Partnership agreements – it’s a business
You can have the best, most comprehensive partnership agreement that’s ever been written by the world’s brightest legal minds, but one should never confuse the difficulties that lie ahead for any property investor considering making a partner out of a friend. Or several friends even. It’s going to eventually become a sticky wicket. And fraught with a great deal of compromises, most especially your original friendship. Because of this, I am not a big fan of buying investment property with friends. There are numerous associations that act as good conduits towards investment property buying clubs. And I would always recommend looking into these buying clubs as a natural way to get involved in partnerships for the express purpose of property investing. But having a go at investing in real estate with established friends is just a risky endeavor. If you want to stay friends, that is.
How to easily wreck a friendship
Consider a few of the possibilities that could wreck a friendship, even with a written partnership agreement detailing how different situations should be handled. How about the concept of joint liability when new debt is taken on. (And of course, to increase your leverage over time, you’ll always be taking on new forms of debt as you add projects to your portfolio.) If one of your friends becomes ill, has marital problems, goes broke, has other debts, etc., and they can’t pay their share of expenses – you’ve got a problem. A problem that most assuredly will strain any friendship, regardless of what a partnership agreement calls for.
Think about the situation where a partner wants to be bought out. Will this be a reflection of your existing friendship? Will the other partners be able to buy the other out? And will it create a negative dynamic within the formerly close-knit group? If you create partners from afar, who were never your friends before, you’ll find a situation such as a buyout will become a simple business transaction. Nothing more. There can be no referendum on whether you will still remain friends. It’s obviously much cleaner. And safer emotionally as well. And you always want to invest without emotion whenever possible.
Managing partners – who best to choose?
Also consider who will be the managing partner? Or did you think you and your other partners could collectively manage a property, or set of properties, yourselves in concert? If so, good luck. What about if you hire a property manager to look after your investments? Who will be the main contact person with them? More importantly, will that main contact person get all the blame should things go wrong at any given time with any of your units (and, of course, they will).
What about when disaster strikes? A tenant sues you all collectively. Or one of your properties, God forbid, has a fire. Who deals with the insurance company then? All of you, or one? And gain, if just one, will the other partners second-guess the managing partner? Naturally, this could sabotage any friendship as well.
The bottom line
When looking for new ways to finance investment property, it’s good to continually be searching through many options. And clearly, utilizing partners is a great way to expand your buying potential. However, my advice is to steer clear of buying investment property with friends. It’s eventually going to have negative repercussions. Keep your friends. And make new business partners. That’s the safest approach to helping to finance real estate investments that you are unable, or unwilling to finance yourself as a lone property investor.
photos courtesy of starproperty.my, nytimes.com, theguardian.com, immo-annonce.net, goldcoastbulletin.com.au, ellisiumpartners.com