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The Potential Pitfalls of Investment Property Partnerships

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Buying an investment property is a great idea, but there might be situations where it’s necessary to partner up with someone to acquire the property.  Most often these situations revolve around money – or lack thereof.  For example, if you want to go “big time” and buy a 20-unit apartment complex, you will likely have to partner with someone to come up with the down payment funds.

Generally speaking, there is nothing inherently wrong with forming a real estate partnership.  But you must consider the potential pitfalls before you jump in with both feet first.  One common pitfall is not having a clear exit strategy.  For example, you need to document what might happen if one partner wants to pull out, including some framework for a buyout price, how assets will be divided upon dissolution of the partnership, and how an investment-dissolving catastrophic event would be handled.

Another pitfall is failure to document how the actual workload will be divided.  You must specifically agree upon and document things like who will recruit and do tenant verification, who will manage existing tenants, who will work on repairs & maintenance, who will pay the bills, etc.  These types of tasks must be documented to foster accountability and manage everyone’s expectations properly.

Another pitfall is simply a failure to communicate and resolve differences of opinion.  For example, you may want to immediately evict a problem tenant but your partner might want to give him another chance.  Or you might want to update a bathroom while your partner is focused on updating the kitchen.  Or you might have more of an appetite to take risks than your partner.  No matter what the disagreement, you must talk it out and not let it fester, because this will result in a build-up of ill will and can result in something akin to a partnership “divorce.”

The bottom line is that partnerships are not inherently a bad idea, but you must consider all the angles and possibilities.  Most of all, make sure you consult with both an attorney and an accountant before you move forward.  And of course, have a real estate attorney craft all the legal documents.

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