Real Estate Partners – The Profits and Pitfalls

real estate partnersMarriage and real estate partnerships aren’t that different. There’s a courting period, there are things that each person has to bring to the table to make it work, and there are as many problems as there are possibilities for success.

In real estate investing, just as in a marriage, there are many ways that a partnership can fail. If you rush into a relationship without dating or doing your due diligence you may find that you’re not as compatible as you once thought. You may find that you and your partner end up having different objectives for the relationship. One of you may oversell what you’re bringing to the relationship. Or, maybe things change, and one of you just decides it’s time to move on.

There’s plenty of ways a partnership and a marriage can go wrong. It can get messy and it definitely can be stressful and emotional. And it can happen when you least expect it. And it can feel like there was no warning.

We’re no strangers to turmoil in our real estate partnerships. While the majority of deals we’ve done have been with partners, and they’ve gone very well, there are always new lessons to be learned.

So, if there’s potential for so much turmoil with partners why bother? Why not do all of your deals solo?

Well, just like the right partner in your life can make you happier, more fulfilled and even more successful, the right partner in your real estate deals can allow you to do bigger and better deals with reduced risk.

In fact, the right partner can bring any one or more of these positive things to a joint venture:

  • Skills and Expertise:For example, if we decided to get into flipping properties we’d be interested in partnering with someone that has experiencing working in the trades or working as a contractor. Someone that has never invested in real estate before may wish to work with someone with experience on their first deal.
  • Money:Most of our deals involve us bringing our expertise and experience to the deal and doing all the work in exchange for a partner putting up most of the initial capital required.
  • Financing Options:On a recent deal we were unable to secure the kind of financing we wanted so we brought in a partner who could. Sometimes the best way to look good to a bank is to bring in people that fit into their tiny little box of lending requirements.
  • Risk reduction:Having additional parties involved in a deal allow everyone to carry a lesser share of the risk on a deal. It reduces each persons exposure and downside should something go wrong.
  • Network:In the past we partnered with someone that had a gigantic network of high net worth individuals. This guy knows someone in just about any field and could get them on the phone pretty quickly.

Julie’s parents aren’t willing to take on partners, and they acknowledge that this has slowed down their wealth creation. They made the choice consciously but they’ve missed out on great deals because they weren’t willing to work with a partner on the deal.

On the other hand, we’ve expanded our wealth rapidly thanks to great partnerships but we’ve also experienced a lot more stress, surprises and drama than we would have without partners.

People like to make partnerships more complicated than they need to be. If you keep things simple it will be easier for everyone. There are also a few other things you can do to minimize  the potential pitfalls of partnerships:

1. Before you get involved communicate a lot… and just when you think you’ve communicated too much … communicate some more! And a big part of communicating is listening. Listen carefully to your prospective partner. Ask questions. Understand their objectives and their needs. Make sure you’re going to be able to meet their needs. Focus on what you’re bringing to the table. Make sure it’s at least equal to what they are bringing to the table … preferably greater than what they are bringing to the table so they feel confident that they are getting a great deal.

2. Always be accountable.Recently we almost lost two really great rental property deals because our partner had less money to contribute than we had expected. We felt we had two choices … be bitter and lose the deals or be productive and save them. It literally took 100+ hours and it pretty much consumed our summer vacation but we saved the deals. And we are fixing the leaks in our process and learning from what went wrong.

We aren’t victims of anyone’s actions. And when you don’t accept the victim role you can keep control of the situation. And that is what we did. We accepted the fact that we had not done a good job of communicating, realized that we contributed to the disaster, and took the yucky tasting medicine.

If you are always accountable for what goes wrong in a partnership, you will be able to handle just about any of the pitfalls.

3. Have a clear and fair joint venture agreement created by a lawyer: And of course, follow up that accountability with a solid and fair joint venture agreement that lays everything out clearly for all parties involved. There’s nothing wrong with covering your butt!

Published on September 18, 2009

5 Secrets to Successful Real Estate Partnerships

Successful Real Estate Investing PartnershipsOne good thing about being young is that you are not experienced enough to know you cannot possibly do the things you are doing.”  – Gene Brown

The smartest thing my husband and I did to build our multimillion dollar real estate portfolio in under eight years was to find a couple of great partners.

As I reflect back on the things that my husband and I did in the last eight years to become millionaires – I think that finding good properties in areas with promising economic futures, and buying them with good partners was the key to our success.

Partners can bring cash to the table if you don’t have enough, they share the risk on a venture and can also provide mentoring or advice. A good partner, in our experience, brings something to the deal that you don’t have. If you and your partner have experience but no money, you will be stuck. If you both have money but no idea what you’re doing, it will be messy. But if one partner has experience and the other has money, it’s a foundation for a solid partnership.

