What’s in a Real Estate Partnership?
To partner or not to partner? That is a question that we certainly, as real estate investors, come across often during our ventures. There are many forms of partnership, including: two passionate real estate investors joining forces together, one passionate real estate investor working with a passive investor with money to invest, or even husband and wife tackling real estate altogether. There are many advantages to partnership and certainly there are quite a few disadvantages as well. One must carefully examine the possible consequences before stepping into a partnership, especially if one that will go beyond, say, one real estate deal.
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Advantages to Partnership
Some of you may possess entrepreneurial prowess but lack organizational skills while some others may possess impeccable organizational skills but do not have the ability to take risks. We all have our natural skills and weaknesses (or I’d like to say so to convince others that my failure to organize is an inherent disadvantage that cannot be overcome with hard work). Sometimes it is extremely beneficial to have one complement the other. I’ve met some partners in which one handles the dealmaking while the other handles the numbers. I have met some partners who do amazing work and are willing to split their profits for access to capital.
When a partnership works, it works wonderfully.
Disadvantages to Partnership
Partnerships usually come with the caveat that profits or success will be shared. With that in mind, it is not always easy to divide the spoils given that in many partnerships they are difficult to measure the efforts and rewards accurately. Resentment may build up if one party feels like it is working too hard and getting too little rewards. It is especially difficult to measure if either party contributes the same skill sets or capital.
Partnerships also mean sharing control. This is critical because often two people may not share the same vision or the same decision making. While it is always good to have a sounding board when making an executive decision, having two parties with different viewpoints may cause a lot of conflicts and second guessings. For example, while Partner A may think the real estate market will rebound in 3-5 years and want to speculate as much as possible, Partner B may think the rebound will take 7 to 10 years and is not willing to take on too much risk. If both compromises neither will be truly happy. Same goes if the decision goes one way. Thus, in this instance it is not ideal to give up that kind of control if a partnership is not necessary.
Personally, I’d take up the extra costs of having to do everything myself despite some of my weaknesses in exchange for having ultimate control. I don’t know how the market will turn out but I need to know that I can make adjustments quickly and I can make them alone. Imagine having a partner in a real estate market in 06-07 and your partner does not want to sell while you do. What would have happened in that relationship?
Furthermore, the relationship between partners can be damaged as a result of a partnership. Be aware with who you are partnering with. Too close of a partner, i.e., family members, you can lose that relationship. Too strange of a partner, it is hard to build the trust.
I would prefer a partnership only if it is what it would take to take my business to a whole new level. More importantly, if I can retain control of executive decisions then I think it would be much more favorable. Don’t do it as a convenience. You are capable to do a lot of things and you are capable to delegate a lot as well. You can find money. You can borrow money. It is not the first option. Strike it on your own first and I think you will have a much better experience in this real estate business.