8 Secrets to Structuring an Efficient Real Estate Partnership

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You often hear people talking about how great a joint venture is and how that partnership has given them so much more business. But how can that be? Doesn’t a joint venture always amount to more work, less freedom, and endless disagreement between partners?

If these questions have been troubling you, you’re not alone. So now, sit back and allow me to break it down for you. Entering in a joint venture or partnership with someone is something that, when done correctly, can give you a ridiculous edge in the long run. In fact, if it’s money you’re after, partnering up is the best way to do it.

It can be best described as a seamless merger between two parties — this partnership can mean many things, but often it’s a business expert who partners with someone who brings in the capital. Sounds simple? It is an extremely lucrative preposition and has a lot of potential. However, there are certain things that you’d need to keep in mind if you wish to go that way.

In this article, we discuss the benefits of having a partner on board, as well as the 8 best kept secrets to structure a partnership that is both efficient and rewarding. So let’s get started!

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5 Benefits of a Partnership

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Running any business smoothly, big or small, usually depends on one thing only: the regular availability of resources. If you have a person who is ready to share the financial burden and who has similar goals and work ethic, then pooling your resources may be the best way to go. (The more, the merrier, right?)

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Related: 5 Top Tips for Creating a Mutually Beneficial Real Estate Partnership

The Power of Networking

This is a crucial superpower. The importance of networking cannot be stressed enough. For any business to grow, it needs a constant push. When you enter into a partnership, your partner can bring in strong contacts that could be utilized for further growth and expansion of the business. And before you know it, these extended contacts end up playing crucial roles in the success of your business. Sometimes they become team leaders; other times they become clients.

Sharper Analysis

How many times have we taken a decision and doubted it later? We’ve all been there. The ability to analyze the worth of a product, property, or location can be an extremely daunting task. However, when you have two or more heads working together and analyzing the same issues, it becomes a total cakewalk. Maybe not a cakewalk, but it certainly becomes a lot easier. Not only this, but a good partner will also help you zero in on possible solutions to the issues. Having that second pair of eyes can make all the difference.

Talent Pool

Every partner brings in their own distinct skill set and talents. While one might be a great at working with numbers, the other might be a sales genius. When you set out to build a successful business, all talent you can get ahold of counts. After all, talent, when combined with hard work, always yields results.

Risk Sharing

I get it. Not everyone is a born daredevil, risking it all and living life on the edge. Most of us like to play it safe. However, when it comes to business, risk is an inevitable truth. That business partner can bear that risk with you and even if there’s never any issue, give you the feeling that you’re in it together.

8 Tips to Create a Successful Partnership

So, having a partner is great. We’ve established that. But that doesn’t mean that any partnership will just go smoothly as soon as you start. Quite the opposite. Partnerships are hard work, and it’s best to know how to avoid certain pitfalls from the get go. So now you might be curious to know what goes into making a partnership successful. And how should you structure an effective partnership? Well, brace yourselves, for you are about to learn 8 best kept secrets to structure a partnership. You’re welcome!

Keep it simple.

There are several ways to structure a partnership. However, the most efficient way of doing so is by keeping it simple, transparent, and uncomplicated. It is as simple as that! Clearly chalk out the main aim of the partnership and the end goals, so that everyone is on the same page. Do not underestimate this part. Make sure you’ve gone over your expectations about the work you’re expecting the other to do, and have your partner do the same. Transparency is key, so make sure communication between partners is as smooth as possible.

Choose: general or limited partnership.

These are the two types of partnerships. Each joint venture has to choose which type would work the best. Both types of partnerships have a completely different structuring and are used for different purposes. If you and your partner enter into a partnership to make profits and each partner is liable for any debts on behalf of the business, this is what you’re looking for.

Limited Partnerships, on the other hand, are comprised of one general partner and one limited partner. In this, the limited partner is a silent partner whose main role is to provide cash or other forms of equity. This partner has no say in the functioning of the business. A limited partnership can only be formed by creating a formal agreement and filing certain documents with the local Secretary of State’s office.

Related: The Biggest Real Estate Moguls Relied on Partnerships. Here’s Why You Should, Too.

Write a business plan.

Many may not find it productive to make a business plan, but it goes a long way in helping you structure your partnership. It serves as a great road map and helps with the careful implementation of everything you need to generate growth. It also helps break the big overall goal into smaller achievable units. But there’s one thing that’s always overlooked. A business plan is a great idea because it helps to align the partners on the goals. It spells out who does what and when do they do it.

