Exploring the Partner relationship

6 Replies

Hello everyone!  I just closed on my first deal last week!  Now I'm looking to take down the next one.  I've been approached by several people about partnering on some deals.  I know that partnerships are a way to scale faster, but they also carry a certain amount of risk.  I'm familiar with dispersion of duties, dual ownership, and having everything written down in a signed agreement. 

What I'm curious about is when one of the partners wants to leave.  Let's say he moves away, changes jobs, doesn't want to do it anymore etc.  In that case, what happens to the business?  The properties would certainly have mortgages on them.  Would they all have to be refinanced out of the partner's name and 50% of the equity handed over?  For example, if we owed $80k on a $100k house, would I have to refi him out of the property and give him $10k in equity?  A situation like that would turn any cash flowing property into a liability and sink the business right?

If you are going to partner you should from an LLc and purchase as a company. You will need
To create an operating agreement for your LLC. When you or your lawyer do this you will need to spell out all of the questions and what happens in every situation.

Why do you want to partner? To add Capital or experience or something else?

@Jordan Northrup if it still cash flow. Why get out of it? Before you form the LLC. Identify responsibility and also think about your exit strategy. If you are going to be the main drive / decision maker, your partner will be passive investor, you need to put in your sweat equity into profit splitting.

Hey Jordan,

A lot of this is stuff you want to pave the way for before it ever happens since it can get really messy if a partner decides to drop out down the road. Ideally when you are working with a partner you will want the property to be held in an LLC or some form of liability protection tool to start with. The two really major benefits would be asset protection for all involved and the ability to establish an Operating Agreement which can clarify scenarios like what you listed above.

Asset Protection: if you just hold the property into a general partnership, then any legal issues the property has can "spill" over into either you or your partner(s) personal assets. On top of that, if either you or your business partner have any issues that exceed or are excluded from taxes (say a car accident while intoxicated or texting,) then a legal action can impact the investment through a bad judgement or settlement. The LLC would create a stop gap between the investment property and either of the investor's personal assets.

Operating Agreement: this is where the LLC can really shine. When you set up an LLC you want to come up with an operating agreement that outlines how the investment will be run, who is in charge of what responsibilities, ways for people to "back out" without hurting the deal and what to do if the investment is either hyper successful or a total flop. If you can explore these possibilities before they happen it is quite simple to make a contingency and get on the same page. But lets say you have a bad year or two with no contingency, then suddenly a partner wants to sell and move on... That gets really difficult and strains/breaks many partnerships. But it can be pretty easily avoided with a good OA. Check out this article for some questions that should be addressed on that agreement.

Realistically they are on the note with you, so I would place the responsibility on them (as much as possible) to help find a solution. The ideal would be to find a replacement investing partner who you can trust to essentially buy them out of the deal - but there will be costs involved in this transaction and you would want to know the individual. In reality there would be a few ways to handle a situation like what you said above. I only enter into partnerships with people I trust, and so if I were in your situation I would generally feel  comfortable asking them to find a good solution to resolve the issue and work with them to find it - such as finding a new partner to buy them out. For partners I am not so trusting with... I would probably try find some local investors promptly and built those relationships for advice and a potential replacement.

Just some thoughts! Hope it all works out - feel free to reply if you have more questions.

@Jordan Northrup

Partnership is like marriage, so don't "jump into bed at first sight!" Take the time to get to know your potential partner(s). Talk through the responsibilities and roles. Discuss your and your partner(s) long term goals to ensure alignment. When ready to join forces, hire an attorney to help you draft a detailed Operating Agreement that covers all of the "what if's" as well, things like what if one dies, or what if one decides to leave, etc... 

Hi Scott, thank you very much for the detailed advice. I'm inclined to agree with everything you said. Right now, I have no need of a partner. There is only one guy who I'd consider partnering with. We served together in the Marines and have worked together outside of the military for several years. He's got an entrepreneurial mindset too. But, like I said, I don't need a partner right now. I've already formed an LLC for my business. Should we ever partner down the road, I would certainly have my attorney develop an OA that spells out all of the nuances and situations. Would you by chance have a sample OA that I could look at to get some ideas?

Originally posted by @Jordan Northrup :

Hi Scott, thank you very much for the detailed advice. I'm inclined to agree with everything you said. Right now, I have no need of a partner. There is only one guy who I'd consider partnering with. We served together in the Marines and have worked together outside of the military for several years. He's got an entrepreneurial mindset too. But, like I said, I don't need a partner right now. I've already formed an LLC for my business. Should we ever partner down the road, I would certainly have my attorney develop an OA that spells out all of the nuances and situations. Would you by chance have a sample OA that I could look at to get some ideas?


Most of what I have on hand are specific to the deals I create for them. There are many available online that are created to be very general/broad, so if you plan on going the DIY route I would say finding one of those might suit you best - I am pretty used to adjusting them significantly, so the drafts I have aren't generally applicable without adding to them.

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