Investing in real estate can allow you to generate additional income and enjoy greater financial security. Working with a partner can limit your responsibilities, but it also has risks. Before you invest in real estate with a partner, carefully consider the pros and cons.
Potential Benefits
If you have a limited amount of capital to work with, you can partner with someone else, buy a property that you wouldn’t be able to afford by yourself, and share the financial rewards. You can also share responsibility for managing the property, or you can simply invest your money and have no role in day-to-day operations.
Common Pitfalls
Another person’s bad credit can affect your mortgage interest rate. If your name is on the mortgage for an investment property, you might have a hard time getting a loan to buy your own home or car. Even if you’re only responsible for part of the mortgage for an investment property, when you apply for another loan, a lender will count the entire mortgage payment when it calculates your debt-to-income ratio.
If one individual doesn’t keep up with his or her responsibilities, that can lead to conflicts. Getting out of a partnership can be complicated. You might have to sell the house or refinance the loan.
Buying a property with a friend or relative may or may not be a good move. If the real estate venture doesn’t work out for some reason, your personal relationship might never be the same.
Communicate Openly and Be Realistic
When entering into any type of relationship, it’s important to choose your partner wisely. You’ll have to be clear about your objectives and expectations.
You and your partner might have very different backgrounds and personalities. That can be a blessing if your strengths and weaknesses complement each other, or it can be a curse if you have conflicting goals and management styles.
Think about your objectives and how much money and time you can invest. When selecting a partner, make a level-headed decision so you can avoid problems later.
Select the Right Type of Partnership
You and one or more other individuals can create a real estate partnership. In a limited partnership, one or more limited partners provide funding, and one or more general partners handle day-to-day management. A limited partner is financially liable only up to the amount that that individual invested. A general partner makes decisions and therefore has greater liability.
In a general partnership, partners share ownership, responsibility for managing the property, profits or losses, and financial liability. If one partner gets sued, the other partners can also be held responsible.
You should have an agreement that clearly defines the structure of the partnership and each person’s role in it. An attorney can provide valuable legal guidance.
