Have you ever considered partnering with anyone? Or tried to work with other real estate agents to score deals? If not, you’re missing out on many opportunities to succeed in the real estate market.
Fostering a durable partnership, whether with real estate agents or clients, can yield benefits beyond the ambit of a single sale. Currently, the real estate market is in an exciting place. Even after being badly influenced by the pandemic, the real estate market shows interesting upward trends.
According to Grandview research, the global real estate market is glancing at a brighter future. The report valued its market size at USD 3.69 trillion in 2021. The market value stands at USD 3.81 trillion in 2022, and the revenue forecast shows that it may reach USD 5.85 trillion in 2030, at a compounded annual growth rate (CAGR) of 5.2% within the span of eight years.
Source: Grand View Research
Are you excited to see the upward curve in the real estate market and wish to enter into a partnership to gain profits? Don’t sweat it. We’re here to help. This article includes the know-how on everything related to real estate partnerships. But before immersing in it, first, understand the meaning of the real estate partnership.
Let’s dig in!
Table of Contents
What is Real Estate Partnership and its Types?
A real estate partnership is a strategic corporation between two or more investors who work together and combine their capital to purchase properties. It’s similar to buying a house with your spouse with the money you pooled together. Though you might not consider it an official partnership, the core idea is the same.
Source: Passive Investor
The idea of partnering with other investors is thrilling but tricky. Why? Partnerships can do more harm than good if you don’t heed the different aspects of working together. Of course, there are challenges involved. However, it’s possible to form profitable partnerships, and the benefits of real estate partnership are endless.
The first and foremost thing to consider is the type of partnership you want to get into. The most prevalent type of partnerships structured as pass-through entities in real estate are:
- Limited Partnership or LP
- Limited Liability Partnership or LLP
- General Partnership or GP
The partners split profit and loss among themselves. And they take the responsibility of filing taxes and paying them corresponding to their profit portion. A written agreement highlights the roles, duties, and rights of partners.
1. Limited Partnership or LP
A limited partnership restricts the legal liability of some partners in the collaboration for liabilities and debts. At least one partner is a passive cash and assets contributor in LP. And there is a minimum of one general partner who manages and runs the business.
The portion of profits gets mentioned in the partnership agreement, and the partners pay the taxes. And the partnership is not responsible for taxes.
2. General Partnership or GP
General partnerships are the simplest form of partnerships. In this partnership type, two or more general partners own the business. The partners share a joint and several legal liabilities for liabilities and debts.
The business is run and managed jointly by the partners. It is simple to dissolve, and the taxes are the partners’ responsibility, not the partnership.
3. Limited Liability Partnership or LLP
Since 1990, Limited liability partnerships have been among the most popular types of real estate partnerships. It’s an extended version of the general partnership as it limits the legal liability of each partner. The general partners in LLP enjoy protection from the wrongful doings of the other partners.
Under this partnership, the partners pay the taxes instead of the general partnership.
Exclusive Benefits of Real Estate Partnership
Source: Excalibur Homes
One can create effective real estate partnerships for many reasons. Examples? Perhaps you want to increase your profit. Or maybe you want to establish your brand but don’t have enough resources. Establishing a real estate partnership has many potential benefits compared to a sole proprietorship.
While everyone has different motives, some of the most prominent benefits that bring investors together are:
- Raising significant capital to purchase a real estate property isn’t possible for a single member.
- Investing in a real estate project requires much energy and time to create a mark. Forming a real estate partnership takes the burden off a single person’s shoulders and distributes it among partners. The partners share both risks and rewards while associating with each other.
- The partnership offers an opportunity to combine the talents and strengths of the partners. Every partner bringing a different set of skills increases the gambit of performance and hence, success.
- Another benefit the real estate partnerships is motivation. Investing in real estate alone is quite intimidating for many. But it’s comparatively easy to conquer the real estate market by working with partners having similar goals and expectations.
How to Structure and Build Real Estate Partnership?
The way you structure your partnership can lead to success and failure. Therefore, partners should not take the process of allying for granted. Always research and take into account each other’s business needs before making it official.
Skim through the following steps and consider taking into account each one of them when starting to build real estate partnership:
1. First Decide If Partnership Suits Your Needs
Determine if you need a partner or not. The prospect of partnering with someone is alluring. However, you must be sure on the dot if the partnership fulfills your business needs. Identify your goals and weigh the pros and cons of partnership.
Understand your mindset. Whether you prefer working alone or you can work in tandem with others.
2. Evaluate Your Strengths and Weaknesses
More than anything, getting into real estate partnerships is about finding a perfect match. Take a closer look at yourself and see where your strength lies and where you lack. Once you evaluate and understand your potential, then only you can find a suitable partner.
