Many times is it easier for more than one person to begin investing in real estate. This happens most often within families or between friends who become business partners. Pooling financial and time resources is a definite benefit of forming a private partnership, LAQC, or joint venture. But there are also risks involved.
A Partnership Agreement Minimises Risk
The best way to avoid disputes and minimise risk for both parties is to create a partnership agreement that clearly spells out the responsibilities, rights, and obligations of each partner. This agreement is the foundation upon which the investment enterprise is based and meant to resolve any disputes that might occur while eliminating any misunderstandings.
There are few situations worse than one where previously close friends or family members are torn apart due to a business deal gone bad. It is best to argue about the details and air differences before the partnership is formed so that both parties are unsurprised. A formal agreement is the most efficacious way to avoid later problems. Do not rely on verbal agreements or a handshake; property investment between partners requires a legal document.
What to Put in a Partnership Agreement
First decide on the type of structure that will work best for all parties involved. This may be a trading trust, a general partnership, limited partnership, joint venture, traditional company, or the formation of an LAQC.
Agree on the payment structure. If one partner is supplying the majority of funding, they will typically expect to take more of the profits. Then again, if one of the partners functions more as a silent partner whilst the other performs the business tasks required, this should also be compensated. Decide on a fair and reasonable fee for work performed as well as a repayment schedule for the financier.
Payment to either party can either be on a regular basis, such as weekly or monthly, or it could be deferred until such time as the property is sold and a profit realised. Remuneration for capital funding should include the payment of interest. Interest may also be used to repay the financing partner for risk involved, such as when a home is used as security against a loan.
Remember to include stipulations for what happens when the partnership ends, for whatever reason. Each member should have the option to leave the partnership if desired. There are also legal considerations which will arise if one of the partners does not survive the duration of the agreement or if someone defaults on the terms.
There are additional considerations that should be included in any investment partnership. Be sure to consult a good legal representative who can offer advice on creating an agreement that is beneficial to all parties in an investment partnership.
Author Resource:
Paul Easton is working with Gilligan Rowe & Associates are New Zealand Accountants and are a specialist Accountant firm and experts in property and family trusts.
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