Worries about partnering with buddies on a deal!

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Worries about partnering with buddies on a deal!

Soniel Estime
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?

How did you handle it and what was the outcome?

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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
6y

Answers to your questions:

1 NO!!!!!!

2 - You can't...and won't...so don't

3 - NO!!!!!! (see #'s 1 and 2)

4 - No.  Thank God.  Have watched plenty of others make the mistake.

5 - There's a very easy way to handle it.  Don't Do it.

There are only 3 reasons why you form a partnership (and friendship and relatives are not in the list,,,ever).

1 - Your partner doe something you can't do.

2 - Your partner does something you don't want to do.  If you don't want to do it, you won't do it well.

3 - Your partner does something you shouldn't do.  Just because you can do something, doesn't mean you should.

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  • Codie Fisher
    Lender · Oklahoma City, OK · Member since 2020 · 3 posts · 0 votes
    6y

    @Soniel Estime

    From my experience, the biggest mistake that friends make in partnering is in not making sure that each person has different strengths and clear roles are not set from the beginning.

    When those 2 things don’t happen, 1 person always ends up doing the majority of the work.

    If you’re sure that each of you bring something unique to the table and if you are able to assign roles for each person to handle, then do it. If not, then don’t.

    0Reply
  • Markesha Ramirez
    Rental Property Investor · Frisco, TX · Member since 2020 · 18 posts · 18 votes
    6y

    @Soniel Estime Hey good morning 😁✍🏽 Well i must be honest , i Never partnered with a relative or friend of mines and i Never mixed business with pleasure. #1 deal go wrong your the baddest person in the world,then the heated conversation plus lost of possible friendship #2 But if it goes through everyone do the money dance right ? Me i believe in risk especially in this business if they aren’t educated on the possibility of the deal crashing possibly i would second guess it , if they are duty risk i would definitely get it in writing and a good understanding in the contract so we have a mutual understanding. With me i don’t mind Jv here and there but upfront others money i wouldn’t do, i’ll take my own risk on certain projects of mines ... Follow your gut , it knows best 😉

    1Reply
  • Luke Saglimbeni
    Rental Property Investor · East Longmeadow, MA · Member since 2019 · 154 posts · 64 votes
    6y

    @Soniel Estime

    I would partner with a few of my contacts mainly skilled workers to cover my weakness and blind spots. But my goals and vehicles to get there are different than yours.

    Have an attorney draft up an air tight partnership and hold everyone accountable.

    Don’t fail.

    It never hurts to get more experience but if you need the capital bring them on and let them know There is a chance of losing money. Consider the brrrr strat.

    Contractors on the BP are pretty good and are of a higher standard. Do your due diligence and read the google reviews.

    Good luck!

    0Reply
  • Nate Sanow
    I​nvestor & Agent · Tulsa, OK · Member since 2016 · 1k+ posts · 1k+ votes
    6y

    @Soniel Estime

    Respectfully, it’s not necessarily your sister in laws fault on your previous contractor experience. When handling referrals, it is still the job of the investor to verify. It is the inherent risk / reward that we face. I’ve had my teeth kicked in and I’ve wanted to blame, so I know how you feel. But blame is cheap, and it’s a bad habit. I’m learning to look at myself and grow into a better operative mindset where I scrutinize my own decisions and pursue a variety of referrals, wise counsel, etc. and move forward slowly on everything.

    Moving forward, in my opinion, one can partner with family and be ok. I partner with my brother in law and have for 4 years. I had to learn he is more hands off but he’s good at finding money. My money has gone a lot of places in the same 4 years as I became I dad x2 during this period. So it’s a win-win. But we had everything in writing and we are both two strong minded men who talk very honestly with each other all the time. Assuming things is where 99% of dysfunction comes from.

    Before viewing a partnership or referral scenario as a marriage view it as a date. Do one small thing and then decide if it’s a bad relationship or a positive one.

    Good luck.

    0Reply
  • Soniel Estime
    OP
    Rental Property Investor · Chicago · Member since 2018 · 74 posts · 67 votes
    6y
    Originally posted by @Matthew Watson:

    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. 

    Great advice, I love your idea of having your brother learn until he could bring value to the team. 

    1Reply
  • Soniel Estime
    OP
    Rental Property Investor · Chicago · Member since 2018 · 74 posts · 67 votes
    6y
    Originally posted by @Justin V.:

    @Soniel Estime

    Hi

    I’ll add my anecdote.

