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.
Rental Property Investor · Prairie Village, KS · Member since 2015 · 2k+ posts · 2k+ votes
6y
@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!
Specialist · Toronto, Ontario · Member since 2012 · 2k+ posts · 891 votes
6y
I would avoid having too many decision makers. Nominate one or 2 people and make the others passive. You can allow all parties to make larger decisions like min $10k or vote when to sell..
Also make sure whoever is actively involved be compensated accordingly
Rental Property Investor · Prairie Village, KS · Member since 2015 · 2k+ posts · 2k+ votes
6y
@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!
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.
The first step is to decide on the role each partner is going to play, how decisions will be made, how you will handle any disagreements, exits, capital contributions and capital calls, who will be signing for debt etc. Once you have these basic issues agreed on by all of you then meet with an attorney to draft the operating agreement for the partnership as they will cover and explain all the other issues like survivorship, dissolution, buy sell etc.
Clearly defined roles, and if/how compensation will work for those How money will be distributed and when How much needs to stay in reserves How/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
Real Estate Investor · Springfield, MO · Member since 2017 · 1k+ posts · 2k+ votes
6y
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.
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.
Rental Property Investor · Austin, TX · Member since 2018 · 8 posts · 9 votes
6y
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.