Real Estate Joint Venture Agreement
Real estate is a tempting investment option if you’re interested in putting your mark on something and building wealth. However, not everyone is in a position to make a big investment on their own. The idea of signing a real estate joint venture agreement with someone else to purchase property can be appealing. Many people go the route of pairing up with friends, family members or business partners to achieve the goal of investing in a property. This avenue holds potential for helping people to reach their goals without walking into the unknown completely alone. Of course, it also holds the potential for pitfalls involving miscommunication or disagreements regarding how details should be handled. Should you partner up on a property? Take a look at the how and why of partnering up to purchase a property.
Why You Might Want to Buy a Property With Another Person
When does it make sense to purchase a property with someone else and sign a real estate joint venture agreement? The big benefit of teaming up to purchase a property is that you will be able to pool your resources. This means that a property that may be out of reach when you’re on your own can suddenly become a realistic option. You may be able to qualify for bank financing more easily if you have the resources of two people instead of one. You are also dividing the risk when you split the cost of a property with another person. In addition, two minds can be better than one when it comes to analyzing whether or not a property is a good investment. Having someone on your team who is also making a big investment can help you to avoid the trap of getting caught up in the excitement and making a bad decision.
The benefits of entering in a real estate joint venture agreement to purchase a property doesn’t begin and end with the financial angle. Investing in a property takes a lot of work, planning and mental energy. Having another person going in on a deal with you will enable you to split up tasks. In addition, a co-buyer can help to keep you focused and motivated through accountability during times when you might start to get too comfortable with the idea of putting off key tasks.
How to Go About Purchasing a Property With Another Person
It goes without saying that you should only consider purchasing a property with someone who you know and trust. Having a shared vision is crucial if you want to avoid issues down the road. Sharing a property is a big financial commitment that will link you with your co-buyer legally, financially and personally for many years to come. One of the big questions that must be addressed during very early conversations about teaming up to purchase a property is how you plan to deal with the title. There are actually four ways to address title ownership.
Here’s a look at them:
- Joint tenancy with right of survivorship
- Tenants in common
Joint tenancy with right of survivorship is common among married couples. However, it can also be used in other situations. This setup determines that the last living person will end up with complete ownership of a property. This arrangement can be used in cases where more than two people hold a title.
Tenants in common is a structure that is used often when each person owns a percentage of a property. However, percentage amounts do not need to be equal. This means that a partner is allowed to sell shares to another person. In addition, shares of individual partners are transferred to their heirs upon death.
A trust allows a partial property owner to transfer their percentage of a property to an heir without the need for probate. This setup allows a partial owner to retain some control over the property after death by leaving instructions for how the property should be handled by an heir. Of course, a trust is a more complicated and expensive way of handing things. Whether or not this is the best option will depend largely on the specific laws that are in place in the state where the property is located.
Forming an LLC is a popular option because it limits the liability of each individual property holder in possession of a title. This setup makes it possible to walk away without huge personal losses if property owners are sued because of something that happens on a property. Of course, the LLC will likely need to declare bankruptcy if this is the case. Forming an LLC can be a good option if you are teaming up with multiple people to purchase a property. However, it may be necessary for each person to bring the needed cash to the table when purchasing a property. Many banks and lending institutions won’t provide financing to an LLC. The effectiveness of forming an LLC varies by state because each state has its own rules regarding how much protection from liability an LLC can be granted.
Questions That Must Be Addressed
Many people are surprised by just how many questions must be addressed before the fun part of purchasing and owning a property can begin. It is important for all parties involved to be on the same page before entering in a real estate joint venture agreement together.
Here are the three essential questions that should be looked at:
- Decide what the fractional ownership of each partner will be
- Figure out how costs like mortgage payments, property taxes, insurance premiums, maintenance expenses and more will be split among owners
- Determine the parameters for how each owner can destroy his or her interest
It is also important to have a conversation regarding credit scores before committing to teaming up with another person to purchase a property. Both of your credit scores will be used by your chosen lender to determine your mortgage rate and terms. That means that the rate and terms you receive for a mortgage could be negatively influenced if one of the borrowers has dings on their credit report.
Alternatives to Purchasing a Property With a Partner
What if you decide that partnering up to purchase a property simply isn’t the right choice at the moment? That doesn’t necessarily mean that your dreams of investing in a property have to be forgotten. You may need to simply focus on starting smaller. This means that you might want to focus on choosing a less expensive investment property and using the money you make from that investment to work your way up to larger investments. You might also want to speak with a lender to see the types of options that are available to you. There are also some exciting opportunities for people who like the idea of investing in properties using a hands-off approach. Technology is really changing the way people invest in properties and see returns. Several popular platforms now make it possible to partake in peer-to-peer lending and crowdfunding opportunities. These platforms allow you to invest sums of money in property purchases and see returns without taking a hands-on approach to actually managing each property. This could be an option if you are interested in getting in the property market without taking on the risks that go along with purchasing a property on your own.