Profiting From Real Estate Investments An Investor Newsletter From HomeVestors Of America, Inc. By Marcie Geffner / Vol. 1 No. 14 08/01/2006 Investment Partnerships: Heaven or Hell? The right investment partner can bring new capital, experience and ideas to any individual deal or portfolio of properties. But the wrong partner can just as easily destroy an otherwise sound investment with the scourges of divided priorities, conflict, disrupted decision-making and worse. Thus, the key to a successful partnership is to make a good decision as to whether or not to join forces with one or more partners in the first place, and then, if a partnership seems wise, to choose partners who will complement and support the investment goals and who will bring to the table more than they will take away. The most logical investment partners are personal friends, social and professional acquaintances, and family members. These people know and presumably respect the investor and may be willing to place their trust and financial assets in his or her care. Trusted and trusting friends and relatives can be a reliable source of additional capital for just one investment or for many investments long into the future. Here are some questions savvy investors may wish to ask themselves before they decide to take on a partner: Do I play well with others or do I prefer being alone? Am I a good listener and collaborator? Do I have good communication skills? Do I prefer to work out problems through discussion and compromise with others or is rapid autocratic decision-making more my style? Do I appreciate advice or do I place more trust in my own judgment? What lessons have I learned from prior experiences working with others? Could my relationships with trusted friends and family members withstand the challenges and stresses of an investment partnership or it would be unwise for me to risk the possible damage that a failed investment might cause? Once a partner is selected, a written agreement and good communication are essential to the success of the partnership. The written agreement is important because it sets up the ownership structure of the deal and the relationship between the partners. The informal "tenants-in-common" ownership structure means each partner holds title to the property. The more formal "limited liability company," or "LLC," ownership structure means each partner owns a share of a company that owns the property. The LCC is the more common structure for larger investment deals today. The written agreement also details how profits from the investment will be distributed among the partners. A typical scenario is for each partner to receive a share of the profit based on his or her percentage of ownership in the property or the LCC. The main investor who organizes the deal and is responsible for management of the property might get a disproportionately bigger share as compensation for those and other services to the partnership as a whole. The written agreement also may give the main partner the final authority to make all the decisions about the property, unless the partners have agreed otherwise. If the partners plan to share decision-making powers and management responsibilities, those arrangements should be detailed in the agreement. At times, not even a written agreement will dissuade partners who get the fixed idea that they should become more involved in the management of the property. This type of situation can get very touchy is one more important reason why a written agreement is crucial. Finally, the investment agreement explains what will happen if one of the partners wants to exit from the investment. Typically, the agreement will outline how the remaining partner or partners, or another new partner or partners, can buy out the exiting partner's share. A professional appraisal of the property is one way to establish the value of the exiting partner's investment. A window of required advance notice is a good idea as well. It's important to keep partners well-informed about the status of their investment so they won't be surprised if turns out to be unprofitable, perhaps temporarily, or is less lucrative than they'd hoped. A monthly report or partnership meeting are among the many good ways that partners can share information about their joint investment. Copyright 2006. Marcie Geffner. All rights reserved. COMING NEXT ISSUE: How to Advertise Rental Housing on the Internet. The Investor e-Newsletter is provided free by HomeVestors of America, Inc. HomeVestors of America HomeVestors franchisees use a proprietary software process, BMS, to evaluate property values and estimate repairs. The software is part of the package franchisees receive when they buy a franchise. For franchise information, call 1-866-249-6932. If you have a question, comment, or an idea for our newsletter, please click here. <back | printable version