The Essential Guide to Forming Successful Partnerships

In the real estate business, partnering with others, including credit partners, is sometimes essential to closing deals. We often speak with individuals eager to enter the real estate market but lacking the necessary resources, especially as lending becomes more restrictive. I previously wrote about partnerships, noting that many fail because they are formed for the wrong reasons. This month, I want to highlight the significance of forming partnerships for the right reasons and explain how to do so effectively. We will focus specifically on credit partners, emphasizing the importance of proper implementation to avoid legal issues.

First, a disclaimer: I am not an attorney, and nothing in this article should be considered legal advice. I am merely sharing my experiences and understanding of these partnerships.

Now, let's dive in. A credit partner is typically involved in long-term financing. In a successful partnership, each party adds and receives value. The credit partner helps secure financing, while the other partner(s) find and manage the deals. They split the profits as agreed. This arrangement benefits both parties, with the credit partner providing the financial resources and the other partner(s) contributing expertise, time, and labor.

Securing financing has become increasingly challenging, especially for self-employed individuals who often face rejections despite having documented income. Even those with high credit scores and substantial savings can be denied loans. Therefore, some investors may need credit partners to continue expanding their property portfolios.

Creating these partnerships correctly is crucial. Here are three effective methods:

• LLC: Forming a Limited Liability Company (LLC) is often the best option if the partner doesn't need to show the full rent amount to qualify for additional loans. It simplifies accounting and offers safety for both parties.

• Joint Venture (JV): If the credit partner needs to show rental income for future loan qualifications, the property should appear on their Schedule E on their tax return. This arrangement requires them to display the full rent amount and liabilities, paying you your profit as a management or consulting fee, which will also appear on Schedule E. A joint venture agreement must outline these details.



• Sublease or Lease/Option: Another clear method is for the credit partner to rent the property to you, and you sublease it to the tenant. The lease agreement should specify that mortgage and expenses are paid first, with the remaining balance split. Both parties will then reflect the property on their tax returns. Consult a CPA regarding property depreciation benefits under this arrangement, and include an option in your lease to define terms for selling the house.

All these methods are viable as long as the credit partner shares in the profits. It's crucial to avoid having the credit partner finance the property and then exit the deal, such as deeding the property to you after financing it and paying them a fee. This practice, known as straw buying, is illegal. Never pay a fee to use someone else's credit. If they sign the loan, they must remain involved and responsible for it. Additionally, for multiple deals with the same partner, the loan will appear on their credit report, affecting their debt-to-income ratio and making future loan qualifications more difficult. If it’s on their credit report, they should show income on their tax return to offset the liability.

In a related issue, some Denver investors were found paying to use others' credit, which led to financial troubles and foreclosures, damaging the credit of those who signed the loans. Avoid becoming a straw buyer for someone else.

In summary, partnerships, when done correctly, are powerful tools for building wealth for everyone involved. However, they must be approached with caution and integrity.