Real Estate Investing Basics

4 Steps to Creating a Great Partnership as a Rookie Real Estate Investor

Expertise:
1 Article Written
Two colleagues giving high five in meeting. Business people celebrating success in conference room.

This article was a collaborative effort, written by Ashley Kehr and Felipe Mejia.

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Have you ever stepped foot in a Crossfit gym and seen all the acronyms? WOD, AMRAP, CFWU, and so many others…

Felipe: Yeah, me too! I walked back out! It made me feel like I didn’t belong or that another language was being spoken.

The same rings true about real estate investing aka REI. When I was starting out, the same thing happened. Except this time, I decided to learn the verbiage. I wanted to learn about real estate more than I wanted to join Crossfit, which is probably why I am successful in real estate and not in Crossfit.

Being able to explain a deal or plan for an investment will require you to learn the language of real estate, as well as the acronyms, therefore proving that you took the time or have been around long enough to hear them. This is especially important if you are seeking out a partner.

Choosing a Partner for Your Real Estate Investing Business

The first step of real estate investing and partnering is to know what you want and how to explain your vision to your potential partner. When you can provide a clear picture or formula to a partner, there is no guesswork about the potential earnings or outcomes of a deal. If your goals and visions align with your potential partners, then that’s a good starting point.

While picking a strong partner is very important, we believe what’s more important is BEING a good partner! Will you be the type of partner that people want to work with or the type of partner that people dread calling?

Listen, when the money comes rolling in, all calls are fun to make. The not-so-fun calls are when you may need $1,000 in repairs and your three months of cash flow is wiped out. How will you tackle the tough issues together?

Related: 5 Lessons I Learned From a Real Estate Partnership Gone Bad

Planting the Seed

There are so many possibilities when it comes to structuring the nature of your partnership, but the first thing you need to do is find someone.

Ashley: I call it “planting the seed.” Start with identifying a list of people who could be potential partners. Once your list is defined, talk to each one of them about what YOU are doing.

growing-wealth

Try to shy away from telling them you are seeking out a partner. Once people think you are soliciting them for something, they stop listening. Tell them the details of what you are going to do and why you think real estate is a good investment.

This can happen over multiple conversations. Each conversation gives a little more information and builds the hype. When you are finally ready to sell them on a certain deal, have as much information available as possible. Let them know you’ve enjoyed talking with them about real estate investing and that you are now looking for a partner.

Supply them with a BiggerPockets Calculator report for the deal, the MLS listing (if applicable), and information on your personal finances. Include your personal finances because it carries weight that you have your own finances together. You could include a tax return, a credit report, or a list of other investments and their performances.

If you are relying on experience as your value, then prove it. Show your research, how many books you’ve read on the topic, your construction experience, etc. It is important to remember that you are making this an opportunity for them. Prove how this will benefit them.

Real-Life Example: My First Partnership

Felipe: Let me tell you a story about one of my first partnership projects.

Flipping a property, to me, is always fun! There are challenges to overcome, and I always walk away learning something new.

This project, in particular, definitely taught us a lot. The house was N-A-S-T-Y. There were literally hundreds of rats in the house. Every piece of furniture in there had been chewed on or clawed by rats. Get the picture?

Not to mention, the house also smelled like old, wet dog and urine. It was so bad that the home inspector barely finished the inspection and respectfully left before we could even pay him.

We purchased the property for $70,000 cash. The after repair value (ARV) was $200,000! We had hit a home run—something people talk about for years before it usually happens. (Well, maybe not THAT much of a home run but definitely a notable one.) We sold the property for $220,000.

Anyway, the plan was simple: My partner and I were to go half-and-half on everything and split the profit. As the project got underway, here is where things got hairy.

What if I am able to work four hours one day, and he can only work two hours (or the other way around)? What if I get sick and can’t work for two days, or what if my partner, Billy Joe Bob (not his real name), had a car problem, etc.?

