Building up a partnership for rental properties is very much like creating your own fashion style. There is no universal combination. Like how you decide what suit works for you, a profitable real estate partnership also requires trying out a number of formations, terms, etc. One that works for me might not work for you. You need to figure out what benefits all the partners involved in the partnership, especially for rental property partnerships.
While rental properties are a great way to ensure steady cash flow, it comes with a good number of challenges. That’s why you need to structure your partnership correctly so that everyone gets what they came for.
Even though there is no one universal way to structure it, there are some ideal ones that you need to consider and possibly change a few things to suit your needs.
The first way is splitting 50/50 only after 30% is off the top of the NET. As interesting and awesome as it might seem, this 30/50/50 partnership is great for big-time investments only. Although you can work things between your partners and come up with a solution to make it appropriate for a smaller-dollar investment, I personally think it’s not a great idea to structure your partnerships if your main target is small time investments and properties. That being said, it is definitely a good approach for bigger deals.
Now, here’s what you can do for smaller deals and investments –
First, you and your partner should agree on splitting the Net (loss or profit) equally among yourselves. So, this is basically a 50/50 partnership.
In this setup, no matter what happens to the property, everything is going to split between you and your partners equity. This means, when you sell the property, you split the NET i.e. profit or loss. Again, for appreciation and refinancing, the split is 50/50.
Both you and your partner will have to report the 50% of the income (or the loss) on your personal taxes. However, at the beginning, both partners need to contribute the required amount of cash for down payment as well as for the closing costs.
And don’t worry, the 30% at the top is not that important to investors for small-time residential.
However, the question might arise in this situation – what’s in it for the investors?
I can understand where the question is coming from. This is actually a 50/50 deal but the responsibilities might differ. In theory, the split should be a 50% investment for the guy behind putting the funds together and 50% investment for the guy who is doing the work. However, none of the facts, figures, and numbers are solid, as I’ve mentioned earlier. There is no universal way to do this and I was just stating some of the ideal partnership structures commonly used for rental properties. Now, it’s up to you to make the approach your own by altering, moderating and adding necessary terms to your partnership agreement.
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