Be wary of partnership?

Question

Hi everyone,

I am a fairly new investor looking to get into the market (from New Haven, CT). I've been trying to network with bigger investors in the area to get some more insight in the market. I ended up connecting with a fairly large investor in the area.

By the end of our meeting, the investor mentioned perhaps going into a partnership. This is a brief outline of the deal. The investor would purchase and reno a home - she has access to property and reno lending. She would then reno the home and draw on the loan. Together then we would go into an joint-entity and purchase the home with traditional financing. I do have access to capital and we could go in on multiple properties together. I could also go purchase a home after reno at cost.

Overall this does seem like a great way to get into real estate. The impression I got was that she wanted to help a new investor to get into the market.

I just wanted to get everyones thoughts on my situation.

Thanks and appreciate the help!

Ned Carey · Answer

@John Michael welcome to BP I see it is your first post. This sounds like a much better deal than the last partnership post I replied to.

I think this could work because it sounds like she has experience enough to get short term financing. Getting longer term financing for buy and hold properties is another story. it sounds like you are in a position to do that.

You each are bringing different things to the partnership. That is what makes good partnerships.

Some cautionary points:

• Does she really have experience or just enough knowledge to fool you. 
• Does she have buy and hold experience?
• Will these renovated properties be priced at a level that makes sense as cash flowing properties?

John Michael · Answer

Any other comments or suggestions?

John Michael · Answer

@Ned Carey Thanks for your reply! Appreciate your insight and here are some of the details.

I've taken a look at her company (she owns both a prop management) and have taken a look at the county records, she does have all the properties that are on their website. It is in the LLC of the same company name.

As far as I know, that's all she has been working on so far, she is part of a fund that purchases and rehabs homes to keep in their portfolio.

This is the key thing, from what I  have gathered, we would be able to offer on multiple properties to hopefully leverage a better deal compared to market prices. The apartments we are looking for are 3/1. We hope to change them to 4/2's as the sqft will allow for this. This will offer better cashflow as we can mark up the rents accordingly after reno.

@Lynnette E. All of these are great points and I will try to address them accordingly. I definitely would love to have my own type of properties, but I work well both on my own and in teams. I am a bit hesitant to go in on a partner which is why I posted to see if there could be anything else that I missed.

• I'd like to get everything in writing before I moved forward, but our typical drafted plan is that these will be long term buy and holds. She has a portfolio currently so we don't expect a need to refi unless there were appreciation gains we could leverage.
• We both are looking at each others finances, in terms of say bankruptcy we both are doing well (I have a great w-2 job and she does this full time as she is a CEO of her own prop management company. This is definitely a great question though and I've made a note here
• Depending on said maintenance, we are fully reno'ing these homes before we move in. Cap ex is expected to be lower than a standard MLS without any renos. Ideally we would approach the situation per basis, if the roof is to a point where it needs to be replaced we would both agree to this. Again, this is something I would like to draft in our partnership contract.
• While I agree we both want something out of this deal, I believe that is much more than just the knowledge that she has. She has some great contacts and I believe that she would be a great contact to network with others. I'm almost seeing her as a mentor, she sees that I am hungry and she mentioned that she sees a little bit of her younger self in me so that is why she approached me on a partnership.
• I am trying to stay as open minded as I can because I believe that partnerships can benefit both sides! If I could a purchase one of my own properties from her and then also go into deals I feel like this is a good strategy. I'd have one property on my own and then partnered in on other deals.

I'd like to get everything in writing before I moved forward, but our typical drafted plan is that these will be long term buy and holds. She has a portfolio currently so we don't expect a need to refi unless there were appreciation gains we could leverage.

We both are looking at each others finances, in terms of say bankruptcy we both are doing well (I have a great w-2 job and she does this full time as she is a CEO of her own prop management company. This is definitely a great question though and I've made a note here

Depending on said maintenance, we are fully reno'ing these homes before we move in. Cap ex is expected to be lower than a standard MLS without any renos. Ideally we would approach the situation per basis, if the roof is to a point where it needs to be replaced we would both agree to this. Again, this is something I would like to draft in our partnership contract.

While I agree we both want something out of this deal, I believe that is much more than just the knowledge that she has. She has some great contacts and I believe that she would be a great contact to network with others. I'm almost seeing her as a mentor, she sees that I am hungry and she mentioned that she sees a little bit of her younger self in me so that is why she approached me on a partnership.

I am trying to stay as open minded as I can because I believe that partnerships can benefit both sides! If I could a purchase one of my own properties from her and then also go into deals I feel like this is a good strategy. I'd have one property on my own and then partnered in on other deals.

Lynnette E. · Answer

I don't know you, your personality, how you like to work, e.g. alone, with groups, teams, etc. so what I think may not apply to you, but since no one else has answered I will.

I am VERY hesitant to join into a long term financial commitment with someone I do not know very well.  Once you jointly own a home neither you nor she can just sell it or decide anything about the home by yourselves.

What if she wants to refi and pull the money out for another deal and you want to pay down debt for another purpose.

What if she files for bankruptcy and now your home that you do not want to sell and can not afford to buy her out is going to be sold?

Will one of you want to be cautious and replace a failing roof before it leaks while another will want to patch it over and over and take a risk of it leaking?

It takes a lot to be successful with a partner.  Look at how many marriages fail.  And with your proposed partnership, she wants your access to long term, lower interest loans than her available HML, and you want her knowledge, not a good basis for along term relationship. Your money will eventually run out and you will not need her knowledge as you gain your own, a break up is coming eventually.

Personally I do better with being in charge, managing my property myself and hiring out the work I do not do myself.  The carpenter I use would love to trade his work for a piece of the action, but I am not willing to give my money up long term to him when I can hire someone and keep the profits.

I look at what you have proposed as giving up your money long term for a 'lesson'.

I would recommend not making a partnership, but to learn from the rehab process then buy the house yourself or walk away with the knowledge and leave the house.