Over the last few months we have seen a number of threads in the forum discussing the pros and cons of property partnerships. While the majority of these are set up in an orderly fashion there are some involving friends and family which can end up very messy. The fact is that you should treat any property partnership like a business not a hobby.
Whether you like it or not you will require a legal agreement for any property partnership to protect yourself and to ensure that the business is on a correct and sound footing. There are many basic legal agreements on the Internet but it is sensible to take specific legal advice to cover your particular situation and plans for the future. It is all good and well suggesting that friends will be friends and nobody will fall out but the world of property investment is littered with partnerships which began this way but ended very differently.
Know your role
What kind of role would you like in your property partnership? What role will your partner(s) play in the everyday running of the business? These are issues which need to be addressed before you even begin to think of buying or developing a property. We all have different expertise and this is where the idea of property partnerships comes into play because each individual partner should have a particular strength. How much time they spend on their particular role and what kind of remuneration this attracts is something which needs to be discussed as soon as possible.
Investment and returns
As one individual may not be able to play an active role in the business they may compensate this lack of input with a greater initial investment. To arrive at an agreeable solution you will need to take into account the role of each party, the time they can put to the business and how the returns will be split. The majority of property partnerships are structured in such a way that each party receives an equal share of the profit (or the loss) after taking into account investment and active roles in the business.
It is all good and well sitting back and suggesting that all profits are split 50/50, without actually discussing input and activity, but you can bet your bottom dollar there will be some disagreements when the profits begin to flow!
While all property investment partnerships are probably created on a long-term basis, as we know things can change with personal circumstances and finances. As a consequence, there may be a time when one or more of the partners is forced to withdraw from the arrangement at which point the issue of capital entitlement comes into play. What kind of return has been built up in the partnership? Does the partnership have sufficient cash flow to cover any repayments?
It is very easy to set up a partnership but there are many things to take into consideration. When investing in business you should expect the unexpected and ensure that as many possible scenarios are covered as possible when the original partnership is being structured.