Choose a name together.

What’s in the name? Well a lot! Often the name of the firm explains the business partnership. But more importantly, the name is something both partners will have to agree on. Sometimes this can be very personal, and it’s absolutely key to consider each other’s stance on this. Once you find a suitable name to represent your business and partnership, the next step is to register the name. Now, this is important! Register it both online and with the local government body. Also, it would be a good idea to get a trademark for your partnership.

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Get your federal employer identification number.

Do not forget this one. It seems like a small thing, but it isn’t. The EIN or federal employer identification number plays an extremely crucial role when structuring the partnership. The EIN number changes with each new partner joining the enterprise.

Create a partnership agreement.

So you met this awesome potential partner. You’ve even become mates, which is great. But now you’re looking to start making money together, and that’s where things get serious. It will seem tough to propose this, especially if you’re close, but there’s no way I would ever enter a partnership without any agreement in place. It’s a typical beginner mistake and one that often comes with dire consequences. Jot down how you would spend the money, how the partners will be paid, how the losses and profits will be shared, who does what, and how much time each will be spending. Make sure you outline what happens if someone doesn’t honor the agreement.

Assign roles.

It’s important to assign roles at the very beginning of the partnership. Determine who is going to sign the contracts, the voting rights of each partner, etc. Also, set rules on inclusion of new partners and their roles in the functioning of the business. Another important aspect to consider is salaries. Unlike profits, salaries do not need be the same for each partner. They can vary based on the role each plays; they may even be commission based.

Have a robust exit strategy.

This usually gets lost when you’re going at it alone. But, when you’ve entered a partnership, having an exit strategy is something you should really consider. If things don’t go as planned and the partnership has to be dissolved, it is important to have a sound exit strategy in place. This needs to be drawn up at the very start of the partnership, so that it may be fair. And you don’t regret it later! Everything starting from how the assets will be divided to how the confidential details of the firm would be handled should be chalked out. It should also include points to describe what happens if a partner decides to retire, goes bankrupt, or dies.

With the right partner, a business can reach newer heights and achieve greater milestones. You know what they say — a great team is worth more than the sum of its parts. Try to achieve that, and you’ll be good. Just make sure you take the advice above into account. It’ll save your from a lot of pain and issues.

Investors: Do you work with a partner? Any tips you’d add to this list?

Be sure to comment below!

About Author

Engelo Rumora

Engelo Rumora “The Real Estate Dingo" is a successful property investor, motivational speaker and serial entrepreneur that quit school at the age of 14 and played professional soccer at 18. He is also a soon to be published author along with becoming a TV personality in his very own real estate house flipping show. To find out more go to engelorumora.com . Engelo Rumora has been involved in over 400 real estate deals and founded five businesses in Ohio. The most successful is Ohio Cashflow, a company that specializes in providing turnkey properties in several Ohio markets. The newest venture is List’n Sell Realty, a real estate brokerage based in Toledo, Ohio and soon to be known as the #1 discount broker in the country.

9 Comments

  1. margaret smith on

    Hi Engel-
    I love this article, and I did this once. Put in a whole lot of time and effort trying to anticipate anything that might happen, and get a lawyer to bless the partnership arrangement that I wrote up, with a couple of good agreements I cut and pasted from the internet. It blew up immediately. What a mess!

    I am a hard money lender, which in my case means that I lend $ to rehabbers and others with short term projects, with a mortgage in the public record to secure me against the property as collateral. Of course, I also have an unrecorded Note that secures me with my borrowers both professionally and personally. This is the traditional private business loan, secured with collateral.

    Lately, I have been adding a separate JV Agreement, or Profit Participation Loan, or whatever my lawyer likes to call it. This is the real agreement between the parties. It outlines the intentions of the parties, how funds are escrowed, who pays for what, how profit will be calculated. It includes a budget and timelines and estimate profits as an Addendum. It is not within sight of anyone else. The mortgage is there throughout the project to hold my first lien position in the public domain, and the Note backs that mortgage, and any judge in my state will uphold my position with those two items.

    However, when I lend a large LTV- for instance, I fund the purchase of the house, the closing, and some or all of the rehab in draws…. A standard percentage rate is too low for the amount of risk I have. So I partner with, say, a 50/50 share of profit- or 10% of the proceeds from the sale of the remodeled property- or some such profit sharing. This keeps everyone on the same page. My borrower can get a house, and a project, with little cash- and build a portfolio of (hopefully) successful projects with their own talents and hard work. No LLC’s, no permanent partnership, just a one time agreement between the parties. The agreement sets forth everything you suggest, but for the one secured property. Wash, rinse, repeat, as long as things are going well.

