZoom or Tribevest that can help you with this. An LLC formalizes the pass-through entity for your partnership. It is best practice to use this entity for investing and separate your personal finances and assets.
Remember when you file your LLC, you’ll need to think about compliance in the years to come. Selecting a Registered Agent and Automated Report Filing when filing your LLC will remove any compliance headaches down the road.
After you’ve filed your LLC, you’ll receive your articles of incorporation and EIN. This will enable you to start a business bank account so you can keep your professional finances separate for tax purposes. This bank account can be used to pool capital between the partners and disperse income appropriately.
Create Communication Channels
Once the heavy lifting of getting your legal partnership structure setup is done, you’ll need to make sure to create communication channels between you and your partners. Open communication and transparency is vital to any healthy partnership.
Using tools like Slack, Discord, or Tribevest, you can operate with transparency and never leave information in the dark.
Pool Resources and Purchase
This is the exciting part! It’s time to take action. Now it’s time to pool your know-how and capital to get into a real estate deal. By setting up the business bank account, you and your partners can schedule contributions and begin pooling capital. Once you’ve pooled your capital, you can go do your real estate deal. And hopefully that’s just the beginning!
The best way to invest with partners successfully is to structure a strong real estate investment partnership. The partnership will work if there is open communication, goal alignment, a legal structure and agreement, and transparency.
Partnership structures are Tribevest’s bread and butter. Tribevest helps you put the structure in place that you need to invest with your partners safely, easily, and transparently. If you’re looking for an all-in-one comprehensive partnership structure for your real estate investment, look no further.