Choosing the Right Structure for Your Real Estate Partnership

When tackling your real estate investment business solo, you face certain imminent challenges, like running out of cash or lacking insider know-how in a niche market. That's where partnerships come in: teaming up allows you to combine resources, expand your horizons, and chase bigger and better deals.

However, finding the right real estate investment partners can sometimes feel a bit like dating — you have to align on expectations and goals and be able to communicate well in order to set your business up for success.

Let this guide be your roadmap to understanding real estate partnerships. You'll learn about all of the partnership options available to you, from hands-off passive arrangements to hands-on collaborations where you're deep in the trenches.

There's no one-size-fits-all formula to determine the right partnership style. Instead, we'll show you how to pick the perfect partnership structure for your goals and appetite for risk. Plus, we'll share all of the steps you can follow to establish a solid and drama-free partnership from day one. Let's take your investing to places you couldn't reach going at it alone.

Defining real estate partnerships

A real estate partnership is when two or more individuals or entities come together to jointly invest in or manage real estate properties. It involves pooling resources, such as capital and expertise, to pursue real estate projects.

The partners agree to share in potential profits, risks, and liabilities associated with their real estate activities. Forming a partnership allows partners to leverage their combined strengths, diversify their investments, and potentially achieve greater success than they could individually.

Real estate partnership types

Real estate partnerships fall into two broad categories: active partnerships and passive partnerships. Each type has distinct roles, responsibilities, and investment dynamics.

Active real estate partnership

An active real estate partnership involves partners who are directly involved in the day-to-day management and decision-making processes of real estate investments. This type of partnership is ideal for those who want to be hands-on with their investments and have the skills and experience to manage properties.

Each partner must commit time to managing the day-to-day operations. Additionally, there is a joint liability for all actions taken in the name of the partnership, which can expose each partner to financial and legal risks. You'll need strong communication skills to tackle these challenges, since partnerships can sometimes lead to conflicts, especially if there are disagreements over management styles or investment strategies.

Passive real estate partnership

A passive partnership works best for investors who prefer not to be involved in the daily management of an investment property. These investors contribute capital and rely on professional management teams or active partners to handle operations and decisions.

Passive partners have less control over investment decisions, depending heavily on the expertise and integrity of the managing partners. This can be risky if the managers do not perform to expectations. Also, potential returns may be lower than in an active partnership because management fees and operational expenses reduce net profits.

Partnership structures

Real estate investment partnerships will typically be structured in one of the following ways:

Real estate general partnership

A general partnership is when two or more individuals share ownership, profits, and liabilities equally. General partners actively participate in the management and decision-making processes of the investment. The structure allows for pooling of resources and expertise to share responsibilities and allow for collective decision-making.

Real estate limited partnership

Real estate limited partnerships include both a general partner and one or more limited partners. Limited partners contribute financially but do not make management decisions, and their liability ties to their investment.

Setting up this real estate partnership agreement requires formal registration and compliance with specific regulations.

Real estate joint venture

A joint venture brings two or more parties together to work on a specific project, sharing both the investment and the profits. A joint venture is typically limited in scope and duration to the project at hand.

Each participant in this real estate investment partnership retains their separate legal status and shares in the investment's management, profits, and risks. A joint venture's flexibility allows these entities to collaborate without the need to merge all of their existing operations.

Real estate limited liability partnership (LLP)

A limited liability partnership (LLP) provides its partners with limited personal liability, much like a corporation. In an LLP, partners have protections from the partnership's liabilities and debts and other partners' actions.

Setting up an LLP involves more regulatory compliance than a general partnership. It requires registration with relevant authorities and following specific operational guidelines.

Syndication

Real estate syndication is a structure that allows multiple investors to combine their financial resources to invest in commercial real estate projects. A sponsor or syndicator manages the collective investment strategy. The role of this real estate partner is to identify, acquire, and manage the real estate asset, while limited partners provide the capital.

In return for managing the investment, the syndicator may receive an upfront fee, a share of the profits, or other compensation based on the performance of the property.

Real estate investment trust (REIT)

A real estate investment trust structure allows individuals to invest in large-scale, income-producing real estate. It operates much like a mutual fund for real estate, where investors can buy shares in commercial real estate portfolios across property types such as retail, office, apartments, and hotels.

REITs provide investors with regular income streams and the potential for capital appreciation. They must distribute at least 90% of their taxable income to shareholders as dividends, making them an attractive option for income-focused real estate investors.

Tenancy in common

A tenancy in common is when two or more individuals hold ownership interests in a property. Each owner has a separate and distinct share, which can be of unequal size and purchased at different times. Each tenant in common has the right to use the whole property despite the size of their share.

In this real estate partnership investment, each owner may sell, lease, or bequeath their interest in the property independently without the consent of the other owners. This provides a high degree of flexibility in managing individual ownership stakes.

The benefits of real estate partnerships

Real estate partnerships offer a range of benefits that make teaming up a great option for real estate investors. Key benefits are:

• Combining funds: By joining forces, partners can tackle bigger projects or investments that might be too costly to handle alone.
• Spreading the risk: Sharing the investment with others distributes risk more widely, making any potential losses easier for each partner to manage.
• Leveraging expertise: Everyone brings something unique to the table, whether it's know-how in managing properties, capital, or insights into the market.
• More opportunities: With more resources available, the partnership can chase after larger or more profitable real estate investments that offer better returns.
• Divide and conquer: Sharing the workload means tasks like tenant interactions, maintenance, or bookkeeping can be split up amongst partners, making property management more manageable.
• Building connections: Working with others helps you grow your network, which can lead to more deals and financing options.

