Partnership rules/ guidelines

[Sanjay Sharma]

three colleagues and myself are going to form a real estate partnership. Our goals are to put money into our partnership on a yearly basis and purchase real estate on a yearly basis. We started looking at mfh. We put a brake on aquiring property because we wanted to creat rules for the group. These are some of the rules we thought of:  

1.  Majority, i.e., 3/4 partners make a voting decision

2. We wanted to put a timeline when we cannot touch the money, maybe five years

We are work colleagues and around the same age. Therefore, we have similar income and similar life timelines such as college for the kids, retirement, etc. 

What rules have others made?  Any thoughts?

Thanks

[Daniel Chang]

@Sanjay Sharma

It sounds like your futures are uncertain.  Therefore, what you are suggesting is somewhat like a holding company, and how to structure this holding company.  If you futures are uncertain, I would recommend against this.

Instead, when you are ready to purchase a property, create a LLC and a operating agreement just for that property. Create a separate one the following year when you decide to purchase another property. Therefore, you are essentially creating multiple small partnerships. For instance, may be a few years later, one of your partner decides that he no longer wants to keep buying real estate, well then on your next deal, he just wouldn't be a partner.

You may also want to read up a bit on operating agreements.  There's a lot of standard issues that you'll need to work through as you have alluded to.  What if someone dies? Divorce?  Can you transfer interest?  Can you sell?  

I'm not an accountant but I've studied partnership taxation.  Let me tell you, it is very complicated.  Especially if someone wants out with unrealized capital gains or outstanding loans.  So best not to start a partnership with anyone who may be uncertain about their goals.