    This has worked for me over the past year, and I have several repeat clients that I love. I also have one client that I didn’t find very easy to communicate with. The remedy? A quiet decision on my part…No more ventures with that borrower- and no harsh words, no lawyers, no tax repercussions, no hurt egos.

    The satisfaction of knowing that I gave some deserving folks their start in this business, with many expected projects to come with tried and true partners– is the best reward!

  2. Joshua Flippin

    MARGARET, I would to get more details on how you work your partnerships. I’m a rehabber, and I’m about to enter a partnership similar to what you describe, with the profit sharing aspect. Do you have a standard agreement form of some sort that you use? How do you find the deal? Joint bank account or something like that? I feel like I have a hundred questions but I don’t know what they are. I want to make sure my funding partner feels secure but also make sure everyone gets what is agreed to in the end.

    • margaret smith on

      Hi Josh-
      For what I do, I could find no template, but created my own separate Agreement. I had a very experienced attorney look it over so that I could use it with one of his clients. He did not have much to add. Everything is spelled out, with most paragraphs begging with whose responsibility something is, as in “Borrower” is responsible for procuring the property, completing due diligence and all inspections, title work, muni lien search, surveys, etc, as may be required by Lender. “Borrower” will be responsible for payment of all reports and inspections, legal and title work, etc prior to closing. “Lender” will be responsible for reviewing all due diligence, title commitment, insurance binder, providing all lending docs, assisting with the HUD, setting up escrow, “Lender” will provide POF if required, and all agreed funds, to be made available prior to closing. “Lender” will have full access to the premises at all times, with a copy of all keys. On, and on, where you take into account who does what with construction, hiring, permits, insurance, utilities, safe maintenance of the project, books, final accounting, marketing, commissions, decision-making, problem solving in the event of an impasse.
      Anyway, this should give you a feel. You have to think, if I were lending the lion’s share of a project, what would I want to feel secure? Once you have your template, believe me, it is adjusted for every single project, as they are all a bit different. I would definitely have a lawyer look it over first time or two you use one.

      I can use my self directed IRA doing this (I make sure that no doc has me responsible for actively doing anything on the project, ie no “self dealing” or adding services to my benefit.) I do not run afoul of the SEC. Taxes on the profit are pass-through, as for any passive mortgage. I am not licensed to do anything. I can do this within a company or some entity, or just me, as an investment.

      Josh, I am a Pro member, just not sure how to use it. If you are too, perhaps you can reach me that way if interested?

      • margaret smith on

        Hi Engelo-
        You are so right, Engelo- If you are a seasoned rehabber, and have access to cheaper money, you should absolutely go for a standard private money loan. I do plenty of those, with no profit split and no need for an Agreement. Of course, those loans are more of the 85% LTV amounts. If as a newbie– or, let’s say someone coming back into the RE business after a hiatus, with not enough funds- this profit share agreement is one way to get going again.
        Once my newbies have a few successes under the belt, I modify that 50/50 to be, say, a reasonable cash finder’s fee to the investor, from my funds, at closing, plus a 45/55 profit split. The risk has been reduced, along with the lender’s rewards. None of my loans are amortized or require a monthly payment, BTW. I want all funds to go toward the project, and for bookkeeping to be simple for all.

        • Engelo Rumora

          Thanks Margaret,

          My advice has always been to work hard for a few years and save up enough cash to do deals on your own.

          If you loose, you only have yourself to blame and you don’t loose anyone else’s money.

          There is nothing worse than loosing another persons money.

          One can always use hard money to super charge their growth once they actually know how do it.

          Have a great day.

    • margaret smith on

      Rigoberto-
      I would, and I do! It is very risky, and you must choose your borrowers very carefully. I originally got this idea from a local, well respected guru- John Schaub, who wrote a couple of classic books for single family real estate investors. This is how he got his start. He would go to people he knew with savings that were not doing much, and suggest- “I have a great deal on a house that needs work. If you would fund it, I would do all the work, and we could just split the profits. A good deal for us both.”

      Really, the more the borrower has in the deal, the safer you are, but- some newbies just don’t have much to work with, yet are still worthy of the project. Beware who you give it to!
      I know one investor who does a 60/40 split, but I know how much focused work it takes to do a project, and so feel that is unfair, and unmotivating, to the borrower.

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