Home Blog Real Estate Business

Do You Need a Real Estate Partner?

Logan Freeman
4 min read
Do You Need a Real Estate Partner?

Did you know the divorce rate for business partnerships is higher than the divorce rate for marriages? In the U.S., while 40-50% of marriages end in divorce, the divorce rate for business partners is much higher at 80%.

We’ve seen over and over again in the business world, poor business partnerships ending in disaster for both parties. What looks good on paper doesn’t end up working in the real world. In the ’80s, a movie starring fellow A-listers Warren Beatty and Dustin Hoffman had “can’t miss” written all over it. Everyone involved couldn’t be more wrong. The team-up resulted in Ishtar, a stinker of a movie with some of the worst reviews of the ’80s and even worse box office. Released in 1987, it was made for $55 million and made only $14 million worldwide. For perspective, Top Gun – released in 1986 – was made on a budget of $15 million but grossed $357 million worldwide. The team-up of Maverick and Goose worked out a lot better in this case.

Related: Real Estate Partnerships: A Powerful (& Profitable) Way to Start Out as an Investor

In the business world, remember WordPerfect? In the early 90’s it was the top word processing software in the world before the onslaught of Microsoft’s Word. When Wordperfect merged with networking software giant Novell, everybody thought it was a match made in heaven. In reality, the merger was a disaster. The infighting between the Novell and the WordPerfect executive teams brought down both companies. Novell eventually sold off WordPerfect at a loss of $1 billion and by 2014, both companies and their products were defunct. A poor relationship can bring down entire business empires.

Now here are some business partnerships that worked:

  • Steve Jobs and Steve Wozniak of Apple
  • Bill Gates and Paul Allen of Microsoft
  • Larry Page and Sergey Brin of Google

The right partners can be the key to greater success like in the case of Apple or, on the flip side, the grease on the slippery slope to failure, losses, and ruined reputations like in the case of WordPerfect.

Why do some partnerships work and others don’t? It turns out there’s a common thread among successful partnerships. Successful partners recognize their limitations and respect what the other can bring to the table. Do the problems arise when one party thinks it can do the other person’s job? Sounds like a recipe for a failed marriage as well. That brings us to one of the golden rules of partnering.

Golden Rule: Know what you’re each bringing to the table.

Can you stand to benefit from each other? Is what you’re contributing valuable? What does the other party bring to the table? Will the combination of assets result in something greater than the sum of the parts or worse? Can you leverage the combined skill sets, knowledge, expertise, and capital for the mutual benefit of both parties?

Other Rules to Live By.

  • Avoid partners for short-term needs. Partnerships with short-term windows lack the commitment to success.
  • Avoid partners with no special skill sets – whose roles or functions can be hired out or outsourced. Why give up equity when you can just outsource?
  • Avoid partners when you’re desperate. Just like the worst time to get involved in another relationship is right after a breakup when you’re desperate, avoid business partnerships when you’re desperate. The cloudy judgment makes for business disasters.
  • Avoid partnering just for security and emotional support for the journey. See above.
  • Avoid partnering with those you like thinking it’ll be fun. Avoid making decisions based on emotions. Base partnering decisions on metrics, numbers, and economic fundamentals.

Vetting Potential Partnerships.

Test runs in the business world aren’t unusual. Potential partners start with something small to see how the two sides interact. If the test run works out, longer-term projects are then undertaken.

When considering an investment partner, run a trial first. Far too often, we refuse to run trials. One-off deals or minimum capital commitments are a great place to start to test the interaction of the two sides before committing long-term. I know of plenty of stories where two buddies decide it would be great to go in on a deal together. They go for broke on their first venture together – taking on a huge project more appropriate for seasoned investors. “Four-plex? No problem. It’ll be great” they tell themselves. “We’ll have a lot of fun. We’ll do it all together.”

The problem is, one guy usually puts up the money while the other guy promises to put in the labor. It’s all fun and games until the weekend rolls around and the lure of sports and bars or sports bars is too much for one party. If you put in the money and the other guy doesn’t show up for the rehab, guess who’s gonna do the rehab? The guy with the money on the line. You end up doing all the work because the other guy has nothing to lose. Instead of taking on the four-plex, maybe a test run on a small single-family home would have been wiser.

When to Partner.

Just as with successful business partnerships like the founders of Apple, make sure that your roles and skillsets don’t overlap. Make sure each party can benefit from the other. This will more likely result in appreciation than resentment. At Apple, Steve Wozniak was the engineer and Steve Jobs was the visionary and marketer. They were perfect complements. Neither one wanted to do the other’s job. When considering a partnership, make sure each party brings different strengths to the table.

Related: The No. 1 Way to Find a Partner for Your Real Estate Investments

Here is a quick list of when it’s a good idea to partner:

  • When you know your weaknesses and your strengths and your potential partner’s weaknesses and strengths. Do you complement each other or are you just duplicating each other’s assets?
  • When you want to scale. Will the team-up result in efficiencies ideal for scaling or will the team up slow each other down?
  • When you know the sacrifices you and your new partner(s) will have to make. Both parties having skin in the game ensures each side staying in the game.
  • When you have documented each role. A handshake only goes so far. Put pen to paper.
  • When you have documented the exit in case one decides to leave or doesn’t fulfill their obligation. See above

The right partnerships can lead to wealth and fulfillment. The wrong one can lead to failure and frustration. When considering a partnership, know what to look for and what to avoid. Know your limitations and your strengths. Equally important is knowing your potential partner’s limitations and strengths. Will you complement each other like Woz and Steve Jobs or will you class like WordPerfect and Novell?

business podcast ad for blog

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.