To Partner or Not to Partner…That is the Question!

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Inevitably if you’ve been around real estate investing for very long, you’ve heard about the potential of partnering with other people for investment deals.

Partnering can introduce considerable benefits to an investment deal. However, it can also introduce considerable headaches. There is nothing wrong with partnering, but just be smart about your decision to do it!

When to Use An Investment Partner

Whether you should use an investment partner or not really depends on a few different factors. These can range from:

  • The size of the deal. If we are talking about a small single-family rental property (buy and hold only, no flipping), an investment partner might be more of a pain than not. But if we are talking a multimillion dollar commercial deal, then I would think it to be rare not to use an investor partner (if not use several). I can’t personally speak for the latter, but it makes total sense to me why partnering in those cases is much more common.
  • Returns on the deal. More specifically than the size of the deal and when the size really matters is the returns. That small single-family home, if it only produces $200/month in cash flow, splitting that with a partner might make profits a little skimpy when it would be better to just use your own money instead and keep the cash flow for yourself.
  • Why you need the partner. Are you using an investment partner because you really need one or because it sounds fancy or you just want your buddy in on a deal with you? Are you trying to lessen risk by using a partner? You’d be surprised at how many people I hear talking about using investment partners when they really don’t need to. No harm necessarily, but figure out if you actually need a partner first.

Related: The Truth About Real Estate Investing Partnerships

The Absolute Best Time to Use an Investment Partner

Ooh, ooh, when, when?!

When you couldn’t otherwise do the deal.

Maybe you don’t have enough cash, or maybe you can’t get the financing under your name, or whatever the circumstance may be… assuming it’s actually a good deal, don’t miss out on it just because you are missing something required to buy into it.

Always do what you need to do to make the deal happen. However, if you can get away without using a partner, I recommend that instead (unless we are back to talking about big commercial deals where partnering greatly increases the returns for everyone). Why do I recommend not using a partner if you don’t have to?

Risks with Using An Investment Partner

Okay, I can hear you already saying you already know the risks associated with using an investment partner.

Related: Is Entering a Real Estate Partnership the Right Move for You?

A couple of them are obvious, for sure, but a couple may not be so obvious. So hear me out and be sure to consider all of these before you partner with anyone.

  • Improper Structuring. If the partnership isn’t thoroughly defined in the beginning, likely through legal paperwork, you run a major risk of an unexpected event coming up and no one knowing how to deal with it or a partner losing out on something. Like what if one of the partners sees an untimely death…. Is it certain that the remaining partner will gain full ownership? If that isn’t defined ahead of time, whoops! Not good. Or what if you didn’t define a certain situation and that situation happens and the partners all have different opinions on how to resolve it? Not having a defined solution ahead of time could make for some nasty fights between the partners and potentially ruin the relationship and/or partnership.
  • Getting Conned. Not sure if that is the appropriate term, but depending on the type of partnership, make real good sure you are partnering with someone you know (in addition to having legal paperwork in place) so you don’t end up partnered with someone who somehow robs you blind. Especially if you are the one putting up the money, be smart about how you are doing that and with who.
  • Headaches. Sometimes no matter how well you think you know someone, you may not really know how they are in business. It’s like roommates. I love a lot of my friends but I would never want to be their roommate because how people are in their own home can be much different than how they are outside of it. Living with someone is very different than being friends with them, or whatever the relationship might be. Do you know that the person you are partnering with won’t become a complete thorn in your side? What if they unexpectedly become a controlling nutbag or what if you didn’t realize beforehand that their basis for decisions doesn’t align with yours, or what if they disappear on you and don’t help you when they are supposed to yet they still collect their share? There’s really no way to guarantee any of these things won’t happen, whether you know the person or not, but keep it in mind as a possibility.
  • Guilt. What if you are the instigator of the partnership, even though your partner was the one who ultimately decided to go in on it with you, and the deal goes sideways? What if the returns never happen or you end up with a loss? If you have a conscious, you might end up with mega guilt over your partner losing the money! Even though it’s not your fault because nothing is guaranteed in real estate investing, but I doubt that you won’t feel at least a little bad. What if your grandmother gave you her retirement money to invest and it got lost? You can’t tell me you wouldn’t be crushed about destroying grandma. Even a friend, or family member, or if you are a really conscious person, you might even feel guilty if the partner was a stranger!
  • Liability. Speaking of deals going sideways, and relating back to the original point about structuring, you better make sure you can’t be held liable in some unexpected way should something go haywire. Like I said about never knowing how people can be sometimes, what if you lost all of grandma’s money and then grandma gets irate and tries to sue you despite you being her favorite grandkid? Is the structuring in place ahead of time to protect you in that situation? Or what about tenant liability or financing liability? Whose name is on the legal documents and who is assuming the risk in the deal, i.e. who can be held liable for something?

As with any investment situation, make sure you are being smart when it comes to liability, risks, realities, and benefits. Don’t be naïve to the possibilities of what can happen, or swear that your grandma would never turn on you, because you really just never know. On the flip side, don’t over-structure partnership either.

Legal protection is always good, but it’s also very easy (and common) to overdo it. Just like forming entities for properties, a lot of time it is overkill when there are easier, cheaper, and more simple solutions.

When you seek legal counsel for a partnership, make sure you are working with someone who specializes in real estate investments so they can most accurately advise as to what the best solution might be, not just what will put the most money in their pockets.

A Real-Life Partnership

I have an investor partner on some of my properties.

At the time I bought them, I didn’t have enough cash to buy the properties myself but he had loads of cash. He was also trying to minimize how many mortgages he had because he would eventually hit the 10 limit after so many properties.

