Rental Property Investor · Chicago · Member since 2018 · 74 posts · 67 votes
I have two friends who would like to partner with me on a few deals. They were telling me about how they were thinking of investing and after I told them of my past experience with real estate, they jumped on me about partnering. I have done one house hack where I got ripped off by a contractor and hit with fines by the city of Chicago.(Finished the project and got some good equity in the deal but wouldn’t call it a home run). They want to join in on a project that I was thinking of taking on where the rehab would be about $130,000. I an unsure if I should partner with them on such a large project because the relationship with my sister in law was damaged due to her referring the contractor that ripped me off... and i would hate for that to happen with these guys. If I lose money that is one thing, but if I lose their money, and friendship because of it , that would be devastating. My question is,
Should you mix friends and business?
How do I avoid damaging the friendship if the deal doesn’t go well?
Should I wait to do a few more deals on my own first before partnering with them?
Have you ever partnered with a buddy, and the deal not go well?
Maybe your friends would fund the deal if you promise to pay them the same as you'd be paying a different Lender (rather than percentage of future profit)?
[Which would be getting them a greater return than their current savings Bank, right?]
You gotta ask yourself - do ya feel lucky? Well, do ya? Cheers...
All good advice so far. I would add one more thing. Should you choose to move forward, make sure you get EVERYTHING in writing! Have an attorney draft the agreement. Make sure you have contingency clauses if one of your partners are not fulfilling their end of the deal, or if one partner loses patience and wants out of the deal. All the remedies should be negotiated beforehand and all partners sign. In the event that the deal goes sour, at least you won't have expensive litigation costs to deal with.
Thanks for your response, let me be clear, I do not need them to partner for me to acquire the funds. I mainly considered patterning because it would mitigate the risk for me. (A little gun shy after my last deal). I also want to help them get some experience so they can start building wealth. After seeing these responses though it might not be as fun as I was thinking it could be.
Thanks for your response, let me be clear, I do not need them to partner for me to acquire the funds. I mainly considered patterning because it would mitigate the risk for me. (A little gun shy after my last deal). I also want to help them get some experience so they can start building wealth. After seeing these responses though it might not be as fun as I was thinking it could be.
Adding partners that have no specific reason for being a partner doesn't mitigate your risk...it exponentially adds to it.
...and, you should not be the one that pays for their experience.
If all your friends are inexperienced it will not be a good partnership ..
Other than $$$ you need to ask what are they bringing to the table? Things to look at do they have trade skills, Project management experience, bilingual etc do they have some skill that you don’t have that can help your future projects ..
I absolutely agree. One of the guys has a high income and the other has a lot of free time, I have the credit and experience. I hate analyzing numbers and of of those guys does. We each have something to bring to the table. I am just unsure if it is worth the risk to partner up. Maybe we can do a very small project first. Something that is like $1,0000 bucks or something?
I absolutely agree. One of the guys has a high income and the other has a lot of free time, I have the credit and experience. I hate analyzing numbers and of of those guys does. We each have something to bring to the table. I am just unsure if it is worth the risk to partner up. Maybe we can do a very small project first. Something that is like $1,0000 bucks or something?
High income isn't bringing something to the partnership of value, unless he wants to bring in all the cash and watch others run the show.
Lot's of free time brings what to the table?
Analyzing numbers is great...if he knows what he's analyzing. If he doesn't, then what your telling me is he an operate a calculator. I'm pretty sure you can do that.
Don’t eat your steak in the bathroom. But if you do.... everything on paper. I mean absolutely everything. Who does what and what happens if they don’t and what they pay and every single case in which people are in default.
And to be clear, this will blow up in your face. Too many cooks, too many friends.
@Soniel Estime, you say that borrowing off your friends would "mitigate the risk for me" (compared to borrowing the same dollar amount from a Bank), but, would it? Why?
There are a lot of valid points here. I just want to say that it is not ALWAYS a bad idea, but there needs to be value brought to the table from all parties.
Our business was started by myself and my brother and we have continued to grow it together, successfully. Our 3rd brother wanted to join in but didn't know a thing about real estate and as a result had nothing to bring to the table.
Our recommendation to him was to learn, learn, learn and come back with some value to bring to the company. He now does our marketing and SEO and is working his way into an even partnership.
My advice would be to hold them accountable and force them to grow before seeing the fruits of the labor. Make them learn a skill, learn real estate, do something that provides long term value to the business. The worst thing for a business is if one person feels they are doing the work of the other partner(s).
It may not be ideal or work for many, but it is possible when done the right way.
It is very hard to keep emotions out of it. Get everything in writing and try your best to stay business with it. I would avoid friends and family up front but who knows it could work. Just be sure to have a third party able to decide if needed.
Me and two college buddies wanted to flip a place and try landlording. One was in sales and a people person (think leasing), I had building experience, and the other claimed to be a numbers guy (thought he would be the deal analyzer), but we are all numbers guys. Bought a duplex in December 2015.
We all had time (lots of drinking weekends) and money to pool for a down payment 1/3 splits all the way.
We had slightly different ideas about how to do things. I found myself project managing and putting in most of the effort. It felt like a manager/employee situation from the get go.