    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.

    Thanks so much for the input, I actually brought your story back to my buddies as an example of what can happen and asked them how they would handle this scenario. 

    0Reply
  • Soniel Estime
    OP
    Rental Property Investor · Chicago · Member since 2018 · 74 posts · 67 votes
    6y
    Originally posted by @Bonnie Low:

    @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.

     Thanks for the advice, I am hoping to get some experience in syndications and partnerships down the line so I figured if I take your advice and go very small, I may be able to get some experience in this area. 

    0Reply
  • Soniel Estime
    OP
    Rental Property Investor · Chicago · Member since 2018 · 74 posts · 67 votes
    6y
    Originally posted by @Codie Fisher:

    @Soniel Estime

    From my experience, the biggest mistake that friends make in partnering is in not making sure that each person has different strengths and clear roles are not set from the beginning.

    When those 2 things don’t happen, 1 person always ends up doing the majority of the work.

    If you’re sure that each of you bring something unique to the table and if you are able to assign roles for each person to handle, then do it. If not, then don’t.

     Noted, that is absolutely something that was brought up in out discussion. I want to make sure we all have different strengths and can all bring something to the table.  

    0Reply
  • Soniel Estime
    OP
    Rental Property Investor · Chicago · Member since 2018 · 74 posts · 67 votes
    6y
    Originally posted by @Luke Saglimbeni:

    @Soniel Estime

    I would partner with a few of my contacts mainly skilled workers to cover my weakness and blind spots. But my goals and vehicles to get there are different than yours.

    Have an attorney draft up an air tight partnership and hold everyone accountable.

    Don’t fail.

    It never hurts to get more experience but if you need the capital bring them on and let them know There is a chance of losing money. Consider the brrrr strat.

    Contractors on the BP are pretty good and are of a higher standard. Do your due diligence and read the google reviews.

    Good luck!

     Thanks Luke, for me it is not about the funding. I can secure the financing to close on a deal myself. I personally enjoy helping people with real estate. I am no expert by any means but I love sharing what I do know. Also I would like to get experience on partnering for bigger deals in the future so gaining the experience of handling a partnership may help me in the long run. 

    1Reply
  • Soniel Estime
    OP
    Rental Property Investor · Chicago · Member since 2018 · 74 posts · 67 votes
    6y
    Originally posted by @Nate Sanow:

    @Soniel Estime

    Respectfully, it’s not necessarily your sister in laws fault on your previous contractor experience. When handling referrals, it is still the job of the investor to verify. It is the inherent risk / reward that we face. I’ve had my teeth kicked in and I’ve wanted to blame, so I know how you feel. But blame is cheap, and it’s a bad habit. I’m learning to look at myself and grow into a better operative mindset where I scrutinize my own decisions and pursue a variety of referrals, wise counsel, etc. and move forward slowly on everything.

    Moving forward, in my opinion, one can partner with family and be ok. I partner with my brother in law and have for 4 years. I had to learn he is more hands off but he’s good at finding money. My money has gone a lot of places in the same 4 years as I became I dad x2 during this period. So it’s a win-win. But we had everything in writing and we are both two strong minded men who talk very honestly with each other all the time. Assuming things is where 99% of dysfunction comes from.

    Before viewing a partnership or referral scenario as a marriage view it as a date. Do one small thing and then decide if it’s a bad relationship or a positive one.

    Good luck.

     I completely agree, it was a rookie mistake to trust but not verify. I have learned my lesson and I am a much better person for it.  

    1Reply
  • Cal Dunagan
    Member since 2020 · 105 posts · 35 votes
    6y

    @Soniel Estime

    There's already so much great advice in this thread I don't really know how much I can help. If you do decide on the partnership route, I agree with Shiva. You're going to need an attorney. And as much as you might all want to have the same lawyer, it's not advisable, as in the future you guys may have a conflict. This is a great article about legal entities and partnerships that you'll definitely want to check out before you go too much further. Also, read through this article as well for more information about forming a partnership with your buddies.

    Best of luck!

    1Reply
  • Angelo Forzano
    Member since 2020 · 54 posts · 30 votes
    6y

    @Soniel Estime. Stay away from friends and family. About 6 disagreements will raise their ugly heads every week and one will eventually break the camel's back it's not worth it. Do you really want to go to a three-person committee on the color of cabinets? Right now you know more than they do 6 months from now they're going to think they know as much as you do... you've been warned LOL

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