A real estate partnership is an investment strategy that integrates the strengths of two or more investors into a single investment property. Typically, partnerships are categorized as either active, where all parties are equally responsible for day-to-day management, or passive, as a means to raise capital from investors who are not as involved.
Real estate partnerships are one of the most common types of pass-through entities. Unlike corporations, pass-through entities are not required to pay corporate income tax or any other entity-related tax. Instead, their owners pay individual income taxes based on their shares of profit.
The Pros And Cons Of Real Estate Investment Partnerships
There are benefits and drawbacks to real estate investment partnerships. But perhaps one of the keys to a successful real estate investment partnership is finding the right partner to work with. It’s important for investors to choose a partner who balances their own strengths and weaknesses. Taking this into account, let’s review the pros and cons:
Here are the main pros of real estate partnerships.
Larger investment: As previously mentioned, real estate partnerships offer a higher return on investment than other types of real estate investments. This means that partners can have the opportunity to earner a higher return on investment for the capital they are putting in to the venture.
Work with partners: There are many benefits that come with working with other professionals. For example, each partner brings something different to the table, so it can be helpful to create a well-rounded team that balances each other out in terms of capital, expertise and experience. Having a diverse group of partners can also represent multiple perspectives and backgrounds when making key business decisions. In addition, dividing up the workload can also be helpful for partners who want to be involved with the day-to-day operations or choose to focus more on long-term strategy development.
Payment flexibility: Another benefit to a real estate investment partnership is payment flexibility. This means that partners can choose how much capital they want to invest in the venture. Partners can also choose how they want to receive their funds. For example, one partner may want a majority of the tax benefits, while another partner might opt for receiving the free cash flow. Being a pass-through entity, there is also more liability and income and losses are passed through each investor and claimed on their own personal income tax returns.
Now, here are the main cons of real estate partnerships.
Potential for conflict: Sometimes tension can be created if there are too many partners in an investment, each with different personalities and management styles. This can also result in a disproportionate level of involvement.
Disproportionate level of involvement: One of the main reasons some partnerships are not effective is because the members don’t clearly define each partner’s duties and responsibilities in their partnership agreement. This can cause some partners to feel like they are contributing more to the venture without receiving a fair share of capital in return. This can also create confusion and make it difficult to divide the benefits of the investment equally among all investors. This may frustrate some of the more involved partners and make them feel as if their profit potential is being limited. Finally, another drawback of a real estate partnership investment is if a project is unsuccessful or a partner wants to exit early, and another partner needs to contribute additional funds.