Partnering Up Is a Great Way to Invest As Long As You’ve Worked Out These Details
In the last 16+ years, I’ve worked with many investors. Occasionally, I am asked about two or more people pooling their resources to buy properties. This can work, but there is a potential pitfall. And that pitfall is assumptions.
For example, suppose two friends decide to pool resources and invest together. They have known each other for many years, so no issues are anticipated. A few months later, the refrigerator dies at a property, and one wants to install a used refrigerator to save money. The other wants to install a new refrigerator with a warranty. While this seems trivial, I have seen friends argue over less.
How do you minimize such future problems? By writing down and signing an agreement that covers as many potential issues as possible. I am not an attorney, but below are some items I’ve seen on teaming agreements.
- Ownership Interest: Define clearly the percentage of ownership each party has in the property. Usually, this is based on the proportion of the down payment, mortgage payments, and other costs each party contributes.
- Financing Details: Define who will pay for what. This includes the mortgage, who will be named on the mortgage, and how you'll split the mortgage payments. Also, explain how you'll share the acquisition costs like the down payment, fixing up the house, and closing costs.
- Payment Responsibilities: Explain how to divide and pay for regular costs like mortgage, property taxes, insurance, homeowners association fees (if applicable), and upkeep expenses.
- Management and Maintenance: Agree on how property maintenance, repairs, and improvements will be handled, including decision-making processes, funding for such activities, and responsibilities for performing or managing the work.
- Single Decision Point - For example, I've observed situations where one person agreed to replace an appliance while another strongly opposed it. The result was the tenant was without a refrigerator for days and refused to pay rent. This kind of indecision is detrimental when running a business. There needs to be one individual making the final decisions.
- Dispute Resolution: Define and agree upon a method for resolving disputes that may arise, such as mediation or arbitration, to avoid litigation.
- Change in Marital Status: What happens to the ownership if a party gets married?
- Succession: Define what happens if one of the owners dies or if there is a divorce, etc.
- Exit Strategy: Include provisions for what happens if one party wants to sell their interest in the property. This could involve a right of first refusal for the other party, buyout terms, and a method for determining the sale price.
- Rental and Use: Define the rules for renting out the property or parts of it, including how income and expenses will be divided. Also, agree on how the property will be used, who can live there, and under what conditions.
- Contribution Reconciliation: Implement a process for handling situations where one party cannot meet their financial obligations or if there are significant discrepancies in contributions towards expenses.
- Legal and Professional Fees: Decide how legal and other professional fees related to the purchase and management of the property will be shared.
- Signatures and Legal Advice: All parties must sign the agreement, and each party is advised to seek independent legal advice to fully understand their rights and obligations under the agreement.
Summary
The hours you spend creating the agreement will likely save your friendship and legal fees.
