How to Structure a Real Estate Partnership: Agreements, Splits, and Avoiding Disasters

Real estate partnerships let you do deals you can't do alone. One partner brings capital, another brings deal-finding ability, another brings management expertise. Together, you access properties, financing, and scale that would be impossible individually.

But partnerships also create the conditions for spectacular blowups. Disagreements over money, responsibilities, and exit timing destroy friendships and bank accounts with equal efficiency.

The difference between a partnership that builds wealth and one that ends in litigation comes down to structure. This guide covers how to build that structure—from entity selection to operating agreements to exit planning.

Why Partner in Real Estate?

People partner for four reasons:

1. Capital — you found a deal but don't have the down payment, [renovation](/blog/bathroom-renovation-cost-guide) funds, or reserves
2. Credit — you need someone who can qualify for financing
3. Expertise — you know how to find deals but not how to manage renovations, or vice versa
4. Scale — managing 50 units alone is a full-time grind; splitting duties makes growth sustainable

The best partnerships combine complementary strengths. The worst ones combine two people who bring the same thing and both want to be in charge.

Before partnering, ask yourself: can I do this deal alone, just slower or smaller? If yes, consider whether the partnership is worth the complexity. Sometimes it is. Sometimes you're better off staying solo and growing at your own pace.

Partnership Structures

General Partnership

Two or more people jointly own and manage property. Everyone shares profits, losses, and liabilities equally unless otherwise agreed.

Pros: Simple, no filing requirements in most states Cons: Every partner is personally liable for all partnership debts and the actions of other partners. If your partner signs a bad contract, you're on the hook.

Verdict: Almost never use a general partnership for real estate. The liability exposure is too high.

Limited Partnership (LP)

Has two types of partners:

• General Partner (GP) — manages the investment, makes decisions, has unlimited liability
• Limited Partners (LPs) — contribute capital, share in profits, but don't manage and have liability limited to their investment

Pros: Lets passive investors participate without management burden or unlimited liability Cons: GP retains full personal liability; formation requires state filing; limited partners who participate in management can lose their limited liability protection

Common use: Syndications where a sponsor (GP) raises money from passive investors (LPs) to buy larger properties.

Limited Liability Company (LLC)

The most common structure for real estate partnerships. An LLC provides:

• Limited liability for all members (your personal assets are protected)
• Pass-through taxation (profits and losses flow to individual tax returns)
• Flexible management structure (member-managed or manager-managed)
• Flexible profit/loss allocation (doesn't have to match ownership percentages)

This is what most 2-5 person real estate partnerships should use. The LLC operating agreement becomes your partnership agreement.

Joint Venture (JV)

A JV isn't a legal entity—it's a contractual arrangement for a specific project. Two parties agree to collaborate on a deal, define their roles and profit splits, and go their separate ways when the project is complete.

Best for: One-off deals like a single flip or development project where you don't want a permanent partnership entity.

A JV can be structured through a dedicated LLC (most common) or through a simple JV agreement. Using an LLC gives you liability protection; a bare JV agreement doesn't.

The Operating Agreement: Your Partnership Bible

If your partnership were a marriage, the operating agreement would be the prenup. It governs everything: who contributes what, who decides what, who gets paid what, and what happens when things go wrong.

Never form a real estate partnership without a comprehensive operating agreement. Here's what it must cover:

Capital Contributions

Spell out exactly what each partner is contributing:

• Cash contributions — amount, timing, and whether they're loans to the entity or equity
• Sweat equity — how non-cash contributions ([deal sourcing](/blog/finding-off-market-deals), renovation management, [property management](/blog/property-management-complete-guide)) are valued
• Property contributions — if someone is contributing a property they already own, get an independent appraisal
• Future capital calls — what happens when the property needs a new roof or a unit sits vacant for months? Can the managing partner call for additional capital? What happens if a partner can't or won't contribute?

Example capital call provision: "Additional capital contributions may be called by a majority vote of members. Members who fail to contribute within 30 days will have their ownership interest diluted proportionally. Members who contribute in excess of their pro-rata share will receive a preferred return of 10% on excess contributions."

