partnerships — Recent Posts

You may be wondering if you should have a partner to help build your real estate portfolio. This is a valid question as some asset classes such as multifamily is well-known for being a team sport. But what about single family, note investing, or other asset classes? This is not an easy decision and it requires looking at your temperaments, the skills that you bring, and goals in forming the partnership.

I have met investors who formed partnerships from the beginning of their real estate careers through meetups, conferences, and even online. I have also met investors who began on their own and partnered up on specific deals where it made sense. Lets take a look into some of the pros and cons of using a partner or going solo in building your real estate portfolio:

Advantages

“If you want to go quickly, go alone. If you want to go far, go together" - African Proverb

Teamwork: Investing in real estate will require you to have resources, whether that be capital to purchase the home and make renovations, knowledge to structure/negotiate a deal, or time and hustle to underwrite the deal, communicate with your team members, and oversee the project. By having a partner, you are able to share the workload and also select tasks according to the strengths of each person. If you love to work with spreadsheets and look at the numbers, and your partner loves to network, build relationships, and find deals, there is a natural compatibility and chemistry between the deal finder and the analyzer. In another example, one person may have the money from a high paying W-2 job, but the demanding hours may not allow them to fly to the different markets, meet with the team, and underwrite/pursue leads. This person may benefit from teaming up with a person who may have low funds, but more time to perform the aforementioned tasks. This also works for people with poor credit, maximum Fannie Mae loans, and other commitments.

Shared Networking: You may have heard the idea Six degrees of separation, where all living things and everything else in the world are six or fewer steps away from each other so that a chain of "a friend of a friend" statements can be made to connect any two people in a maximum of six steps. By having a partner who is well connected, you instantly become two steps away from finding the next person who may be able to help you in your business, whether that be a realtor, contractor, property manager, private lender, or mentor connection. Real estate investing is very well a relationship business and having a strong network will certainly provide huge dividends down the road.

Increased Accountability: Assuming that you have found a partner who is equally motivated, capable, and willing to do the work, you will have won yourself an accountability partner for the long haul. Although you can find large profits in a relatively short period of time, real estate investing is generally not a "get rich quick" scheme. As such, there will be moments where you lose focus, motivation, and need someone to help you get back on track and keep your eyes on the prize. Further, as the saying goes, two heads are better than one, or 1+1 = 3 (synergy). When you encounter a roadblock, you and your partner will be able to put your heads together to come up with a better solution than just you alone.

Disadvantages

"No deal is good enough, to take down with a bad partner"

Multiple Captains: When driving to a destination, it becomes difficult to stay on course when there are several people trying to take control of the steering wheel, each believing they know the best route. Compared to a solo investor, where each decision starts and stops with them, having a partner (assuming 50/50 equal general partners) means that you have to listen and respect the opinions of others. This may result in compromising even though you disagree with their strategy or decision in pursuing or passing on an opportunity.

Division of profits: While an advantage of a partnership is division of risk, the flip side means that any upside is also divided amongst the partners. Assuming all things equal, you may have found a home-run deal that brings a 100% return over 5 years ($100K --> $200K) through forced appreciation and improved management, but the overall returns are split in half with your partner. Contrarily, if you would have purchased this deal by yourself by utilizing debt for the other $50K seed money, you would have realized all $100K in gains (less debt service) which may be significantly higher than the partnership scenario.

Partner problems: Whether you partner up with a stranger or your best friend from childhood, its very important to vet them and understand their finances, goals, and temperaments. I have seen people's situation change in the blink of an eye through death, divorce, health complication, gambling habits, etc. and these things can impact your partnership. There are numerous case studies online where partners sued each other alleging theft of assets, not fulfilling their part of the contract, and other types of fraud. Further, there may be cases where outside liability (e.g. car accident) of your partner results in the loss of your asset as they may be forced to liquidate the property to settle their debts. Make sure you protect yourself by engaging a real estate attorney to draft up the operating agreement or joint venture agreement that secure your interests.

To create a successful partnership, make sure that you and your partner have clearly written goals that align before you start to look for deals. For example, if you want to be a long term buy and hold investor and your potential partner only wants to do fix and flips for 2 years and get out of the game, there is clearly a conflict of interest. Next, remember that consistent communication is key. After identifying your goals and business plan on how to get there, make sure you communicate issues (without personal emotion) and offer solutions to the problem - no one likes a complainer. There may be times where one partner needs to concede to another, and other times where you stand firm. If partners learn to respect one another and compromise for the benefit of the group, then the relationship will become even stronger and you will be one step closer to your goal.

As mentioned above, there are both advantages and disadvantages for partnerships, and as an investor I have gone both solo and partnered up for deals on a case-by-case basis. Remember to carefully review how they apply to your situation, your personality, and the deal. There are many successful investors who have done it both ways and have reached their goal, so do not fear one or the other, and maintain an open mind.

As always, please make sure you do your due diligence and talk to your CPA/Attorney/Financial Adviser before making any investment decision.

Good luck!