You might be tempted to take advantage of some pretty tasty real estate bargains these days. Some markets have very high cash flowing properties, and that can be really attractive. And if you don’t have the expertise or time to uncover and manage good deals, it can make sense to partner up. Especially if you have the money and someone else has the expertise.
In such arrangements, you’ll have to agree to a split of the income and profits even though you put up all the cash. There is nothing inherently wrong with this as long as your capital is protected and your partner knows what she’s doing.
There are two main landmines you must avoid. First, your partner might be a snake. Second, the deal might stink even if your partner is honest and well intentioned.
So, while real estate prices are attractive and interest rates are low, you still have to be careful. Here’s how to do it without getting burned:
Don’t buy real estate unless your name is on the deed. You want to have as much control as possible to protect your assets. Having your name on the deed is the way to do it. Whenever you start getting involved in partnerships, you take risks unless you are in control. Keep your expenses and the number of investors low. Typically, the greater the size of the partnership, the higher the fees. Keep the number of partners small to avoid huge administrative expenses and dilution of your control.
If someone presents a deal to you, get your own real estate attorney to review it. Yes, it will cost you a little, but it’s money well spent – especially if you are considering investing a significant amount of money. Keep in mind that most attorneys will say that the deal is no good. They do this because they have everything to lose if the deal goes bad (you’ll fire them or sue them or both). And they have nothing to lose if the deal is a good one and they say it’s not. They cover themselves. Expect a negative report. That’s why you need a real estate attorney and not a general practice lawyer for this.
When your attorney chimes in, ask her why she thinks it’s a bad deal — if that’s the report you get. Ask her where your risks are. Remember that you went to your lawyer to see if the contract is a good one – not to get business advice. I looked at a great deal for a client once and of course suggested she send it to her attorney to check the contract. The attorney told my client not to get involved because she thought the partner’s split was too generous. That may or may not have been the case, but that wasn’t the attorney’s job to say. Unfortunately my client didn’t participate in the deal even though it later proved to be outstanding.
3. Business Advice
Ask your partner smart questions:
a. What can go wrong?
b. How is my money secured?
c. How I am protected against you stealing my money?
d. Why is this a good deal?
e. What has to happen in order for this to go south?
f. What are vacancy rates? Who are the major employers? Do you have the right liability insurance?
g. What is our “edge”? What makes us better able to make money vs. the other people?
h. If you are buying a condo, what extra costs are you going to incur?
Don’t stop there. Talk to your accountability partner and see what she thinks about the deal. Discuss if you should own term life insurance on your partner too.
Google yourself crazy. Find out as much as you can about the area. Go to zillow.com to compare the prices of the real estate your partners want to buy vs. available inventory. Got to Google maps and zoom in to see the neighborhood.
Real estate prices are low and so are interest rates. That’s a good combo if you’re thinking about investing in this market. While prices may continue to decline and stay soft for some time, investors with a time horizon of five to 10 years might really hit the jackpot if they invest in real estate. Partnering is smart if you can gain access to trustworthy partners in attractive markets. Just cover your bases and don’t rush.
Have you ever invested in real estate with partners? How did it work out? What else should we watch out for?