Profit and Loss Distribution

Define how money flows:

[Cash flow](/blog/net-operating-income-guide) distribution — how monthly or quarterly profits are split. Common structures:

• Pro-rata by ownership — simple but doesn't account for different contribution types
• Preferred return + profit split — capital partners receive a preferred return (6-10% annually on invested capital) before profits are split. This compensates them for the risk of deploying capital. Remaining profits split based on agreed percentages.
• Waterfall structure — profits flow through multiple tiers. Example:
  • First: Capital partners receive 8% preferred return
  • Second: Return of capital (capital partners get their investment back)
  • Third: Remaining profits split 70/30 (70% to capital partner, 30% to managing partner)
  • Fourth: After a certain return threshold (e.g., 15% IRR), split changes to 50/50

Common partnership splits:

Management and Decision-Making

Day-to-day operations: Designate who handles:

• Tenant placement and management
• Maintenance coordination and vendor management
• Bookkeeping and financial reporting
• Insurance, taxes, and compliance
• Banking and bill payment

Major decisions requiring unanimous or majority consent:

• Refinancing or taking on new debt
• Selling the property
• Capital improvements over a threshold (e.g., $5,000)
• Adding new partners or investors
• Taking on additional properties
• Any lawsuit or legal action

Compensation for management: The managing partner typically receives either:

• A management fee (5-10% of gross rent, similar to a third-party property manager)
• A larger share of profits
• Both (fee plus a disproportionate profit share)

Pay the managing partner fairly. If one person is doing 90% of the work for 50% of the profit, resentment builds fast.

Exit Provisions

This is where most partnerships fail to plan, and where most disputes originate.

Buy-sell provisions (buyout clauses):

• Right of first refusal — if one partner wants to sell their interest, the other partner(s) get first right to buy at the offered price
• Shotgun clause — Partner A names a price. Partner B must either buy at that price or sell at that price. Elegant but aggressive.
• Appraisal-based buyout — independent appraisal determines fair market value. Buyout at appraised value minus a discount (10-15%) for illiquidity.
• Forced sale provisions — under what circumstances can the partnership be forced to sell the property? Deadlock, bankruptcy of a partner, death, divorce?

Death or disability: What happens if a partner dies or becomes incapacitated?

• Life insurance funded buy-sell agreements (each partner carries a policy on the other)
• Right of the surviving partner to purchase the deceased partner's interest from the estate
• Timeline and payment terms for estate buyouts

Divorce: A partner's divorce can force a sale of partnership interests. Include provisions that restrict transfer of interests without partner consent and give existing partners the right to purchase interests that might otherwise go to a divorcing spouse.

Dispute Resolution

Include a mandatory dispute resolution process:

1. Negotiation — partners attempt to resolve disputes directly within 30 days
2. Mediation — if negotiation fails, a neutral mediator helps facilitate resolution ($2,000-$5,000 for a day of mediation)
3. Binding arbitration — if mediation fails, an arbitrator makes a final decision ($5,000-$15,000 but far cheaper and faster than litigation)

Specify that the losing party pays the prevailing party's legal fees. This discourages frivolous disputes.

Entity and Tax Structure

Single LLC

The simplest structure. All partners are members of one LLC that holds the property.

• Tax treatment: Multi-member LLC taxed as a partnership by default. Each member receives a K-1 reporting their share of income, losses, deductions, and credits.
• Liability: Each member's personal assets are protected from LLC liabilities (assuming proper formalities are maintained).
• Best for: Small partnerships (2-4 people) holding 1-5 properties.

[Series LLC](/blog/real-estate-llc-guide)

Available in about 20 states (including Delaware, Illinois, Texas, and Nevada). A Series LLC lets you create separate "series" within one LLC, each with its own assets, members, and liabilities.

• Advantage: Each property can be its own series, shielded from the liabilities of other series—without filing separate LLCs for each.
• Cost savings: One filing fee and one registered agent instead of one per property.
• Caveat: Not all states recognize Series LLCs, and their treatment in bankruptcy is still being tested in courts.

