Any tips on setting up a real estate investment partnership?

Question

Any tips on the pitfalls to avoid and things to consider when setting up a RE investment partnership. Our goals will be to invest in large multifamily properties in order to generate passive income. We will begin with approx. $1m in cash as a group. We are currently colleagues and friends.  Just want to maybe avoid some of the lesser-known mistakes with going into a real estate adventure with partners. Any suggestions appreciated.

Erik W. · Answer

Have a written agreement that deals with the "8 D's": Drugs, Death, Divorce, Dissolution, Disinterest, Disability, Dementia, Dispute Resolution.

Basically, you want to head off as many potential headaches before they happen.  My challenge to you is make a list over the next 24 hour of every potential problem you can think of (the list of "D's" above should help get started), then write down what you'd like to happen.  Give your list to 2 experienced business owners: both of whom have done a partnership successfully and let them make suggestions to fill in the blanks of what you didn't think of.  You don't know what you don't know, so let those who do know help.

Hope that helps.

Lee Ripma · Answer

@Russell Buxton

Make sure you write up an operating agreement and decide what happens when and if someone wants out. I agree about the decision makers, you need 1 or 2. Even 2 feels like a lot sometimes!

Evan Polaski · Answer

@Russell Buxton

Clearly defined roles, and if/how compensation will work for thoseHow money will be distributed and whenHow much needs to stay in reservesHow/when to exit, both decision to sell outright or when 1 partner wants out

For management, as was mentioned, who makes what decisions, and what threshold the other partners needs to be involved

Russell Buxton · Answer

Josh. Thanks for your post and for clarifying your point. Love the attention to detail. Take care

Josh Will · Answer

Partnerships are a great way to gain inefficiencies in real estate investing.  I am part of several composed of a diverse and growing base.  I go into each the conservative optimism, which I feel allows me to continue moving forward while seeing the potholes in my path.

Before any money exchanges hands, have a contract in place.  At the beginning of most endeavors, everyone is excited and there is a general feeling of optimism and good will.  Everyone's hope is for this to continue; however, it is important to plan for pitfalls and delays.

-Create specific investment parameters and underwriting criteria

- Do you know that everyone in the partnership is able to withstand personal economic downturns or will they need to pull their money out should they or a spouse lose their job?

-Is there anything in a partner's past that may prevent them from guaranteeing or sponsoring an investment deal (bankruptcy comes to mind).

-Is there a contingency in place that spells out actions of the investment group should you not find a deal in a set amount of time (say six months)?

-Will some of the investors get cold feet?   Sometimes in these types of situations, a partner or partners might want to start cutting corners in order to get a deal done.

- Roles should be defined, and everyone should carry their weight and/or be compensated for the weight they do carry.

- Keep a open line of communication

Marlen Weber · Answer

@Russell Buxton The feedback on this discussion has been amazing. I've learned quite a bit myself from following this thread. Best of luck.

Russell Buxton · Answer

Peter,

Location for investments will be in North and/or south carolina

Peter Nikic · Answer

where are you located, and where (if location is different) are you looking to invest in?

Russell Buxton · Answer

These are really helpful. I sincerely appreciate all your responses. Thank you

Alina Trigub · Answer

@Russell Buxton

A lot of great feedback already. Here're the steps I'd take for such venture

1) Consult with several attorneys and pick one. (FYI... I know someone, so if this is not state-related, I can recommend a quality one).

2) Determine what structure would work best for your company. Ideally you'd want the one that allows people in and out relatively easy. (Maybe consider TIC, or maybe something else will work better.). Note, I'm not an attorney and none of it is a legal advice.

3) Discuss with your chosen attorney various "what if clauses" (Things like, what if someone decides to leave, die, becomes incapacitated, and so forth. ) Ideally you'd want to cover as many of these in the OA as possible.

4) Outsource bookkeeping to ensure there's full transparency and no questions raised about it.

5) Take action!

PM me  if you have any other questions.

Best!

Any tips on setting up a real estate investment partnership?

Most Popular Reply