There’s definitely a right way and wrong way to go about this type of agreement, and not taking the proper precautions and carefully planning all the details of your partnership can spell trouble later on. Here’s what you need to consider when drafting your real estate partnership agreement:
Roles and responsibilities - Each investor will have a specific role, whether they’re out scouting properties or acting as a contractor and dealing with repairs. The details of each person’s function within the agreement need to outlined specifically - no vague descriptions allowed!
Contributions and capital investments - How much is each partner putting into the property? This is important for determining ownership percentages, which you’ll need to know for future financial allocations.
Payments - This is another biggie, because this will outline how everyone is getting paid, which is arguably the most important aspect. You need to determine at the very beginning how you’ll be allocating any profits, as well as any losses you may incur over the course of the investment.
Those are the three main points you’ll want to cover in your partnership agreement, but there are a number of other details it is wise to include as well.
- Your goals as investors
- What type of ownership entity you have (i.e., Corporation, LLC, etc.)
- Decision-making process (how, when, specific decisions you may encounter)
- Managing partner details (if you have a managing partner)
- Tax details (who receives benefits, who prepares taxes, etc.)
- Meetings (how often)
- Insurance details
- Death or inability to perform as a partner
- Dispute resolution
The more information you include in your plan, the better off you’ll be when (notice we said when, not if) certain, shall we say….stressful situations arise. For example, let’s say you lose a tenant unexpectedly, and it results in 3 months’ worth of lost rent. How much will you lose? How much will your partner lose? Who’s going to put in the legwork of securing a new tenant? A formal partnership agreement can answer these questions for you, serving as your guide for handling these types of situations.
When drafting your agreement, find a reputable attorney who can help out. Even if you prefer to write it yourself and save on the legal costs, having an attorney at least review it will ensure that everything is legit and your agreement is sound.
Finally, and this probably goes without saying, don’t forget to have each partner sign it! There’s nothing like an unsigned, and therefore null and void agreement, to throw a wrench into things down the road.
Partnerships are an excellent way to maximize an investment, but they need to be planned carefully and deliberating. There’s no winging it here, and if that’s your strategy, then chances are you will wind up paying for it later on.