3. The Right Partner for You
Now that you know what your partner should be like, you will likely find the right candidate for partnership. Bear in mind to choose a partner who is bringing something new to the table. A good partner must complete the partnership jigsaw puzzle with his complementary skill sets.
4. Determine What You Expect from the Partnership
Another critical step is to find out the objectives of the partnership. What is your end goal? Ensure that your partner is competent enough to help you achieve your dreams. Moreover, they need to be someone you can rely on and trust entirely.
5. Set Roles and Expectations with Precision
What are the roles of your partners? Who will manage the finances? Whose area of expertise is marketing? Each partner should know each other’s functions and duties from the start. They should understand who is responsible for every task beforehand. Only then can you set reasonable expectations from each other.
6. Lay Down the Agreement Terms
Once you decide the roles and expectations, it’s time to lay down the agreement terms. What portion of profits should get reinvested? And what will be the profit or loss ratios? Discuss the possible outcomes and set agreeable terms in the agreement before starting the real estate partnership. Create a written agreement with the help of a financial advisor who understands the finance and corporate laws properly.
7. Keep Your Guard High
Business is never free of risks and challenges. Keeping that in mind, taking the necessary steps to protect you and your partner from unforeseen difficulties is crucial. What would happen in case of disagreement between partners? How does the partnership dissolve if someone leaves the company?
Understand the procedure and lay the terms before signing the contract. You should always be ready to face the worst.
8. Set Clear Long-Term Business Goals
Don’t push the aspirations and goals of you and your partner under the rug. Ensure that each of your goals aligns. As already mentioned, there is no point if each partner’s intentions don’t match. You should work in harmony to achieve a clear set of goals.
Each partner should help and work towards the same goals to make the partnership a success.
Positives and Negatives of a Real Estate Partnership
Source: IMF Blogs
The Global House Price Index reported that the house prices across 56 countries and territories worldwide increased by 10.2% on average in 2022. Often real estate investment is a safe option. In reality, the risks and challenges aren’t worth ignoring. That’s where a real estate partnership comes into play and does the heavy lifting for you. Like any other partnership, it has some pros and cons.
Pros of Real Estate Partnership
- The access to a large pool of capital to invest in the real estate market.
- It allows to split the risks involved and share the monetary loss among partners
- Many people with investment capital don’t have enough experience to make wise decisions. Hence, partnering with someone with expertise in real estate can benefit you.
- Distributing responsibilities among partners is another great benefit of a real estate partnership.
- The capabilities of each partner can help the partnership achieve a greater level of credibility and improved brand value.
Cons of Real Estate Partnership
- Investing in partnerships means your money gets stashed for an extended period.
- Personality conflicts are more common than one might think. It will create many disputes in the future.
- Lack of clarity about responsibilities and expectations in the agreement can lead to incurring losses.
- Partnership disputes like early exit and uneven profit shares can ruin the partnership and create strain among partners.
Expert Tips for Connecting with the Best Real Estate Partner
The real estate business depends on people more than anything else. It’s the relationships that can earn you profits, not deals. It is even more relevant when you want to build real estate partnership. Choosing the right partner can exponentially increase your profit margins. In contrast, the wrong partnership can lead to chaotic business scenes.
Check out some expert tips below to ensure you don’t make mistakes choosing your partner.
- Match-making is an essential criterion for choosing the right partners. As important as it is to evaluate your strengths and weaknesses, weighing your partner’s strong points and flaws are necessary too.
- Communication is key to every partnership. And when it comes to real estate, its importance multiplies manifolds. Have clear and mature discussions about your goals, intent, and approaches to ensure a robust and meaningful partnership.
- Pick partners who have a comparable investment time line as yours to ensure they don’t intend to retire before the exit plan of your real estate partnership is complete.
- Prefer partners with similar investment horizons and retirement time lines. Aligning the investment time lines will help you achieve your business goals. It eliminates the fear of being left behind before proper exit from a real estate partnership.
- Assess the previous portfolio of your partner’s investments and discuss your success and failures to understand compatibility more thoroughly. It will help you decide better when choosing a real estate partner.
The real estate industry has bounced back superbly after the COVID-19 pandemic. Now and then emerges a new trend real estate industry. Although choosing whether to partner with someone or not is a personal choice, one must keep abreast with these trends to gain a better foothold.
No doubt, creating an effective real estate partnership has many benefits. But the risks and challenges are rampant too. As the real estate market grows, B2B marketers can get the best out of it using B2B brand awareness activities.
They can invest in proper real estate industry marketing and take their business to the next level. And the results are absolutely worth it!