People often involve themselves in partnership agreements as part of the process of real estate acquisition. There are as many types of partnerships as there are ideas that can be reduced to writing. Of course any agreement should be in writing to help prevent any misunderstandings between all of the parties involved. It is crucial to create a written agreement acknowledging that all parties are aware of, and agree to, the requirements necessary to uphold the intentions of the partnership.
Customarily there are two types of partnerships: general and limited. In a general partnership, all parties participate to some extent in the operation and management of the business or real estate holdings. Each person is held personally responsible and liable for profit, losses, and obligations.
A limited partnership includes a general partner(s) as well as limited, or silent partners. The responsibilities are handled by the general partner or partners. The limited partners do not participate in daily management, and each can be held liable for the business losses only to the extent of his or her investment. The limited partnership is a popular method of organizing investors in a real estate project. These projects tend to be large and consist of many investors.
In most cases you are better off if you are able to acquire a particular piece of property on your own. Bringing partners into an acquisition is often done because you are unable or unwilling to have 100% involvement yourself. If you feel that you can’t handle the investment alone, then bringing in partners can be a great opportunity. Finding others with similar needs and desires is the first challenge.
Family members, acquaintances, or coworkers can all be a sources for partners. When you are married and purchase a home together you are in a partnership. As we know, marriage partnerships can be wonderful and add strength to your overall relationship. But, at times they can be difficult. Partnerships with others, such as friends or business associates, can also have many benefits. An association of two or more people to carry on business as co-owners, and share in the profits or losses, is a partnership. In all cases, one needs to give a lot of thought prior to establishing a partnership to try to avoid possible future pitfalls. Probably the single most important issue is that all parties involved understand and agree upon their responsibilities and obligations in the partnership.
Once the partners are determined, a partnership agreement needs to be developed. A partnership agreement is a general guideline for the intentions and goals of the investment group. For example, often people want to get started in the acquisition of rental or income property. Two, three, or more people can pool their resources to start building a portfolio of rental properties. You need the guidance of a Realtor that has experience in putting small investment groups together.
Do you want to hold the property for five years and then sell or trade up? What if one investor wants out before the rest of the group is ready to sell the property. There should be a provision for buying out a partner whose plans change. There should definitely be a penalty for early withdrawal to avoid undo strain on the other group members. An experienced Realtor can advise you on the possible scenarios such as these and can help you to prepare a partnership agreement specific to your needs.
There can be many benefits to investment groups and the leverage that is created. Real estate investments should be held for the long haul and be just a part of your overall personal financial portfolio. Expertise in the field is critical; choose your Realtor carefully.
This article was published in the San Francisco Examiner.
Articles are written by Eric Ruxton and Larry Aikins, owners of Terrace Realty, Inc. and Terrace Associates, Inc. in Redwood City. Terrace has been in business more than 55 years and in addition to being an independent Brokerage Company, also owns and operates rental properties.