Questions to ask when evaluating a potential real estate partnership

To choose a real estate partnership structure, consider the following:

What type of investment are you looking for?

Do you want a hands-off investment where you contribute capital but aren't involved in daily management, or do you want to be actively involved in decision-making and management of the property?

What is your experience level as a real estate investor?

If you're relatively new to real estate investing, you might benefit from a real estate partnership where another party handles property management and development.

Do you have specific financial goals for your investment?

Define your financial objectives. Are you looking for regular income through rental yields, or are you more interested in long-term capital appreciation?

How much risk are you willing to take on?

Consider your risk tolerance. Some structures, like a general partnership, expose you to more liability and risk. A business structure like a limited partnership, on the other hand, can offer more protection against personal liability.

How much control do you want to have?

Decide how much control you wish to exert over the investment. If having a say in daily operations and major decisions is important to you, certain structures might be more suitable than others that limit your involvement.

What legal protections do you need?

Think about the legal implications of each structure. How important is it to protect your personal assets from potential lawsuits or debts incurred by the investment property?

How long do you plan to hold onto the investment?

Decide on the timeline of your investment. Some partnerships are better suited for short-term projects, while others are structured to support long-term holdings.

What are the tax implications of each structure?

Understand the tax consequences associated with each type of partnership. Each business partnership has different rules around taxes for profits and losses, which impacts your overall financial outcome.

How important is flexibility in the partnership structure?

Consider whether you might want to change the structure of your investment or bring in additional real estate partners in the future. Some structures are more flexible and easier to adapt than others.

What exit strategies should be in place?

Plan for the future by considering exit strategies that align with your investment goals and timeline. Understand how you can exit the investment by selling your share or dissolving the real estate partnership.

Setting up a real estate partnership

Setting up a real estate partnership requires a few steps that confirm legal compliance and mutual agreement on operations. Here’s a step-by-step guide to establishing a real estate partnership:

1. Choose the right partners

Select individual partners whose goals, risk tolerance, and investment strategies align with yours. Consider their financial stability and professional background.

2. Discuss and agree on objectives

Have in-depth discussions to make sure all partners agree on the partnership's primary objectives and investment strategies.

3. Draft a partnership agreement

Create a partnership agreement detailing each partner's contributions, profit and loss distribution, roles, responsibilities, and decision-making powers. Detailed partnership agreements should include the following:

• Partner contributions: Specify each partner's initial financial, property, or expertise contributions. In addition, outline any expected future contributions, monetary or otherwise.
• Profit and loss distribution: Define how you'll distribute profits and losses among the partners. This can be proportional to initial investments or another agreed-upon formula. The agreement should specify how and when distributions will be made, such as quarterly or annually.
• Roles and responsibilities: Assign specific roles to each partner, detailing who is responsible for day-to-day management, financial decisions, or strategic direction. Clarify non-management roles, possibly including advisory or limited roles for certain partners.
• Decision-making powers: Describe the decision-making process, specifying which decisions require unanimity, a majority, or can be made by individual partners.
• Dispute resolution: Outline the process for resolving disputes among partners, which might include mediation or arbitration before legal action.
• Partner changes: Define the process for adding new partners, including how new partners will be vetted and approved. Likewise, outline the circumstances under which a partner can exit the partnership, whether voluntarily or involuntarily.

4. Set up the legal structure

Register the partnership with the appropriate state authorities. Depending on the state and the partnership structure, this may include filing a partnership certificate or articles of partnership.

For some real estate partnerships, you'll need to apply for an Employer Identification Number (EIN) from the IRS. This number is necessary for tax purposes and to open a bank account for the partnership.

5. Continuous evaluation

Review the partnership's performance against its goals regularly and make adjustments as necessary. This should include regular meetings with all partners to discuss progress and resolve any issues.

Partnering in real estate

There you have it, the full playbook on real estate partnerships. Joining forces can be a powerful move if you're looking to fund developments, tap into local market expertise, or just share the workload with others. However, landing the right partners and structuring a partnership properly is make-or-break.

From general partnerships where you're all-in to limited partnership structures that reduce your exposure, your partnership options are bountiful. Whichever option you choose, just be sure to decide its details upfront, like profit splits, roles, and exit plans.

Real estate investing is a team sport for those wanting to grow. Combining resources and playing to each other's strengths helps you maximize growth and profitability. A successful future is in sight with the right teammate by your side.

Real estate partnership FAQs

How do you split profits on a real estate partnership?

In a real estate partnership, profits get split according to the terms outlined in the partnership agreement. This agreement specifies each partner's capital contribution and details how profits and losses are shared. These splits can be equal or vary based on each partner's investment or role in the partnership.

Is it better to invest with a partner?

Investing in a rental property with a partner can offer several benefits, including sharing financial burdens, pooling resources and expertise, and reducing risks. It also involves shared decision-making and the need for strong communication and trust. The best option depends on your personal financial goals, risk tolerance, and preference for collaboration versus independent control.

Can a real estate investment trust be a partnership?

Yes, a real estate investment trust can be a partnership, typically known as a partnership REIT. This structure combines the benefits of a REIT with the flexibility of a partnership, allowing investors to pool resources and share profits while operating under the REIT regulations to maintain certain tax advantages.