No Money? No Problem! - Partnerships in REI

Growing your real estate portfolio can be both challenging an exhilarating. While the aspiration to grow is the aspiration for many new investors, their dreams can be dashed before they really get off the ground.

Buying the first few rental properties is daunting but most of the time, you aren’t limited by capital. Many new investors have been planning on starting in real estate, learning and essentially saving up for their first property. Depending on the strategy utilized they can likely purchase a few properties, then they are hit with the immeasurable task of – finding the source for their next down payment.

All the momentum that has been building is suddenly derailed due to lack of capital. This is an all-too-common issue with new investors and something that shouldn’t necessarily halt the forward progression. While saving the cash flow you receive from rental properties can help get you to additional properties, it may take time (years) to get you to an amount sufficient for a down payment.

Enter Partnerships!

As with anything in real estate there are pros and cons. It’s important to weigh the potential advantages and disadvantages of how a partnership could affect your strategy and business.

In essence, a partnership is a strategy that utilizes the resources of two or more people (investors) to acquire a mutual investment. Pretty simple, right?

The best thing about a partnership, there aren’t necessarily any rules describing how the partnership needs to be set up or organized. Likewise, for better or for worse, there aren’t any specific guidelines on how the partnership should be structured. Which can be both great and frustrating. It all boils down to what works best for all parties involved!

In his book, “Money. People. Deal.” Stefan Aarnio describes the three major parts of putting together a deal:

• The Deal – the asset or real estate investment
• The Money – the cash required to acquire the real estate
• The People – the team that will operate or manage the investment

With any good partnership, you don’t have to have all pieces of the puzzle – in fact, that is why you are likely seeking out the partnership. In our case, “The Money”, is the rate limiting step to growing our portfolio. It is important to understand and pursue a money partner in the right order. Seeking out the money before the deal or team is in place provides the investor with basically nothing but your word that it is (or will be) a sound investment.

Instead, start with finding the deal and getting the team in place to help manage the investment. Only after you have those two legs of your “three-legged-chair” in place should you start shopping for investors.

The Partnership

Many investors, myself included, get hung up on how best to structure the partnership. As mentioned previously, the best way to structure is to ensure all parties are happy with what they are getting out of the partnership! Prior to getting into some basic considerations for putting together a proposal, it’s important to consider the following to help “boost” your case for getting the investment.

• If you have real estate in your portfolio already, provide accurate details for how they are performing. Discuss management, cash-flow, tenancy, etc – anything that can provide the investor with additional confidence to invest with you.
• Show your investors various scenarios, both the best-case and the worst-case, or even nightmare scenario. Most importantly, you want the investor to understand completely what could happen with their money prior to lending.
• Don’t just partner with anyone!! Family can be a great source for getting funds for you to help grow your portfolio – it can also be the source of major frustrations at holiday gatherings if things go south. Be careful if considering investing with family and/or friends as it could lead to strained relationships.

The Terms

The most important thing in setting up a partnership, is to ensure everyone is happy.

While the investor may not have additional funds to help you grow your portfolio, they may know of others that can help and it would be a shame if they only had a negative experience with you!

Our partnerships have all had similar “terms” – 50/50 split of basically everything: NET income, Equity, and proceeds from the sale (if we choose to sell). If we were to perform a 1031 exchange, the additional (hopefully) cash-flow we acquire will continue to be split 50/50 – this helps the investors see the upside or potential for lending you the money.

We strategically set up our terms so that we don’t payout every month. Unfortunately, in real estate, things happen which means there might be month(s) of negative cash-flow. Instead of having to pay the investor from your pockets, we typically take the earning from a 3–6-month period and split the proceeds 50/50 over that interval.

Why does the 50/50 split make sense? While the idea of you contributing 2 legs (deal and people – 2/3) and your partner only contributing 1 leg (money – 1/3) might not seem that it warrants a 50/50 split think about what happens if you don’t get the money?

No cash-flow. No Equity. No Investment.

As someone that is just starting out, the most important aspect to growing as a real estate investor is to develop your knowledge, confidence and experience. So even if you only get 5% and the money partner gets 95%, that 5% is better than nothing and more than you started with! You’re not going to get rich off of just one property. You get wealthy by building your portfolio which comes through experience and understanding even it comes with you doing all the work and giving the partner the majority of the cash-flow.

Final Thoughts

At the end of the day, you want to provide value to your investor. Splitting a deal 50/50, 40/60 or even 25/75 shouldn’t necessarily deter you from moving forward. Ultimately, your goal is to acquire rental properties to grow your portfolio. Giving up some cash flow to gain an investment could be a very small price to pay on your journey towards financial freedom through real estate investing!

- This blog is written by Adam Sieg for Rent to Retirement