REAL ESTATE PARTNERSHIPS

By Dino Nicosia, Broker of Record, Investpro Realty

IS IT A GOOD WAY TO INVEST?

Real Estate Partnerships have been around for a long time. This is because people have learned to pool their resources in order to reduce risk and increase their leverage (buying power). Partnerships also enable the smaller investor to buy larger properties.

What is a partnership?

A partnership is a method of subdividing ownership amongst smaller investors where they combine their funds and resources to purchase real estate.

Is a Real Estate Partnership for you?

Remember…you are only as strong as your weakest partner. First you must consider who your partners are and how strong they are financially. Can you trust them? The fact that they may me a friend or relative does not automatically qualify them. It is also important to consider how long you will be tied up with your partner(s) and what your exit strategy will be if the partner(s) want to split up for personal or financial reasons. How about in the event of a death of a partner?

The perfect partner

It is very important that you have at least one person in the partnership with relevant experience. Partnerships seem to work well (or better?) when each partner brings with them experience/expertise in real estate, and have similar (what type of?) goals. Having a solid and structured agreement in place, along with an understanding of each partner's individual relationships and responsibility is also essential to maintaining a good partnership.

Occasionally, an investment may require a cash call and you should feel confident that your partner(s) will have the funds to contribute to the unexpected if necessary. For example, if there is a roof leak which requires immediate repair, the depth of your partner's pockets comes into play.

Types of Partnerships

The following are examples of the types of partnerships that can be created.

• General Partnerships

• Limited Partnerships

• Co-ownerships

• Joint Ventures

• Corporations

• Trustees e.g. XY Company in Partnership

ADVANTAGES FOR THE INVESTORS INVOLVED IN A PARTNERSHIP

1. REDUCED RISKS
   An unexpected cost such as a major roof repair of $30,000 - $80,000 for the individual could be devastating. Within a partnership it is much easier to absorb such a cost.

2. ENABLES THE PURCHASER TO BUY LARGER PROJECTS
   The small investor alone could only dream of owning a large complex. However, involving oneself within a group of investors and combining funds, a small investor can become part owner of a much larger project.

3. THE FEASIBILITY OF HIRING OTHERS TO RUN THE PROPERTY
   You will have the ability to hire Superintendents and Property Managers. By purchasing larger buildings you can now afford to hire other people to allocate responsibility. Investors with several smaller properties scattered everywhere will find themselves doing a lot of running around dealing with tenants. This is because they do not have a choice. A partnership enables the investor to have that choice (which means fewer headaches!)

4. DIVERSIFIED INVESTMENT PROTFOLIO
   You must have heard the phrase "Don't put all your eggs in one basket", right? If you have $100,000 to invest, rather than use if for one deal, why not get develop a partnership and purchase a smaller share in multiple projects. This is a much safer investment; if one purchase begins to go sour, you have others which can equalize the loss.

5. SHARE KNOWLEDGE AND EXPERTISE FROM FELLOW PARTNERS
   You may have a lawyer or accountant in the group or perhaps an experienced investor or contractor, with whom you can share ideas and expertise.

6. GROUP IS FINANCIALLY STABLE
   On their own, a single investor may not qualify for a multi-million dollar mortgage Since partnerships involve the combining of assets, the bank will be more inclined to qualify you and your group. If there is an unexpected negative cash flow, the group will have a greater likelihood of sustaining the shortfall.

7. PRIDE OF OWNERSHIP
   It is a tremendously exhilarating feeling for the investor realizing that he is part owner of such a large project, and knowing that he doing business with other professionals and experienced investors.

8. ASSISTANCE FROM OTHER PARTNERS
   In a case where an investor has run into some financial difficulty, the partners may help until the problem has been overcome.

DISADVANTAGES FOR THE INVESTORS INVOLVED IN A PARTNERSHIP

1. DISAGREEMENTS
   There are numerous disagreements that can occur amongst partners while partaking in investment strategies. When to sell? Who should manage? How much leverage? How much cash to invest? Long or short term financing? Such disagreements may cause hardship in the relationship, especially if a partner is a close friend or relative.

2. CARRYING A FINANCIALLY TROUBLED MEMBER
   As mentioned earlier, there is a benefit to having a partnership if they are able to assist you during times of financial trouble. However, this can work both ways. If another partner is in financial difficulty, the rest of the group (including yourself) may have to come to the rescue. It may prove to be difficult if the partner in trouble is unable to recover for a long period of time as it could put a strain on the group financially, possibly leading to disagreements and/or personal conflicts.