Pros And Cons Of Co-Owning Rental Property

By on March 19, 2017

Sometimes you come across a deal that is too good to pass up. And you could very well feel that it is the deal of a lifetime in your mind.

The problem is that you don’t have enough of your own funds or funding sources to do a deal. This is when you entertain the idea of “sharing” the investment with a partner or co-investor.

There are many situations where real estate investors have to give serious thought into co-owing rental property.

Some of them include:

  • You don’t have enough of your own capital as mentioned previously
  • The party who controls the doorway to the deal is the one seeking a partner
  • A group of friends feel that it would be fun to invest together and spread the risk
  • It take too much of a commitment for a single individual to handle
  • etc

Whatever the case, sharing the responsibilities of being a landlord can bring about a number of advantages, as well as disadvantages.

For example, if you have ever played any video games that allowed multi-players, you would know that having a teammate in the game can mean doing extra damage to the enemy. But having a partner could also make a mess of things that leads to game over sooner than if you were playing the game yourself.

This is the same with co-owning real estate. Here are some main advantages you can expect.

1) Lesser responsibilities

If you have ever taken on the job of landlord yourself, you would be aware of the multitude and variety of tasks you have to undertake.

This can be very manageable when you are operating with a single property. And as soon as you hit the 3 property mark, you will find that your time and resources get spread thinner and thinner.

By having someone on your side who has the same risk exposure and goal as you, you should be able to share the responsibilities. You might even avoid the things that you hate doing altogether.

The key factor in making this work is to be clear and concise on the responsibilities of each person. And when things overlap, there must be a pre-agreed authority that would decide on the final decision and outcome.

You don’t budge in on your partner’s area, and vice-versa.

Experienced real estate investors understand this. So it’s no surprise that a lot of co-owners team up as active partner(s) and a sleeping partner(s).

2) Lower expenses

This is another area that needs to be discussed and clearly agreed upon at the point of the conceptualization of the partnership.

If there’s anything that’ll sure to cause conflicts and confrontation among partners, it’s money.

In an investment partnership, you will usually be able to save on expenses as expenses are shared among the co-owners. The portion that each party will fork out is usually segmented by the percentage of the stake they have in the investment. This means that if there is a 50/50 share in the investment, the expenses will be 50/50 accordingly.

However, there are many circumstances that create partnerships. So the split would depend on the deal that you have agreed upon.

3) Bigger buying power

When you want to enter the big league, it is almost certain that you are going to rope in other people for their finances and resources.

How many people or corporations in the world is able to acquire and manage a whole building themselves?

The biggest advantage of bringing in partners is in the pooling of spending power and resources. So if you are involved in an insider group of real estate investors, it’s about time you guys talk about making a deal that is out of the reach of the average individual investor.

There’s little point in partnerships when you are taking on deals that you can do by yourself.

4) Spreading the risks

The biggest factor that motivates people to take action is the fear of loss instead of the potential of profits. It’s no shame to admit it if you fall into that category of risk profiling.

In co-ownership, a failure of the investment or extended periods of vacancy will not fall solely on you. Losses are spread out accordingly lowering your risk exposure.

As we all know, it’s not all cozy in partnerships… especially in real estate co-ownerships. Here are some main drawbacks to be prepared for:

1) Lower income

It goes without saying that the income and profits that the property generates is shared amount the owners.

If the income is minute after the split, you might question yourself what’s the purpose of doing the partnership in the first place. This goes back to the previous point regarding going for bigger deals when doing co-ownership investments.

The bigger the deal, the higher the income, and the more there is to share among you.

2) Less authority

If you are used to calling all the shots in landlording, be prepared for a culture shock. Because unless there is an agreement that you will be overseeing all operations, there is every likelihood that your partners will get involved in the management of the property as well.

This means that there might be times when you see certain actions as illogical… yet there’s nothing you can do about it as it’s not in your area of responsibility.

This can be a nightmare for control freaks.

No longer will you be able to conclusively decide the vendors and contractors to hire, the rental to charge, or the type of tenants that move in. It could also mean that you could one day land into trouble with the law that is no fault or negligence of yours.

More decision makers can also mean a slower decision making process that can be taxing on tenants and efficient operations.

3) Unpredictable co-owner

The best case scenario when you get into partnerships is that the other party is someone whose on-the-ball 24/7. Totally committed to the success of the investment.

But the world is not ideal.

You might end up with someone who is a complete opposite of what’s ideal. This can happen especially with friends who you got into investments with. You felt that they could be depended upon on faith. And what turned out is a disaster.

If for example, your partner is in charge of managing the aspects of repairs and maintenance. And he forgot, or even worse, is too lazy to arrange for repairs to take place, you could end up with a very unhappy tenant. This is the good case scenario. The bad case scenario is when his negligence puts you into trouble with the law.

Is your co-owners credible? Can they be depended upon? Tack record?

4) Exit strategy

In most accounts, there is usually an exit strategy that is agreed upon when the partnership started.

But the future is unpredictable. Circumstance evolves. And people change.

When the time comes to execute the exit strategy, your partner might have a change of heart to what was previously agreed on. And this could prevent you from exiting according to the initial plan.

If you have a conniving fox of a partner, he might even sell his stake behind your back. Leaving you with new partners you’ve never met with whom you have to please.

Don’t say never. Things like these happen frequently in business.

With the advantages and disadvantages in mind regarding co-owning property investments, do weigh out the pros and cons carefully before making a commitment into a partnership.

The biggest headaches in business are usually with the people you work with. And for some weird reason, major problems usually don’t arise when you are not doing well. It’s when real money is being made that the horns grow out of the head of your partners.



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