Before you enter a real estate joint venture, make sure you understand and are protected against the risks
Most people will agree that buying real estate is one of the most viable investments a person can make. And for those who are faced with limited financing, teaming up with a partner and purchasing properties together gives them the opportunity to benefit from a real estate investment. While this can be advantageous to both people, there are certain risks involved that both partners need to be aware of and protect themselves against. Read on to learn more.
Create a formal partnership agreement
Whether you’ve decided to form a partnership with a friend, a family member or business colleague, mapping out your partnership on paper is essential to managing risk and preventing any legal issues later. No matter how well you know the person you’re teaming up with, don’t skip this step. Meet with an attorney and have a formal partnership agreement drafted and establish it as a legal, business entity. There are several different ways you can do this:
- • General partnership
Many people form a general partnership out of default and although it may be the easiest route to take, it’s not the most recommended. A general partnership does not require any official written documentation. Even if you do create it, each partner is at risk of being held liable for the other’s actions. This could result in major losses or business assets being seized—even if you had nothing to do with your partner’s actions and they were not related to the business. Even if you have insurance, you are still responsible for any claims or liabilities that arise on the property.
- • Incorporation
Many real estate partners decide to incorporate, which allows them to create a legal business entity that essentially separates them from the corporation. The advantages to incorporating are that corporations enjoy limited liability, so the partners of the business are not held accountable for the actions of the company. Even in the event that your company is sued, you and your partner cannot lose personal assets and neither of you is responsible for the actions of the other. In the case of a corporation, your business liability insurance will cover any claims against your corporation and protect you and your partner.
- • LLC
A common way that real estate partners operate is to form a Limited Liability Company (LLC). An LLC is similar to a corporation, but not as formal. As an LLC, you and your partner will be protected from any claims or judgements against one or both of you as well as from creditors seizing your property or other company assets.
Get business insurance
When you and a partner decide to purchase property together, experts agree that the best way to protect your mutual interest is with a business insurance policy. A commercial property policy will protect the property in the event of a fire, a flood from a burst pipe or damage from a storm. It can provide coverage for the building, any furniture or equipment inside and landscaping or fencing and more.
Consider Key Person Insurance
Key person insurance is a life insurance policy on you and/or your partner in the event that you or your partner dies or exits the partnership. Business partners often get this type of policy to ensure that neither one is left with the burden of handling the finances or debt of the business when the other one is gone.
Lay it all out
Of course, the key to any successful partnership is for the parties involved to discuss everything up front and come to an agreement on how everything will be handled. Things like ongoing expenses and liability issues are just as important as the type of partnership you’re going to establish and how you’re going to protect your investment.
When you’re ready to purchase a property with a business partner, be sure to review all your options and speak with a financial advisor as well as an attorney to be sure you’ve got all your ducks in a row. Then contact Avante Insurance to discuss which type of business insurance will best protect your investment.