Real Estate Partnerships: Tips for the Rookie Investors

So we just jumped into the world of partnerships.  After 3ish years of investing on our own (and by we I mean my husband and me) we decided to take the plunge and start brining in other people who have shown interest in rental property.

Now we began where most people begin with partnerships.  Family.  In the last 5 months, we've done two partnership deals and have learned a lot along the way.  Especially being the "seasoned" investors in each of the relationships.

We've had family on both sides express interest in delving into investing in rental property and knew that they would probably not take the plunge initially on their own.  So after much discussion we decided to invite them in on some deals to help get their feet wet.

Throughout these experiences we've learned some important tips that I felt would be beneficial to pass along to other investors-rookie or seasoned- who are about to enter the world of RE partnerships. 

Tip 1:

Have the hard conversation before you even buy a property.  

What do I mean by hard?

I mean you need to sit down and talk about the "what ifs".  Talk about all the foreseeable negative things that could go wrong with this property (eviction, vacancies, fire, property destruction, etc.) and have action plans as to how both parties will respond.  Having this conversations up front will allow both parties to not be too emotional in the heat of the moment when something doesn't go as planned.  Believe me, in the world of real estate, something will always not go according to plan.

Tip 2: Put things in Writing

When you do have these initial conversations about the "what ifs" and the good things that can come out of this deal (money, equity, etc)  put the things that you talk about in writing.  Make sure that after the meeting both parties have a copy of the information discussed.

Why?

Because it could be four years of smooth sailing and then something goes wrong and most likely you nor your partner will remember exactly what you had discussed in the conversation.  Having it writing protects both parties from the relationship falling apart. 

Tip 3: Listen to One Another & Be Patient

This may seem silly, but this is what I mean.

If you are the rookie investor and working with a seasoned partner, listen to them and trust them.  That may seem like it doesn't need to be stated, but what we have learned (in our own experience thus far) is that the rookie investors are extremely excited and zealous about their first deal.  So, they may want to go into the property and make updates that, in reality of the market, don't need to be done. 

And I get it.  They're excited and want to jump right in to make a great property.  And I don't fault them for this. But you must take into consideration what the market demands, what truly increases rent and what your tenants expect.  

In one of our cases it is a student rental.  If you've ever been in a student rental, you know that making nice upgrades is most likely useless because the average undergraduate college student isn't looking for granite countertops and hard wood floor.  Money would be wasted to fix things that really don't need to be fixed or updated.

If you're the seasoned investor in this relationship, be patient.

 As a teacher, I live by the motto "pick your battles" I could spend an entire class period discipling students if I chose to fight every battle that arises in a 40 minutes period.  However, I've learned through the years of teaching there are some battles worth fighting and others not worth fighting.

That same concept applies here.  You have to let the rookie investor have a few wins in the process.  If you don't they may get discouraged and feel that they have no say in the partnership.  

So, per my example above, if they wanted to come in and put granite countertops in a students rental and also replace the ceiling fans.  Perhaps, guide them as to why it's not worth the expensive countertops, but give on buying new ceiling fans.  It's important to have your rookie partners experience some small wins.  Just as it is for students to also experience small successes. 

Tip 4: Be Sure to Consider These 7 Questions

• Will both parties be contributing financially to the deal?
• Will the financial contributions be equal?
• Who will be on the deed or loan?
• Who is going to be managing the property?
• Who is in charge of tracking expenses and paying the bills?
• Will you create an LLC or other legal entity?
• How will the profits be split between partners?

All in all, partnerships have been a great way for us to diversify out portfolio and our cash input into properties.  I really think they can be a great route for both rookie and seasoned investors, but I do believe that you must have the necessary conversations early in order to ensure a great partnership in the future.