It’s not a guaranteed great match just because you have the expertise and they have the money! There are some other things to consider before you partner with someone on a real estate investment.

Here’s what we’ve learned are the secrets to successful real estate investing partnerships:

1. Common Objectives

Some people have the expectation that buying investment property is their ticket to overnight wealth. Or they think that just a couple of deals will give them enough cashflow to retire on, but the techniques that can create giant amounts of cash flow or that are more instant in their wealth creation are extremely high risk gambles that pay off for only a few. For many others they can lead to a lot of problems, including bankruptcy in extreme cases.

Before we decide to partner with anyone, we make sure that they have similar fundamental objectives for their real estate investing as we do. When we buy real estate, we buy properties that will have positive cash flow within 12 months of purchasing it, and that we plan to hold it for a minimum of 5 years, but more realistically, 10 – 15 years.

As long as our partner has a similar mindset, and is comfortable investing their money for the long term, then we can continue discussing our partnership.

2. Begin with the End in Mind

It’s a throw back to Stephen Covey’s Seven Habits of Highly Effective People, where he says“Begin with the End in Mind”.It’s important to discuss with your partners how either one of you can get out of the deal in the future if it’s critical. For example, if you buy a duplex and each have 50% ownership, but down the road, your partner comes on hard times and needs the equity from the property. You have three options:

1. Sell the property
2. Buy your partner out
3. Find another partner to buy out your partner.

You could also do nothing, or give your partner a loan against their share in the property, but realistically you’d probably consider one of the three options.

What you need to discuss and have written into a partnership agreement is how you will value the property if you choose to buy your partner out or find another partner to buy out your partner. You should also note that any new partner must be 100% satisfactory to you. In other words, your current partner should not go out and find a new partner for you and sell their share without consulting you.

3. Be Fair

It’s not always easy coming up with $20,000, $30,000 or more for a down payment on a property. And, although we are millionaires on paper, that doesn’t mean we always have chunks of cash lying around ready for the next super property deal. But because we have a few partners that almost always have money sitting around, and because they’ve made great money with us in the past and they trust us to make good decisions, they are always willing to consider new deals from us. And, they selectively tell their friends. Because, what you’ll find, is that people with money, often have friends with money. Over time, you can find yourself with a really solid group of people willing to provide the down payment for future deals.

Just because someone is waving a stack of $100 bills in your face, doesn’t mean you should throw them on the first deal that comes your way.The secret to long term and high quality partnerships is to spend your partners money even more frugally than you would spend your own. This means you NEVER put someone else’s money into a deal you wouldn’t put your own money into. You NEVER take a cut that is unreasonable for the amount of work you’re doing relative to the amount of money they are putting in, and you NEVER make major decisions without consulting your partners.

4. Under-promise and Over-deliver

Not too long ago, our main partner introduced us to a friend of his. As the two friends were discussing their businesses and their investments, our partner realized that this person would make a great addition to our team. When we met for coffee my husband and I communicated our failures in investing as well as our successes. And we clearly told him that we aim for neutral cashflow properties that we hold for the long term.

What we told him is not totally true though. We aim for positive cash flow. But, we always try to undersell ourselves and then over deliver. We’d do the same on a specific deal. We’d tell him that we expect it to break even, but really we’re expecting it to be postive.

If you tell someone that a property is going to bring in $500/month in positive cash flow, and then it only brings in $380 each month, they will be disappointed. But if you tell them that the property will be neutral cash flow, and then it brings in $380 they will be thrilled.

We’d rather undersell someone and have them decide not to invest with us than over sell, have them invest with us, be disappointed, and be an unhappy partner.

5. Communicate Regularly

We partner with people that don’t expect us to give them a glossy annual report each year. They don’t expect a weekly progress report. We do, however, always give them updates and advance notice of money coming in and going out. And, we keep them up to date on the property. If a tenant moves out, we let them know. When the unit is filled again, we let them know. If we foresee a major expense coming, we give them a heads up. If we just learned of some recent sales in the area that indicate our property has gone up in value we let them know. If there is bad news in the market, we will reassure them about their investments. But, we do this informally. A quick phone call or an email when there is something to tell them.

And, if they call or email us, we get back to them right away. If you have money in the bank and you want to check on it, but nobody is answering your calls and you can’t get online to see how your money is doing, you will lose confidence in that bank. The same will happen to your partner if they can’t talk to you when they need you.

We found that because we take care in choosing our partners, and ensure we are all “singing from the same song sheet”, we rarely get calls from our partners. And, we also find that our circle of trusted partners is growing without us trying. And thank goodness, because now that I am retired from my job, and my husband is close to doing the same, we’ll have more time to find great deals, but less cash coming in to pay for them!

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