If you’re considering purchasing an investment property, you might think about working with a partner—especially if you’re not personally experienced in property management or property buying. There are some strengths to a partnership arrangement in property management, but it isn’t always a good idea.
Before you decide to work with a partner, you should know exactly what you’re getting into.
There are some real benefits to buying an investment property with a partner, and they shouldn’t be neglected.
- Risk management. Working with a partner can be a great way to manage your personal level of risk. Essentially, instead of buying an entire property, you’ll be buying half a property, so if that investment fails, you’ll only have half a property’s value to lose. You’ll also be splitting many of the duties of being a landlord, so you won’t have as much personal exposure to the risk.
- Unique perspectives. No person is exempt from dealing with cognitive biases and perspective limitations that lead to bad decision making. Working with a partner can help you see the charm of a property you might have overlooked, or help you catch a problem you otherwise wouldn’t have noticed until it was too late.
- Responsibility sharing. Having more than one person working on a property means you can spend less time, personally, on the property. It also means you each can specialize in different areas. For example, one person might focus on resolving tenant disputes while the other sources and manages contractors to make repairs on the property. This way, you’ll each get the benefits of managing a property for fewer time and responsibility
- Financial burden reduction. Buying a property requires significant capital, but that upfront capital demand is significantly reduced if you’re buying a property with a partner. Similarly, when there’s an emergency repair that needs to be completed, you can share the bill, so neither of you takes on too much of a burden at once.
But are those benefits enough to outweigh the downsides? These are some of the most important negative factors to consider:
- Credit risks. Cosigning a loan is rarely a good idea. If you end up buying a property with a partner, and they end up not being able to pay for their share, you’ll both end up facing the consequences. You might be required to pay more to compensate for them, or your credit could take a massive hit.
- Timeframe issues. Buying an investment property isn’t a project you can finish in a week. For the most part, these are long-term investments and major commitments. Can you really see yourself working with this partner for the next 10 years? What about the next 30 years?
- Inevitably, you’ll run into disagreements with your partner, and in some cases, those disagreements can get serious. This is especially tough if you’re buying a property with someone you have a personal relationship with, like a significant other. In some cases, you’ll end up with a fractured personal relationship. In others, you could wind up with a lawsuit on your hands.
- Profit sharing. How are you going to share profits with your partner? The ideal situation would be for you and your partner to split everything down the middle; you’ll share all the expenses of buying and maintaining a property, while also sharing all the revenue. Unfortunately, it can be hard to maintain this arrangement indefinitely—especially if one partner feels like they’re putting in more than half the work, or if one partner is incapable of making good on their half of the expenses.
Tips for Success
If you do decide to work with a partner when buying your next investment property, there are a few things you’ll need to keep in mind to be successful. Most of the downsides can be compensated for, or prevented entirely, with these strategies:
- Pick the right partner. First, make sure you choose the right partner. It’s rarely a good idea to partner up with someone you have a close personal relationship with—since it can put a major strain on that relationship—but it is possible if you go into it with the right mindset. Ideally, you’ll choose someone business-focused, who’s interested in an investment property as a long-term investment, rather than as a whim. If you’re not experienced in property management, it’s a good idea to partner up with someone who’s had some experience in the industry. This is a major decision, so be prepared to spend some time finding the right candidate.
- Treat this as a business. Being a landlord is a business, and you need to treat it as a business. When working with a partner, it’s easy to be overtaken by your emotions or instincts; for example, you might be persuaded by a partner’s excitement when they view a new property, rather than strictly looking at the underlying expenses that will be associated with that property. You and your partner should both think of things as logically and mathematically as possible, making decisions based on numbers rather than feelings.
- Outline a specific, detailed partnership agreement before you start. The best way to resolve disputes with a property investment partner is to resolve them proactively—before they even arise. Once you’ve decided on a partner, have a frank discussion about your mutual goals, and outline a document together that offers specifics on the nature of your partnership. Explain who will be responsible for what, how you’re going to split profits, and what you’re going to do if you can’t agree on how to move forward with a specific decision.
One way to make investing in property easier—regardless of whether you have a partner or you’re going it alone—is to work with a property management firm. Property management services can help you keep your property maintained, collect rental income, and can even resolve tenant disputes on your behalf. Contact Green Residential today to learn more about how we can help you stay profitable.