No matter how well you know someone you choose to invest with, there is simply no way to guarantee how he will react to a situation without a written agreement up front. And even if you could guarantee a reaction today, things change. Your partner might suffer a stroke, lose a job or move to France. A partnership agreement might not be able to predict every eventuality but it can put fundamental principles and dispute resolution steps in place.
It's one thing to shake your partner's hand on an agreement to put in an equal amount of money to buy a rental property. It's quite another to anticipate every subsequent potential expenditure over the course of your ownership. A partnership agreement can include initial contributions, outline estimated contributions over the course of your ownership, place limits on future contributions, create a contribution fund from rental profits and require an emergency fund. When money issues are worked out ahead of time and a fallback plan is in place for emergencies, disputes are minimized.
Not every partnership is based on equal allocation of contributions and profits. Contributions may include expertise and sweat equity as well as funds. In addition to including these distinctions in the contributions section of the agreement, specify allocation in percentages, dollar amounts and time expended.
If you think the big decision in a rental property partnership is limited to the purchase, think again. What and when to improve and fix, what to charge for rent, who to select as a tenant, how to respond to a difficult tenant, how much liability insurance to secure and when to sell are questions that may arise. You can't anticipate them all, but you can develop a process that will guide you through every issue. Define the process.
Do you want to keep the property for a year, a decade or forever? What if one of the partners changes his mind next week? Unless the exit strategy or a process for determining the exit is written in stone, any one partner — even a minority partner — can force a sale at any time. You can't always prevent a sale with a partnership agreement, but you can put steps in place that require a partner who departs from the exit strategy to be bought out at a price that reflects a discount or penalty and allows you to keep or expand your share.
No matter how many contingencies you write into a partnership, disagreements will arise. If you've written in both an exit strategy that discourages an unplanned sale and a process that kicks in to settle disputes, you should be able to work your way through most disagreements.
Mary Gallagher runs Mary Gallagher Planning (mgaplanning.com), an urban planning and consulting business in San Francisco. She is the former assistant planning director for San Francisco and planning director for San Mateo. Gallagher has been writing about real estate, development and land use for numerous websites since 1995. She holds a master's degree in historic preservation planning from Cornell University.