None of us were the best partners. I wanted the project done quickly so i could focus on my home renovation. I was the pusher and we all sucked at contracting out at that time (didn’t have much money or a realistic value of our time back then or at least I didn’t). I also wanted to know how to do everything non-construction so I micromanaged a bit and asked lots of questions. To boot I was more of a perfectionist vs a good enough person.
We finished with a refi for 48k 8 months later and 1200 cashflow per month. Felt like a home run at the time. We did it again
In spring 2017 but my wife and I closed on another duplex around the same time and got pregnant midway through while still renovating my place, so 5x the pushing. Finished it fall of 2017.
Landlorded together until summer 2019 and then sold them. Partnership turned into more of a me making them fix the places and them not wanting to or not thinking it was necessary when things broke down/didn’t work (hvac overhaul, retaining wall crumble, turnover things). Every issue I wanted to talk out a bit more than them. I wasn’t really prepared for when they started talking to each other and then telling me how they wanted to do things or excluding me from the conversations entirely. I’m dense so missed the subtle anger they were feeling for months.
After we sold the second duplex they stopped talking to me except for crps (end of jan) and eventually taxes. I got 1 to talk to me again after multiple attempts and I we’re friendly again and hopefully good friends again someday. I haven’t seen my other ex business partner in over a year now. I’ve reached out on multiple occasions, but no luck. I also don’t get invited to much of anything anymore which he’s invited too, since he was a better friend with most of our mutual friends.
We each invested 23k in December 2015 and after a very strongly appreciating market plus many hours we each netted 120k plus our investment back. Landfall win investing wise, but it didn’t save the friendship.
If you can do it alone, don’t partner up is my thought.
@Soniel Estime echoing all the concerns, but let’s say for a moment there is a compelling reason to do it.
Ok then Spend a lot of time discussing risk and failure—what happens if? Who takes what hit?
It’s a lot easier to resolve disputes when u are splitting up profit...too few think about what happens if it doesn’t work well. Capital calls? Ultimate decision responsibility? Worst case scenario? Legal fee responsibility?
If the idea survives a hard look at all this then u can star thinking about it.
Do not take the partner is you have doubts. Analyze them from several perspectives, including what they will add to the deal, how they assert control in the partnership and the downside if things do not go to plan.
@Soniel Estime it's a tough question. Lots of people who are very successful talk about how they first started out using other people's money and that often came from friends and relatives. But it's a dangerous game, especially if you're not experienced. I'm guessing they want to invest with you because they've seen you have some success and don't know how to go about it themselves. If they lack experience, this could be setting you up for failure because they're unlikely to understand the risks inherent in real estate investing, may not have realistic expectations around returns, and may want to be active partners (which could be ok if they've got a skill to bring to the table). You should get your agreement in writing, which would protect each of you, but it doesn't avoid hurt feelings should something go wrong. If you don't need investors, I'd probably pass. But if you want to help them figure out where else they could invest since they are, after all, your friends, you could refer them to another option like investing in turnkey rentals, note investing or a syndication. Lastly, there may be a way to dabble in a partnership where there's not a lot of money at stake to see what kind of partners they're going to be. For example, let's say you want to buy a property to flip or BRRRR and you have the money for the down payment but not the repairs. Let's say the repairs are estimated at $20,000. Maybe they could split the cost of funding the repairs with you borrowing the money from them at a decent rate of return for them - say 10%, which is comparable to a hard money loan and more than they're probably earning on their money anywhere else right now. That should be no more than a 6 to 12-month transaction at the most and they're each only $10,00 into the deal. It goes without saying you have to run your numbers right (use the BRRRR calculator from BP) but, worst case scenario it goes bad, you could probably get a personal loan to cover their losses if you absolutely had to. These aren't big numbers, you'd be turning it over quickly, and if it didn't work out you aren't locked into a long term relationship with them. Best case scenario it goes really well and you'll have found some solid business partners and kept the relationships in tact.
I have two friends who would like to partner with me on a few deals. They were telling me about how they were thinking of investing and after I told them of my past experience with real estate, they jumped on me about partnering. I have done one house hack where I got ripped off by a contractor and hit with fines by the city of Chicago.(Finished the project and got some good equity in the deal but wouldn’t call it a home run). They want to join in on a project that I was thinking of taking on where the rehab would be about $130,000. I an unsure if I should partner with them on such a large project because the relationship with my sister in law was damaged due to her referring the contractor that ripped me off... and i would hate for that to happen with these guys. If I lose money that is one thing, but if I lose their money, and friendship because of it , that would be devastating. My question is,
Should you mix friends and business?
How do I avoid damaging the friendship if the deal doesn’t go well?
Should I wait to do a few more deals on my own first before partnering with them?
Have you ever partnered with a buddy, and the deal not go well?
How did you handle it and what was the outcome?
I have a few thoughts:
1. Get everything in writing. Have a lawyer draft it.
2. Encourage them to have an attorney review it. This way they can't complain later that they they did not understand.
3. Make sure you are VERY confident in what you are doing. I would say build a bit more experience if needed. Perhaps JV with someone more experienced first, gain the expertise, and then come back and work with friends.
4. As part of #1, make sure everyone is very clear on their roles, money they are putting in, equity earned, etc. Friends may want you to work for free or very little - don't do it. Better to network and find better partners if needed.