When it comes to real estate investing, I definitely think you should have partners. However, there are many caveats.
First off, I believe that you should only do partnerships on a house by house basis; in other words, I would never add someone to your LLC, because then they’re a 50% partner in your entire business. If you’re partnering on individual properties, if something goes wrong, you can never partner with them again, and you don’t have to worry that they’re on your LLC — which would make it pretty tough to get rid of them.
Secondly, get everything in writing. It doesn’t matter if the person is your brother, sister or best friend. On every deal you do, you need to have an agreement in writing that states how the profits are split and what each person is contributing to the deal.
If you’re a brand new investor, you probably don’t have a lot of money to invest. (I know I didn’t.) So you might go around and find deals and then partner with an investor who will put up the cash.
Or the situation could be reversed. These days, I’m the one putting up the cash, and investors are bringing the deals to me. Now, your role — whether you’re putting up cash or just bringing a deal — will determine the level of due diligence you need to do.
If a person has zero experience, then they’re likely going to be the ones who are going to bring the deals and will be partnering up with a successful investor. The new investors are the ones who need to do the most homework to make sure that the supposed “expert” investor who they’re partnering up with, knows what they’re doing, has the right paperwork, and is going to honor all obligations.
How can you tell if the investor is actually successful and knows what they’re doing?
Well, the first thing you want to do is go to your local REIA meeting and ask about them. Find other successful investors and ask “what can you tell me about John Doe.” Next, you want to go to “John Doe” himself and say “can you give the details about 5 of your deals including the addresses?”
Don’t be shy to ask this question, just tell him you’ve heard horror stories about new people getting ripped off and you don’t want to be one of them. Of course, we all know that there are many dishonest gurus out there that have probably only closed one deal in their life, if any.
And if you ask the “expert” investor to give you the details on five of his deals and he flinches or starts making excuses on why you can’t have that information, then walk the other way quickly. This “5-deal test” is probably one of the smartest things you can do to make sure you don’t get taken advantage of.
On the other hand, when you become the expert, you get to be more in control. The main thing you have to worry about then, is people wasting your time by approaching you with crappy deals.
Either way, I recommend partnering up on a per-deal basis — that way you leverage your time and are able to close more deals this year – just remember to get EVERYTHING in writing.