Investing with a single partner or as a group is a challenging task. This will involve structuring the right entity as well as understanding the goals of every stakeholder. Having said that, investing as a group can be a success. You can take advantage of opportunities in which you would not otherwise have access to. Investments that require a huge capital investment would be completely out of your reach if you had to go it alone.
When investing with a group, you have more bargaining power. For example, let’s say the group enables you to bring a larger down payment to the table. With a larger down payment, you can take a tougher stance on negotiating on price and other terms. You will, in addition, have more alternatives simply because there are far more properties within your reach. Many of these properties are such that most competing investors cannot afford them because they are acting alone. Another important facet of this idea is that larger properties often have much better cash flow than a single family residence that you convert into a rental. As a side note, when economic conditions are healthy, it can be difficult to find a single family residence that offers good cash flow for a reasonable down payment. Multi-family properties, on the other hand, typically offer good cash flow.
Partnering with other investors can also help you diversify. Instead of using all of your own money in a single property, you can spread your money across different properties with your partners. This would protect you from an unanticipated occurrence wiping out your entire investment.
Next, you should consider the goals and motives of your partners. Everyone has slightly different expectations, so it’s vital that you continuously communicate with your partners. This is important not only before you decide to pool your funds and invest but also you need to maintain the relationship over time. No partnership is without legal risk. However, with good communication and relationships, you can reduce this risk considerably.
Finally, you need to decide on what business entity to form. You generally have three choices which are a partnership, limited liability company (LLC), or a corporation. A partnership, meaning the business entity not the act of forming a group, generally offers no liability protection. Therefore, it is best to either form a LLC or a corporation. A LLC is generally the easiest to form and has the fewest requirements with regards to formalities and record keeping. This is the best entity choice for most investors. However, the best choice will ultimately depend on your specific circumstances including your income tax situation. You should seek professional advice from both a legal and tax advisor.