Holding Company Structure

For larger partnerships:

• Parent LLC — the management entity, owned by the partners
• Property LLCs — each property held in a separate LLC, owned by the parent
• Management company — a separate entity that manages properties and collects fees

This structure isolates liability between properties and provides clean separation of management and ownership functions. It's overkill for a two-person partnership with one rental, but essential once you're managing $1M+ in real estate.

Tax Considerations

• Depreciation allocation — the operating agreement can allocate depreciation disproportionately to the partner who benefits most (usually the higher-income partner). This must have economic substance beyond tax avoidance.
• 1031 exchanges — partnership interests cannot be exchanged under Section 1031. If you want to 1031, the partnership must sell the property and complete the exchange at the entity level. Alternatively, distribute the property to partners as tenants-in-common before the sale.
• Self-employment tax — active partners may owe self-employment tax on their share of partnership income. Limited partners and passive investors generally don't. Structure accordingly.

Work with a CPA experienced in real estate partnerships. The tax planning opportunities (and pitfalls) are significant.

Red Flags in Potential Partners

Watch for these warning signs:

• No skin in the game — partners who want profit without contributing capital or substantial effort
• History of lawsuits — check court records. Serial litigators will eventually litigate against you
• Financial instability — a partner under financial stress may push for distributions you'd rather reinvest, or fail to meet capital calls
• Control issues — a partner who won't agree to clear decision-making frameworks will create deadlocks
• Vague about contributions — "I'll handle the marketing" isn't a contribution. Quantify everything.
• Unwilling to put it in writing — if a potential partner resists a formal operating agreement, walk away. "We trust each other" isn't a legal strategy.

A Partnership Setup Checklist

Before your first deal together:

• Define each partner's role, contribution, and compensation in writing
• Form an LLC with a comprehensive operating agreement
• Open a dedicated bank account for the partnership
• Set up bookkeeping (QuickBooks, Stessa, or similar)
• Obtain adequate insurance (property, liability, umbrella)
• Establish reporting cadence (monthly financials, quarterly reviews)
• Review the partnership annually—adjust roles and splits as the portfolio grows
• Each partner consults their own attorney before signing (yes, separate attorneys)
• Fund a life insurance buy-sell agreement if the partnership is significant

Frequently Asked Questions

What's the most common real estate partnership split?

For partnerships where one person provides capital and the other provides expertise and management, a 70/30 split (capital/operating) is the most common starting point. For equal partnerships, 50/50 with a management fee to the active partner is standard. There's no universal right answer—the split should reflect the relative value of each partner's contribution.

Should we use an LLC or just a partnership agreement?

Use an LLC. A bare partnership agreement provides no liability protection. If the property causes injury or the partnership incurs debt, your personal assets are exposed. An LLC costs $50-$500 to form depending on the state and provides essential liability protection.

Can I do a [1031 exchange](/blog/1031-exchange-guide) with partnership property?

The partnership can do a 1031 exchange at the entity level. Individual partners cannot exchange their partnership interests under Section 1031. If individual partners want to go different directions, consider dissolving the partnership and distributing the property as tenants-in-common before the exchange.

What if my partner isn't pulling their weight?

This is why the operating agreement matters. Define specific responsibilities and performance standards upfront. Include provisions for buyout or dissolution if a partner materially breaches their obligations. If the operating agreement is silent, your options are limited to negotiation or litigation.

How do I protect myself if my partner goes through a divorce?

Include a provision in the operating agreement requiring any transfer of membership interests to be approved by existing members. Add language giving existing members the right of first refusal on any court-ordered transfer. Consider requiring partners to have their spouses sign a consent acknowledging the operating agreement terms.

Do we need a lawyer to set up a real estate partnership?

Yes. An operating agreement template from the internet is a starting point, not a solution. Real estate partnership law varies by state, and the tax implications of different structures can cost or save you thousands annually. Budget $2,000-$5,000 for an attorney to draft a proper operating agreement. It's the cheapest insurance you'll ever buy.

Related Articles

• 1031 Exchange for Beginners: Complete Guide to Deferring Capital Gains Taxes
• 1031 Exchange: Defer Taxes, Build Wealth Faster
• 1031 Exchange Rules 2026: Complete Guide to Tax-Deferred Real Estate Exchanges