If you’re a real estate investor, especially a beginning investor, a partnership is probably a good idea. The right partner can provide all the things you lack, whether capital or experience or contacts. You can pool capital and resources and share costs and responsibilities, as well as sharing the risk. But you do need to have a formal partnership agreement in place that clearly outlines the rights and responsibilities of both parties. This agreement will go a long way toward avoiding disputes (and even legal action) somewhere down the road. So here’s how to structure a partnership agreement for Los Angeles real estate.
Responsibilities and Roles
The first task when you structure a partnership agreement forLos Angeles real estate is to hammer out all the details on both parties’ responsibilities and roles. And in order for the partnership to prosper, those roles must be realistic and within each person’s area of experience and expertise. Each partner must have a clearly defined role with clear-cut responsibilities within that role.
Defining roles and responsibilities should take into account each partner’s individual strengths, weaknesses, competencies, and preferences. And when hammering out the roles and responsibilities, you need to consider at least the following areas:
- Lead development
- Construction/repair management
- Property management
- Business development/growth
Keep in mind, too, that these roles and responsibilities will evolve over time, so you have to structure a partnership agreement for Los Angeles real estate with the elasticity to accommodate such role evolution. Things change, and your partnership agreement should be enough of a “living document” to allow for that.
And, of course, to successfully structure a partnership agreement for Los Angeles real estate, you must be absolutely clear on the financials, which is typically the most important aspect of any partnership agreement. A clear understanding of the foundational money matters is the surest way forward toward a successful partnership.
The questions you will need to ask and answer in this part of the partnership agreement structuring include:
- How much capital will each partner contribute?
- How will profits be split?
- What are the desired returns on investments?
- Will you pay yourselves a salary?
- What will be the level of risk tolerance/aversion?
- How will financial decisions be made?
- What are the investment philosophy and business model?
- Do your retirement goals and exit strategies align?
The amount of time each of you plans to stay in the real estate business, as well as how much time each can devote to the business, will also play a big part in how you structure a partnership agreement for Los Angeles real estate. Most often, real estate investment businesses begin as part-time ventures. It’s imperative, then, that you and your partner be comfortable with the amount of time each is willing and able to devote to the business till it takes off and becomes a full-time affair.
In addition, you need to be clear about long-term commitment. For example, do you both plan to stay in the business for a decade or more? Or does one of you want to commit to only a couple of years? Clarity in this area at the outset can help you avoid bitter disagreements (on even lawsuits) later on.
Protection of Assets
Although entering into a partnership can be a great move for a real estate investor, there is always a risk, no matter how trustworthy and financially solid your partner seems to be. So you must structure a partnership agreement for Los Angeles real estate in a way that protects your assets. Even if the risk is obviously slight, you still need to protect yourself.
You also have to protect yourself and your assets from malicious lawsuits. (Tenants are known for suing at the drop of a hat.) This kind of protection will determine in large part the kind of business entity you form. So be sure to consider the overall business trajectory, liability protection, tax treatment, and the ease of formation.
Consider a Local Agent
While your real estate agent is not a business consultant, she can, nevertheless, be a wealth of information on the real estate side of your business. It’s probably a good idea, then, to consult your qualified local agent when you’re ready to structure a partnership agreement for Los Angeles real estate. And we’re ready to help when you are ready.