Posted almost 6 years ago

4 Tips for Creating the Perfect Real Estate Investor Partnership

Discover the Secret to Creating a Winning Real Estate Investment Partnership

Turning to a partner that adds a unique twist to your already established set of skills and knowledge in the real estate business can be a beneficial career move. Pooling resources to reduce risk and increase leverage has proven time and again to be a smart business decision.

In fact, real estate investor partnerships often lead to larger down payments, a stronger financial statement showing, and a combination of experience that can make for more successful investment moves.

If you are an investor considering whether to take on a partner in your next real estate investment endeavors, take a look at these four tips to help you get started in the right direction.

What to Look for in a Solid Real Estate Investment Partnership

1. Have Common Goals

Everyone has his or her own idea of what success means in the real estate world. Your partner must be in tune with your vision of the business in order to keep deals from going sour down the road.

Having similar taste in property type, the level of investment risk to be undertaken, and future moves such as buying new properties and/or selling older properties are crucial to a good working partnership.

Before you and your potential partner move forward with investing in a property together, carefully consider the following details that are involved in any property investment to make sure you both are on the same page:

  • Determine how the investment will be financed and ultimately purchased.
  • Decide how much money each party will invest and how much of it is personal finances versus third-party loans.
  • In the case of a long-term financing option, decide which type of financial institution will fund the property (e.g. Fannie Mae, a local bank, etc.).
  • In the case of a short-term financing option, decide what type of return each party is looking for. For instance, in a cash-out refinancing situation, the return is lower but the money each party puts in is returned much quicker.

In the end, the choice to go with either long-term or short-term financing is often tied to how much cash each party is willing to put into the deal and the type of return they are collectively looking for.

2. Understand the Details

Fully Understand the Details of Your Operating Agreement

People typically enter into partnerships with good intentions. And if you have done your homework, you should know that the person you are partnering up with is not out to steal your life savings or plan some Ponzi scheme that you are unaware of.

That being said, sometimes during the course of business, investor partnerships crumble. In order to salvage the hard work, time, and finances you both have placed into your investments, it is important that you both understand how either party can get out of the Operating Agreement.

If your partner wants out, you must decide whether all properties should be sold, if you can buy your partner out, or whether a new partner can be taken on to buy your leaving partner out. The goal is transparency and fairness. After all, this was a business deal and the dissolving of a business deal should be handled professionally.

Here are some of the important details that should be included in an ironclad Operating Agreement to protect you and your partner:

  • Designate a Managing Member - This person is responsible for taxes, insurance, reporting to banks, and distributing proceeds from the property. If you are the Managing Member, you cannot sell or refinance the property without the consent of your partner. In the case that the Managing Member fails to perform their duties correctly, the other partner then becomes the Managing Member.
  • Delegation of duties - It is important that each partner understand their role in the partnership. This is where the added value of a partner comes in handy. One partner should be responsible for, and have a thorough understanding of, day-to-day activities while the other partner should be more involved with reporting to the banks, finances, and structuring of deals.

3. Play Fair

There are bound to be times when either you or your partner have the upper hand financially when it comes to sealing an investment deal. And in the real estate world, this in normal and understandable. However, this does not mean that either party should take advantage of the situation.

Best practices for creating a lasting and mutually beneficial relationship with an investment partner include:

  • Always treat your partner fairly. Whether your partner currently has more available cash flow to invest or you do, it is important to treat each other the way you would want to be treated. This way, when/if the roles are reversed, you can expect that you will receive the same fair treatment.
  • Only agree to a deal if it is something you would comfortably put your own money into.
  • Don’t take a larger cut of the deal than is relative to the amount of work, or finances, you placed into the deal.
  • Never make a decision without consulting your partner, especially if it is their money that is funding the deal.

4. Always Communicate

Communicate Weekly with Your Real Estate Investment PartnerThe idea of communicating every detail with your partner cannot be understated. Everyone is busy. Your partner may be involved in a ton of other investment deals separate from the deals you are partnered in. And the same goes for you.

Regardless, transparency is absolutely paramount to any successful partnership.

Here are best practices for maintaining transparency and open lines of communication:

  • Monthly reports outlining delinquency reports, profit/loss statements, and bank statements should be shared with all parties.
  • Real estate investment partners should conduct, at minimum, a 1-hour phone meeting on a weekly basis to discuss all properties. These meetings should cover:
    • Progress of renovations
    • General leasing activities
    • Ideas for increasing cash flow
    • Ways to reduce costs
    • New investment opportunities
    • Lease renewals

In the end, each party deserves the right to know what is going on. And, if your partner reaches out to you, get back to them quickly. You want him to feel confident that he can contact you for anything related to the deal since he is just as much invested in the project as you are.

This is by no means a comprehensive list of tips for creating (and keeping) the perfect real estate investment partnership. Though, for those of you that have been considering a partnership, these tips are sure to give you a boost in the right direction.

If there are any additional tips you feel that might help secure a good investor partnership I would love to hear all about it in the comments below!