Airbnb, flipping, and long-term rentals: Oh my! The world of real estate investment is filled with near-boundless opportunities.
If you want to get into real estate investing but don’t want to go it alone, you have a few options you can pursue. But which is best for you—a real estate investment partnership or a real estate investment trust (REIT)?
Consider this post your crash course on real estate investment partnerships. We’ll cover what this type of partnership entails and how it’s different from a real estate investment trust (REIT). After reading, you’ll have all the information you need to make an informed choice about your alternative investment future.
Pros and Cons of Real Estate Investment Partnerships
Before we compare real estate investment partnerships (REIPs) and REITs in more detail, let’s first look at real estate investment and REIPs in general.
What are the benefits of entering into a partnership to invest in real estate? When you invest in real estate together, you and your partners can enjoy benefits like:
- More Capital: The first (and most obvious) benefit of investing in real estate with a partner or a group is that, by teaming up, you have more capital to invest. You’ll be able to access more and higher-value properties than you could have purchased alone.
- Combined Knowledge: When you invest together, you leverage the knowledge and experience of every group member rather than simply relying on your personal real estate experience (or the lack thereof if you’re a newer investor).
- Larger Network: Investing with a partner or group gives you access to your partner’s network. This shared network is valuable during the purchasing process but can also help you spread the message further when looking for buyers or contractors.
- Shared Responsibilities: Real estate can be a time-intensive investment. When you pursue your investment with a partner or group, you can share the load regarding maintenance, property management, and more.
- Relationship: Lastly, investing with a partner is just more fun! You can build your relationship with your partner or group and build wealth at the same time.
Real estate is one of the more stable investments you can make. Unlike stocks, real estate investors purchase a tangible asset. Real estate assets also tend to appreciate over time and offer investors opportunities for tax breaks and cash flow. If you’re letting real estate investments pass you by, you’re missing out on these opportunities and more.
Real Estate Investment Partnerships
Let’s start by discussing real estate investment partnerships. What does this type of investment partnership look 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).
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 will 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.
You can form a REIP using the following steps:
- Choose your partner(s)
- Align on budget
- Create a Real Estate Partnership Agreement or Operating Agreement to align responsibilities, duties, and more
- File your LLC (or create another corporate entity)
- Create communication channels to ensure continued alignment
- Pool resources and purchase your first property!
Any investor at any level can leverage this type of group structure as long as they are willing to go through the six steps outlined above. Once you develop a real estate investment partnership, you can invest in all types of properties with your partner. It’s important to note that you’ll have to research and purchase any properties you are interested in rather than having deals packaged for you by a professional investor.
Real Estate Investment Trusts
A real estate investment trust is similar in structure to a mutual fund. A REIT owns and finances real estate, allowing investors to generate cash flow from properties without needing to purchase or manage them. In short, a REIT will purchase or lease properties, then distribute income earned on those properties to all applicable shareholders.
Where a real estate partnership is more similar to an investment group, a REIT trades assets more similarly to stocks. Generally speaking, a REIT will focus on a specific area of real estate, such as office buildings or apartment complexes. Investors can choose which type of REIT in which they want to invest in but will not have control over the individual properties involved in the REIT’s transactions.
There are three different types of REITs:
- Publicly Traded: Individual investors can purchase shares of these REITs on a national securities exchange.
- Public Non-Traded: These are not traded on a national securities exchange but are registered with the SEC.
- Private: Traded only amongst institutional investors like banks or insurance companies.
A REIT is a good investment opportunity to diversify your portfolio if you don’t have the experience, time, or desire to purchase and manage investment properties independently. However, you will see significantly lower returns on this type of investment than you may be able to obtain when investing in property yourself.
Real Estate Investment Partnership vs. REIT
Real Estate Investment Partnership
An investment group structure in which two or more people come together to form a business entity and invest in property together.
A structure similar to a mutual fund where individual investors can receive dividends on property investments without managing or purchasing property directly.
Who it’s for
Anyone with the capital and desire to team up to invest in property together.
Individual investors looking to receive some benefits of property investment without managing or purchasing property themselves.
How it’s formed
Two or more people come together, align on goals, and form a business entity like an LLC before pooling funds and purchasing property together.
A real estate company will form a REIT by filing a Form 1120-REIT tax form. Individuals participate in REITs as shareholders but don’t generally form them.
You will purchase and manage properties directly with your partner, reaping the returns of your investments.
You will purchase shares of a REIT like buying stocks. You will receive dividends based on the portfolio of properties in the REIT you’ve invested with.
Managing Your Real Estate Investment Partnership
If you’re interested in real estate investing but don’t have the capital (or desire) to go it alone, you may want to explore a real estate investment partnership. Investing as a part of a partnership can feel intimidating, but it doesn’t have to.
The best way to invest with a partner successfully is to manage your partnership using open communication, goal alignment, and transparency.
To manage your partnership effectively, you’ll want to use an alignment tool like Tribevest. Tribevest can help you manage group communication, pool capital, manage taxes and business entity paperwork, and more. Get started with Tribevest today to begin your real estate investment journey.