Watch Out for These Risks When Considering a Partnership

For many investors, entering into a partnership is a necessity, usually because they’re lacking some critical element. This may be experience, skill, capital, or something else, but the point is, they need to join forces with another person so they can buy real estate. Sometimes these partnerships turn out to be beautiful things, beneficial to all involved. Other times, the opposite is true, and the partnership does not go as planned. To avoid the latter scenario, watch out for these risks that can happen in a partnership:

Your personalities don’t mesh

Nothing can kill a partnership faster than personality conflicts. If you don’t get along with your partner, it’s not going to go well. There will likely be communication breakdowns and disputes, and over the course of ownership, this will take its toll. If you’re in the buy-and-hold camp, you are tying yourself to this person for a number of years, presumably. To ensure those are happy, healthy, and successful years, make sure your personalities mesh before partnering up.

Trust issues

Trust is at the foundation of any relationship; without it, that relationship is doomed to fail. Before you enter into a partnership, you need to be able to trust the other person 100%, and they need to trust you, too. Be open, honest, and demand the same of your partner. Keeping thorough records and using a third party accountant can help maintain transparency, so I highly recommend this.

Shared decision-making

When you’re going solo in real estate, you get to call all the shots. You don’t have to consult with another person; you simply make up your mind and act. This is not the case in a partnership, where you have an obligation to allow each partner to weigh in. While there are benefits to sharing the decision-making process with another person, it can also be stressful. What happens when you can’t agree on something? What about when you need an answer fast and you can’t a hold of your partner? These are things to think about before taking on a partner.

Relationships with family/friends can be damaged

It’s natural for people to turn to family or friends when seeking a partner. You know them, they know you, so it seems less risky than partnering with a virtual stranger. And it is, to some degree. You know their personality, and presumably you trust them since you’re considering them as a potential partner. However, throwing money into the equation can change things. I’ve seen great friendships turn sour because of financial disagreements, and plenty of family relationships have been ruined too. My advice? Be very careful when entering into a partnership with someone you’re close to, and make sure that you are both 100% on the same page with all details regarding the investment.

You have to share the profits

This one isn’t so much a risk as it is a fact. However, I’m listing it because it’s one of the more important details you’ll want to remember when you’re considering a partnership. Partners share everything - ownership, risks, and profits. Before you make any agreements, you need to be crystal clear on the amount of money you will be getting out of this deal, because any amount of uncertainty can result in conflict later on.

Like any other aspect of real estate investing, there are pros and cons to weigh when considering a partnership. Be careful of the risks listed above, but remember, if you do your homework and make sure all parties are clear on the arrangement (and you have this in writing and it’s been reviewed by an attorney), your chances of encountering any of these situations are greatly reduced. Be smart, be patient, and make your decision carefully.