What are major key points to include in an operating agreement with a partner?

Question

I'm currently looking to purchase my first investment property this year and have determined that I will need a partner to help me purchase. I have some family that are interested and I feel as though we will make good partners. I do want to set clear boundaries especially since it is family, and make sure we all understand our business responsibilities to this investment.

When setting up an operating agreement with a partner, what are key points, or main factors that are important to include? Also, what are other factors that many first time investing partners do not consider when starting out on their first purchase?

Jared Hottle · Answer

When setting up an operating agreement with a partner, there are several key points that should be included: Distribution of profits and losses: This should include how profits and losses will be shared among the partners, as well as how they will be allocated for expenses such as property management, repairs, and maintenance.Decision-making authority: This should outline who has the authority to make decisions regarding the property, such as whether to buy or sell, and how disputes will be resolved.Capital contributions: This should include how much money each partner is contributing to the partnership and how it will be used.Exit strategy: This should outline how partners can exit the partnership, such as through buyout provisions or the sale of the property.Role and responsibilities: This should outline the specific roles and responsibilities of each partner and how they will be held accountable for their actions. Other factors that many first-time investing partners do not consider include: Liabilities and Indemnification: Outline the specific liabilities and indemnification that each partner will have in case of any legal issues.Tax implications: This should include how taxes will be handled and reported for the partnership and how it will affect each partner's personal taxes.Insurance: This should include what kind of insurance will be in place to protect the partners and the property.Legal and accounting: This should include who will handle the legal and accounting aspects of the partnership, and what the costs will be.Risk management: This should include how the partners will handle and mitigate any potential risks associated with the property. It's important to have a clear, written agreement in place that covers all of these key points and other factors, to avoid any confusion or disputes down the road. It's also important to consult with a legal professional to review the agreement before signing it.

Brett Deas · Answer

What happens if somebody wants out? Divorce? Death? Those are a few of the major points I left out of my first agreement (never became a problem) but when doing something with family it is key that those points are included.

Henry Clark · Answer

Use the lookup. For my name and operating agreement. LLC. Valuation is your hardest issue should a life or relationship changing event occur. Also are all things equal? You don’t have to split everything equal. If one person does most of the work you might put a management fee in.

Drew Sygit · Answer

@Zoe Funk When partnering with anyone, but especially family & friends, you want everything in writing. Otherwise, you may not be welcome at future family events! Too many investors want to partner with “handshake agreements”, which they would never do with a tenant or property management company. Things to think about: 1) What happens if one of you is suddenly incapacitated or dies? Do the surviving partners get that investor’s shares or do they have to deal with relatives that may be ignorant and/or greedy? 2) What happens if one of the partners wants to terminate the business relationship and wants their investment out now? 3) What happens if one of you drinks & drives, killing someone and getting sued by the victim's family? How would the other partner(s) be protected from that? So, why wouldn't you want to hire an attorney to create a partnership agreement and perhaps an LLC to cover as much of the above as possible? Please send us any feedback via email, as we do not use the DM feature here. Also, if you like our response, please don’t be shy about giving us a vote😊 @Jared Hottle we gave you a vote as great info!

Zoë Funk · Answer

That's a really good point to keep in mind. Did you work with a lawyer to help you create the agreement?