BJB (see why acronyms can be important?) and I quickly encountered this issue. Luckily, we were friends and were able to sit over coffee and talk this out. We found an easy fix: We would work for goals, not time.

For example, I was good at floors and he was good at paint, so we started assigning tasks versus worked hours. We quickly identified our strengths, and man, did we work a lot faster and more effectively. It was crazy how much time and money we were wasting by not utilizing our individual strengths!

Dividing Labor in a Fair Way

Just like with BJB and me, when a partnership uses its strengths and plugs (the connections you have with others), the plan for the partnership runs a lot smoother. Do not hold your partner to an “amount of hours worked” or a “clock in and out” quota. It is better to hold each other accountable based on goals. This way, you’re doing what you’re good at and not dreading the next day.

painting blue wall in an empty room. ladder and paiting tools placed on timber floor.

If BJB would have asked me to paint a wall, I would have cringed and dreaded coming in to work the next day! Since I was better at floors, I was able to have fun with my goal of having the floors finished by a certain time.

Another example of projects we split were the water heater and the driveway. Both of these projects had to get done, and we were both trying to handle them. BJB was excited about making sure the house had efficient hot water, and I wanted to ensure the driveway looked good for pictures at the sell.

We both wanted to work on our projects, but for some reason, we felt we needed to oversee each other’s work. However, we both realized that for the best interest of time and money, we were more effective doing the things we liked and not having to sit through each other’s work.

Let me be very clear about this topic. Sometimes my work took longer; other times, it was easier. This didn’t matter anymore, because we were doing what we liked instead of being dragged into something we did not like. Man, did time and work efficiency fly when we made this change!

So again, are you a good partner to work with? Will you use your strengths to benefit the other partner or will you squeeze your partner for all of his or her time and not use your own strengths?

Structuring a Partnership

Once you have your structure in place, be sure to put it all in writing. A common document to use is an operating agreement. This can be drawn up by an attorney and customized to your partnership structure.

An operating agreement is commonly used when setting up a limited liability company (LLC). You and your partner can create this or a joint venture. LLCs and joint ventures are the two most common entity types for partnerships. An attorney can guide you through what will work best for you.

Related: A Step-by-Step Guide to Set Up Your LLC (With Video!)

Besides all the legal jargon, I recommend including terms that state what happens now and in the future between you and your partner in as much detail as possible. If there is ever any argument or confusion, you can refer to the operating agreement to clarify.

I find this similar to a tenant/landlord lease. A landlord can always refer to the lease to respond to tenants’ questions or concerns.

In your agreement, state who will be doing what tasks, if any. Include what will happen in the future.

For example, if you sell, what happens? If one partner passes, what happens?

Ashley: I highly recommend life insurance policies on each partner. If one passes, the insurance proceeds can be used by the other to buy the equity from the family of the partner who passed.

A partnership may be overwhelming at first since there is a lot of risk, liability and dependability. Active engagement from an attorney and an accountant can help lessen these fears and protect both parties.

Once you have agreed upon a structure, run it by your attorney and an accountant. It is important to know how this will affect your taxes!

Remember, one of the benefits of real estate investing is the tax savings. Make sure you are maximizing these savings by consulting your accountant—another OPPORTUNITY for you to give to your partner!

Are there any tips you’d add to the list above with regard to establishing partnerships?

Comment below!

