3 risks to manage when buying property with a business partner
Whether you plan on buying office space for your business operations or purchase an investment property you plan to rent, buying property comes with a number of built-in risks. When you purchase property with a partner, those risks become even more complex.
If you're considering taking the plunge of joint property ownership with someone other than your spouse, be sure to devise a plan for managing these three key risks, which can drastically impact the success of your venture.
Property ownership risk one: liability issues
If you're moving from a home office into an office building, you'll face a number of liability issues, including hazards that affect your employees, clients, and visitors and those that affect your property and your clients'. Most often, general liability and property insurance provide financial protection from any losses business owners might incur in these areas.
If you're planning to become a landlord, the liability issues are different. Unsound structures, hazardous building materials, unsafe tenant behavior, and unexpected weather conditions can lead to a number of dangerous circumstances for which you might be liable.
Prior to purchasing any property, you and your partner should discuss the specific risks involved with an insurance agent and get quotes for adequate coverage. This will give you a more realistic and complete idea of how much property ownership will cost.
Property ownership risk two: partner's exit
Business partnerships can invest in key person insurance to protect the business from the injury, exit, or death of a key employee or owner. Even if you opt not to invest in key person insurance, you and your partner should establish guidelines for what will happen in the event one of you leaves, expectedly or otherwise.
An accountant, attorney, and real estate agent can help you work through the various scenarios that might arise when one partner leaves the business.
Property ownership risk three: ongoing expenses
In an era of deflated real estate prices, property buyers can become distracted from the real-world costs of ownership. Most buildings, whether commercial or residential, require regular repairs, updates, equipment replacements, safety inspections or modifications, and more. In addition, properties bought after a period of disuse may require significant rehabilitation before they're usable.
Partners should be realistic about the ongoing costs of owning property and be strong enough financially to cover expenses if, for example, tenants are late with rent payments or the building sits vacant for a few months.
Without adequate cash reserves, ownership expenses can quickly turn a business venture into a debt trap.
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