Partnering with a friend or family member to purchase a rental property can seem like an attractive prospect, especially with rising real estate costs in Toronto and the GTA. Going in on a rental property with a partner can make it a more affordable and potentially rewarding venture, but with it comes a significant risk. Before making any hasty decisions, it’s important to take into consideration the legal implications of a joint venture partnership.
Family and friends may not always come first
Having a close relationship with your prospective business partner is important, and this could mean partnering with a family member or friend. These partnerships are often fragile and require more maintenance than a strict business partnership – it’s important to leave emotions at the door when going into business. An ideal partner will share the same goals and vision, leading to an agreement that will benefit both parties.
Maintaining an open line of communication at all times is vital, otherwise the partnership can become messy, leading to possible legal and personal ramifications.
Ensure your partnership agreement covers everything – even worst case scenarios
When crafting a partnership agreement, it’s important to discuss every aspect of the contract with your partner. In order to ensure that the legalities of the contract are locked down, everything must be detailed in writing and a lawyer should be consulted to draft up the final agreement – a simple handshake agreement won’t cut it. In order to protect your assets, you must understand all legal aspects of the joint venture. Things like expenses, obligations, shotgun clauses, buy-outs, and even the death of a partner should be considered when writing a contract.
Having a detailed partnership agreement written up by a lawyer is important, and will ensure that the concerns of both parties are addressed. Pricing can be affected by the intricacy of the contract, property values, and the number of partners involved.
Understand your options if your partner fails to meet their end of the deal
If you find yourself in the unfortunate position of having an unresponsive partner, you will be left with few options. Having a partner break their part of the agreement does not nullify the contract when it comes to things like paying the mortgage on the property. You will be held legally accountable for all aspects of the partnership agreement. Partnerships can go wrong at a moment’s notice, no matter how close your relationship with your business partner – and sometimes because of a close relationship that your partner is taking advantage of.
If your partner proves to be incapable of meeting contractual obligations, you may have the option of a shotgun clause, which would allow one party to break the loan agreement. This is only if you had the foresight to include the option in your formal partnership agreement. Another option is a buyout, which would allow the remaining partner to assume the property independently. No matter what the situation is, it is important to consider the partnership’s potential end when writing the initial agreement.
Know the risk of a joint venture
A joint venture of any kind can be risky – Entrepreneur estimates that up to 70% of all joint business ventures fail. Buying a rental property with a partner can alleviate much of the financial stress of property management, but can end in disaster with improperly written partnership contracts, differing goals and ideologies, and irresponsible partners.
As with any real estate property venture, there is a great deal of risk and reward involved in pursuing a partnership with a friend or family member. If you want your partnership to succeed, make sure that all parties know exactly what they’re getting into, and that everybody involved is truly ready for the responsibilities of a business relationship. If you’re considering a real estate joint venture in Toronto and the GTA, contact Highgate to help you look at properties and give you more advice on making these partnerships work.