Ashley Kehr is the co-host of the Real Estate Rookie Podcast. Just a few years removed from being a beginner herself, Ashley is now helping newbies figure out actionable steps to get their first de...
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    Kesha Ferguson
    Replied about 1 month ago
    Hi Ashley. Thank you for that article, you offered a lot of good information. I like how you and your partner decided to focus on your strengths instead of hours worked.
    Ashley Kehr Rental Property Investor from Buffalo, NY
    Replied about 1 month ago
    Hi Kesha. I am glad you enjoyed it!
    Kasey Clair
    Replied about 1 month ago
    Never considered the life insurance aspect of the partnership, as I have always worked on projects with close family. This is is definitely something I need to consider when expanding in the future!
    Kelly Beiler New to Real Estate from Reading, PA
    Replied about 1 month ago
    @Ashley Kehr @Felipe Mejia Great article, especially with the nuggets on using tasks vs. hours and life insurance! Thanks, guys! Looking forward to the podcast!! :)
    Amir Jefferson
    Replied about 1 month ago
    What in informative article. Working toward each other's strengths to not dread the next day was a jewel; I'll consider partnerships now as a start, thank you. I'm so glad this popped up on my dashboard! Happily anticipating your podcast.
    Michael Short Investor from Bushnell, Florida
    Replied about 1 month ago
    Good info for anyone thinking of starting a partnership .. I partnered with a out of state investor on a couple deals back in 2017-2018 and I did everything you have suggested here almost to the tee .. except the contract part .. yes , I did have a contract with my partner ( he was basically the financial partner and and I was basically everything else ) We set out to do fix and flips and executed a contract between he and I on our first property that went through the buy , fix , sell without many hitches except the learning curve we had working with each other .. although , like you suggested above .. the contract was expertly written by his attorney and spelled out exactly what was expected , including timelines from each partner .. We made a nice profit for that first flip in a matter of around 3.5 months from start to finish .. his total investment was right around $102k .. and after costs we split a profit of $68k .. not bad considering all I invested was my time and knowledge .. meanwhile , before that property had sold .. I found another with very good profit potential and we again modified a new contract and each signed it before the property went to closing on the buy side .. This property needed a complete remodel, it was a hoarder house and I can’t even tell you how much stuff I took out of that place .. I do know there was 5 .. yes 5 , 40 yard containers that where filled and taken away .. but that didn’t include all the stuff that my clean up crew took home with them .. if I had to guess , it was at least another container full .. I then tore everything down to the studs .. unfortunately, we ran into a lot of unseen road blocks that stalled that project for months .. after about 5 months after the clean up and demo , we actually had a ok from the City to move forward once a couple stipulations were met .. Meanwhile , around that time I found a great .. very great profit potential property .. in the next town over .. By this time also , I had at least 3 other series out of state investors wanting to team up with me on investments in the same way I had structured with my current partner .. but , I had a non compete type of clause in our contract that was in effect while our project was being rehabbed . Which meant I could not work with other investors or on any other projects , even my own .. while our projects were under way .. I could once we fit to the point of listing and if we didn’t have anything else going on .. basically , he wanted to know that our partnership took priority over all else .. In retrospect .. it’s not something I would sign again .. but , at the time .. it seemed like a good deal to get 100% financing even though I was not a rookie .. I didn’t have cash reserves in order to do flips myself at the time .. Ok .. back to the best deal I found in a while .. this was one of those unicorns you hear about but don’t believe unless it falls into your lap .. So the quick numbers on this property I’m getting ready to talk about ..,1950’s 3/2 Concrete block and stucco w/ raised foundation , newer metal roof , beautiful original hardwood floors throughout original light fixtures that were so gorgeous and expensive .. working fireplace .. oversized city lot only a block and a half from the court house downtown .. the asking was $87.5k .. I negotiated it down to $70k along with $1k in closing costs. It was from a wholesaler I had bought a couple properties before from and he just put it under contract that day ..so he was willing to be talked into lowering his assignment fee to just over $5k .. which actually since I negotiated the closing costs at only $1k .. he ended up walking with less than $5k .. Ok .. rehab was maybe $12.5k .. it needed some hardwood flooring repaired , some light rewiring .. and a rework of the closet / bathroom area in the master ..also a newer ac unit was needed .. it would pass a 4 point inspection once termite inspector signed off .. some paint and definitely needed help on the landscape .. but , it was mostly just overgrown . And you could tell the previous owner before loved her plants and had a lot of exotic type of plants and a koi pond ..it had so much great potential .. The ARV was a strong $165-170 all day long .. So .. the deal had to be done fast .. my partner wired the funds and within 48 hrs we had a closing set up to close the day after the 48 hrs. Meanwhile .. I had my attention back on the down to the studs home .. at night my partner and I discussed the new contract for this house and modified our standard one to fit this one .. it spelled out how we planned to fix and flip .. and only in the case that if it didn’t sell with a certain time frame ..I think it was 6 mths ..my partner had the option to turn it into a rental for a year at which time ge we would get it appraised and ge would buy my interest out after it was rented for a year .. I would get a small portion of the rental profit but the bulk would go to him as it was his capital on the line ..again , not something I would agree to again .. Ok .. sorry for the Novel by the way, So I had signed the contract , sent it to him .. but the closing had already happened before he signed it .. By chance , he was scheduled to fly to central Fl ( where I live ) from Chicago ( where he lived ) the day after the closing ...which he did and upon arrival and seeing his new property ..he decided to tell me he wanted to keep it as a buy and hold.. I was like . Ok . Just buy my interest out . As in pay me the 50% of projected profit ( we projected that flip would have taken only a maximum of 2-3 months total to rehab and sell , but probably closer to 2 ) Even on the low end of the ARV of $165 .. minus costs .. the profit should be around $70k . So split , my half would be around $30-35k .. Well .. here’s where the lesson cone in .. Since I had not gotten the signed contract back from him .. he was under no legal obligation to give me a dime ! Instead , he offered me $3k finder fee .. which after I was done calling him every bad name I could think of ( not to his face or to him . It’s after I got off the phone ) I had time to cool off and think about the situation I allowed myself to be in .. it was nobody’s fault but my own for continuing to trust someone I thought I knew .. we had been talking for over a year , and had a flip under us and involved in another one at the time.. it came as a shock to me .. So , I accepted his offer .. got his check .. cashed it . All of which took a couple weeks ..meanwhile I cane to a crawl on our other project on purpose .. and after his check cleared . I informed him that I was no longer confident in his ability to be truthful with me and continue to do what’s right .. contract or not .. and I wanted to be bought out of our last remaining property that I had worked my ass off to get to the point it was presently ... He seemed surprised .. I laughed .. but wanted to cry .. see .. it wasn’t even the money so much but the broken trust .. Had he discussed wanting to jerk if as a buy and hold before hand or at any time before the property closed .. even though I had other investors lined up and willing to put their money up .. I would have most likely been ok with negotiating a finders fee . Probably would have like to get what the wholesaler made .. closer to $5k . But , because I trusted and didn’t insist on getting that contract signed before closing .. I learned my lesson . .. and as you suggested ..,if I ever go into a partnership again . I’ll most likely do it by setting up a joint llc that would cover all future investments .. by the way, .. I did get bought out on the one that was down to the studs .. it took him almost 10 months to rehab the buy and hold ( he didn’t gave anyone local that he knew to complete the work I guess ) and he never did get the one down to the studs finished or even worked on again and ended up selling it for a loss .. even after I had offered to purchase it for what he had into it and he declined .. That house is now torn down and it’s just a empty lot now .. I’m guessing a neighbor bought it and demo’ed the remaining structure .. I know . It was a lot of reading just to get to the point ., which I guess is, no matter how well you think you know your partner .. always , always put yourself in a protected state and get that partnership contract filled out and signed !! For the record .. I’m not ever opposed to working with another partner and I think it’s a great way to go if you find the right ones .. I’ll just be more insistent on some things , like the contract , not always being exclusive but being loyal is important .. ect .. I wish you and everyone else the very best .. God Speed ! P.S. I actually met that partner right here on BiggerPockets.. best real estate website ever !!
    Jamie Pagay New to Real Estate from Houston, TX
    Replied 29 days ago
    @Amber Koontz
    Jamie Pagay New to Real Estate from Houston, TX
    Replied 28 days ago
    @Amber
    Brandon Barber from Dallas, TX
    Replied 22 days ago
    This is awesome. I don't think many people have explained their partnerships or how they are structured that I have seen. Ashley is killing it here on BP and social media. Well done.