It worked perfect because I took the mortgage (saved him a mortgage he could use for himself later) and he provided the cash for the deal (he had gobs of it to spare). So he provided the down payment and closing costs and I took the mortgage, essentially assuming the risk, and did all of the work. In return, we split the net profit (or loss) 50/50.

This partnership worked great because my partner didn’t want a mortgage, I didn’t have the cash, and at the time the returns on rental properties were extremely high so splitting the cash flow still leaves a pretty penny in our pockets each month.

A partnership for the same type of rental property now might be a little harder since the general market has jumped in price, meaning the returns are now less than before and could yield much more minimal returns for each partner, but it’s always an option.

I’ll tell you what though, something I never would have realized would happen had it not- when some of our properties experienced some drawn-out problems, I felt horrrrrrible for my investor partner.

I could have cared less about losing my own money (as much as one could not care about that), but knowing he wasn’t getting return?

I can’t even tell you. No matter who told me it wasn’t my fault, there was nothing I could have done different, and he was the one who offered to go in with me… I couldn’t help but feel bad, and it was a bad feeling that I hated. There was a big downside for me.

Have you partnered for investment deals before?

If so, how was it structured and did it pan out as expected? Any pitfalls?

Be sure to leave your comments below!

 

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About Author

Ali Boone(G+) recently left her corporate job as an Aeronautical Engineer to work full-time in Real Estate Investing. She began as an investor only two years ago but managed to buy 5 properties in just 18 months using only creative financing methods. Her focuses have been on rental properties and overseas investing in Nicaragua.

15 Comments

  1. James Pratt on

    Ali, very good post. It’s impossible to stress how important it is to have a contract made out showing what each partner obligations are. Nowadays, a simple handshake just doesn’t cut it.

    Lost money with partners, even with my own brother. “I’ll do this, I’ll do that”, yeah! when??? When they saw the amount of money we were making it was like winning the lottery, they couldn’t spend it fast enough.

    • Ali Boone

      I totally agree James. Even if it is someone you are close to, even a family member, you just never know how people are going to be in business so have that contract in place.

      My dad and aunt inherited a couple businesses from my grandfather and my aunt, who is overseeing, keeps giving herself astronomical raises that are completely absurd. With nothing in writing about their salaries, it’s hard to contest!

  2. I would like to partner with someone – it seems like a cool idea. You hang around together, bounce ideas around, two heads are better than one, you work together, supervise the hired help, etc. and then in the end; you both split the net. And I think with the right person I can still hold the fantasy of this perhaps one day coming true. But so far I have found that I either supply the majority of the funding, or do the majority of the work, or both. Which really doesn’t bother me very much. But so far, without exception, I have always ended up being told, or at the very least having it intimated, that I had somehow cheated them and that their 50% of the net was insufficient compensation to them.

    stephen
    ————

    • Ali Boone

      Oh no Stephen. Lol. I assume it was probably not even enough compensation but probably more than enough?

      In hindsight, is there anything you could have done differently you think to avoid those situations? Or it just is what it is?

  3. Graham Mink on

    Great article Ali!

    Can anyone recommend a good book that outlines the different possible partnership setups and how to structure deals with multiple investors?

    • Arthur Banks on

      Good question. I’ve wondered the same. I’m interested in the idea of a partnership but couldn’t figure out how to get their money back in a buy and hold situation. I guess it would be more of a private investor more than a partner. But I still don’t know how to get their money back if they wish to have it returned with interest rather than split monthly income.

      • Ali Boone

        Graham and Arthur, I don’t know of any. Great question though. I first started learning about options for partners from a random investor guy at a conference I was attending. I had to tweak his advice for small SFR properties, but there are always ways to do it. But the big differentiation being, as you mention Arthur, are you taking a loan in which you pay interest or are they getting a set part of cash flow and equity?

  4. Gualter Amarelo on

    Excellent article! I am currently called out with my local lenders and am seeking ways to structure a good partnership. This article has definitely helped me see the importance of gooood structuring. Thanks Ali!

  5. Good article Ali. Having been involved in dozens of partnerships, I can say that the best partnerships are ones where the two partners have differing skill sets and/or bring different things to the table. That might mean they bring money when you can’t, or they bring labor that you can’t contribute, or they know things that you don’t know. If you partner with “yourself”, one of you is redundant.

    • Ali Boone

      Haha, totally true Brian. Redundant, and I think it opens up more room for the partnership to become uneven. If you both bring the same things to the table, you don’t need double of most of it, so one of you just doesn’t have to perform. But when the partners compliment each other, I’d think it would keep everything more even.

  6. Diane Bartley on

    Good article! I met my partner through BP and it’s worked out really well so far. We did due diligence on each other before agreeing to anything, had a RE lawyer set up a legal operating agreement for our new entity (LLC), and made sure to spend a lot of time talking about our goals and objectives and getting to know each other’s communication styles up front before committing. We also confirmed that we had complementary skills and value to bring to our first deal (with hopefully more soon).

    Finally: typo in your paragraph on Guilt – first instance of “conscious” should be “conscience” and second instance of “conscious” should be “conscientious.”

    • Ali Boone

      Good catch Diane! I completely claim to mix those up all the time. And don’t even get me started on screwing up ‘affect’ and ‘effect’. That one is the worst.

      Wow, that’s really cool about your BP partnership! When you say due diligence on each other, what kinds of things did that entail?

  7. What do you folks think of having 3 partners? I’m debating adding a third partner to add some capital so we can grow the business more quickly.. anyone have any experience in doing so? I’m not yet sure if the financial benefits are worth the administrative headache…

    • Ali Boone

      I don’t have experience with that yet John. Can’t say for sure. I guess it depends on how much financial benefit it brings? Also, a big thing is whether any of those partners are anticipated to be silent or not. That makes a huge difference! 3 opinions gets tricky, but if one or two are silent, that may get substantially easier.

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