If you invest in real estate with partners, there are important things you need to discuss in advance. This will protect you later from costly legal or accounting fees.
Here are some of the main things to consider:
Who is going on title?
If it is your first investment, I suggest that all partners be on title to the property, in their personal names, as opposed to a corporation. A lender will want all the partners to sign personally for the mortgage, so there is little advantage to spending the extra money to incorporate, with additional bookkeeping fees and tax returns. You can always get insurance to protect against claims related to liability.
How are decisions going to be made?
Key decisions include who to accept as a tenant and which renovations to undertake. Most of them should have majority approval, but in some cases, you may require decisions to be unanimous, to protect all of the partners.
Who signs the cheques?
Signing authority and how distributions are made to the partners is also a concern. I suggest that cheques up $1,000 or $2,000 can have one signature, but anything more needs at least two. There should be a separate account devoted to the investment, so there is no confusion about personal cheques being used to pay bills.
When is reporting to be done?
The partner who is managing the property should be required to submit monthly reports to the partners about the rents received and the expenses paid each month. There should be an annual report as well. This way each partner can make the appropriate income and expense reporting to the Canada Revenue Agency when filing separate tax returns.
How are disputes settled?
If things go to court, only lawyers win. Agree on a detailed and expedited arbitration process. That way the arbitrator’s decision is final, with no right to go to court, where it will inevitably get delayed and become expensive.
What if one partner dies?
There should be a process where the property is appraised and the partner who survives has to buy out the estate of the deceased partner at fair market value.
What if one partner wants to sell and the other partners do not?
There should be a similar process where the partners who do not wish to sell have to buy out the partner who wants to sell at fair market value, to be determined by an appraisal.
What if one partner doesn’t pay their share of expenses?
If one partner is not paying their share, then they should lose their right to make any decisions about the property. There should also be a formula so that the non-defaulting partners can buy out the share at a reduced value.
It is hoped that every real estate investment will lead to a profitable result and that no one will have the need to look at a partnership agreement. However, if things do not work out, it is good to know that the answer can be quickly found, without having to resort to costly legal or accounting procedures. By having the right legal and accounting advice before entering into a real estate investment with partners, you can ensure peace of mind for all partners involved.
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