The idea of forming a real estate investment partnership can no doubt be exciting. However, if you don’t practice due diligence, the process of forming a partnership may end up causing you more harm than good.
The reality is, creating a real estate investment partnership agreement is a process that involves many moving parts. If you master each one of these parts, though, you can quickly elevate your investing career, as you’ll be able to confidently work alongside someone who can help you to move to another level.
Here’s a look at what real estate partnership agreements involves between general partners and limited partners.
A general partner is a seasoned property manager, for example, who is interested in expanding his or her real estate investment strategy. As a general partner, you’ll form a real estate investment partnership agreement with limited partners—outside, accredited investors who are willing to finance your real estate projects.
Pros and Cons of Being a General Partner
One benefit of being a general partner is that you’ll dictate how your real estate projects go. You’ll use the capital contributions from your limited partners to pursue potentially profitable opportunities that both you and your limited partners can benefit from. With your limited partners’ financial contributions, you can more easily buy a property that you couldn’t purchase on your own.
Because your limited partners are helping to fund your projects, they will receive shares of ownership in the deals. They won’t always have management-level control in your projects. However, they’ll receive the benefit of having less exposure to risk.
One of the most important components of a real estate investment partnership agreement is the section that outlines what both parties’ responsibilities are. If you’re a general partner and you don’t clearly define your roles and your limited partners’ roles, your partnership may be fraught with conflict down the road.
General Partner Duties and Expectations
As a general partner, you’ll be responsible for scouting properties and even handling repairs/construction, unless you have another general partner working alongside you who can handle this. General partners are also responsible for performing marketing and sales duties, as well as any other essential business operations tasks.
If you do have a fellow general partner working with you, be sure to spell out in your real estate partnership contract how much time both of you will commit to the business as well; this will prevent feelings of resentment in the event that one person feels that the other person isn’t pulling his or her weight in the business.
Limited Partner Duties
A limited partner’s main function is to simply invest money and then wait for their returns. They’re passive real estate investors who don’t take part in and influence your partnership’s everyday operations directly. Instead, they must put their trust in you, the general partner.
Limited Partner Expectations
Before entering a real estate equity partnership agreement with you, limited partners must understand that investments in a limited partnership are typically long-term ones in the real estate world. In other words, your limited partners might not have the flexibility to suddenly resell their investments if they need to do this. Unlike with stocks, which they can cash out at any time, they might have to wait for a property to be sold before they can pursue other investment opportunities with their capital.
Also, because the real estate market fluctuates frequently, you can’t guarantee as a general partner that all your deals will be profitable, as project expenses may sometimes exceed the budget. Your limited partners need to understand and accept this reality. At the same time, your goal is to remain profitable so that limited partners will continually want to work with you; only then can you consistently be in a good position to grow your business.
The financial aspect of your partnership is important to solidify before you make your partnership official. For example, if your business incurs losses, your limited partners will be liable only for the money they contributed, not for all of the business’s debts. Meanwhile, as a general partner, you can expect to be held liable for your business’s debts. This means that your business assets and your personal assets may be needed to pay off your business’s debts.
It’s critical that you firmly grasp your real estate company’s financial situation. The more you understand your financials and clarify them, the less likely you are to experience complications with your fellow business partners in the short and long terms.
Purchasing investment properties can certainly be a thrilling yet intimidating process. However, partnering with other investors is a smart move, as it allows you to leverage their capital and your capital to achieve new heights in the real estate investing world. Of course, both you and your partners need to create a strong real estate investment partnership agreement to put yourselves in the best position to reap financial rewards.
I can walk you through the process of developing such an agreement. I’ll show you how to tackle potentially confusing and contentious areas like general partner and limited partner compensation. I can also help you to figure out how to choose the right partners for your business, as not all potential partners may be right for your needs. Get in touch with me today to learn more about how you can make the most of your real estate investment partner in the years to come.
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Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.