5 Tips I Wish I Knew Before Partnering on a Real Estate Deal

by | BiggerPockets.com

As an active real estate investor, it is likely only a matter of time before you joint venture, team-up, or partner with another investor, friend, or family member. Many investors will choose to utilize a partner for a variety of reasons; some reasons are valid, others less so. Remember that every partner you bring into a deal will likely reduce your potential profit. While it is better to have a small piece of the pie versus no pie at all, perhaps there is a way to safely keep the entire pie for yourself.

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5 Tips I Wish I Knew Before Partnering on a Real Estate Deal

1. Gain clarity before going into the partnership.

Ask yourself, “What’s my excuse for not doing this solo?” You are only one person. As a single person, you have limitations. Oftentimes an investor may choose to work with a partner out of fear, discomfort, lack of capital, lack of experience, location, a perceived lack of time, and/or much more.

  • Capital: Instead of partnering and splitting a percentage of your profits, consider borrowing money from a friend, family member, IRA, private money lender, or hard money lender. Borrowing money from a public or private lender may seem a bit more time-consuming to find and organize; however, you will likely keep a significantly higher portion of your profits.
  • Fear: Fear often comes from the unknown. Ask more questions to seasoned real estate investors to gain more clarity. Understand your ideal step-by-step process before moving forward with your specific situation. This website has many helpful investors waiting to give a helping hand to active investors with genuine questions.

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2. Understand how much knowledge you’re lacking.

At best, you are an expert within a few areas of real estate investing. Still, no one knows everything about real estate investing. There is just too much to know and too much changing at any given time. With that said, there is nothing stopping you from learning what you need to know to close the deal ahead of you. If you do not have the specific knowledge or experience to successfully navigate an entire deal, then if is important to understand if:

  • You have little to no idea what you’re doing. If this describes you, then it may be best for you to gain more clarity before moving forward with any particular deal. This clarity can come from asking dozens and dozens of questions to experienced investors, investing via trial and error, or working/partnering directly with an experienced investor you trust.
  • You have more than a basic understanding but still have questions. If this describes you, then you may not need to partner with a more experienced investor to invest safely. However, it may be a wise idea to have the phone number or email address of an experienced investor you may ask general/specific questions and bounce ideas off of. Keep in mind while working solo, it is your responsibility to keep yourself and your business safe.
  • You are pretty sure you know your stuff, but would like a second opinion at times. If this describes you, then you may not need to partner with a more experienced investor to invest safely. However, it may be a wise idea to have the phone number or email of an experienced investor you may ask specific questions and bounce ideas off of. Keep in mind while working solo it is your responsibility to keep yourself and your business safe.


Related: 9 Possible Pitfalls of Real Estate Partnerships

Use the help of this website and your local real estate investor clubs to reach out to experienced investors in the niche you need help with. For example, ask the president or leader of your local real estate investment clubs who they would recommend as the local triplex expert or wholesaling expert. You may then reach out to these people and hopefully get a number of your questions answered. With any luck, this person will be able to answer some questions for you before, during, and after your specific deal(s). You may also ask to partner on the specific deal if this investor is interested.

3. Always vet potential partners before the deal.

Talk is cheap. Especially in the real estate investing world, there are many people who tend to over-promise and under-deliver. This is not a trait you want in any partner you work with. Ideally aim to know somebody for a few months, look over their deals, and have multiple interactions with them (and other investors they know) to properly vet any potential partner before working together one-on-one. It may be a prudent idea to:

  • Walk through any deals your prospective partner may be working on currently.
  • Make sure there are no current warrants or legal suits against your prospective partner.
  • Inspect his or her books/files to see how organized your prospective partner is when it comes to incoming/outgoing payments.
  • Ask for referrals of other investors who have partnered with or lent money from/to your prospective partner.

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4. A good agreement can save you.

Assume your business partner will eventually try to take advantage of you. When everything is going smoothly, there is typically nothing to worry about. However, when things go unexpectedly or there are problems ahead, it can be very important to have a written agreement outlining who is responsible for what and when. Agreements and contracts can save time, money, friendships, and headaches.

Related: 4 Tell-Tale Signs of a Bad Partnership (From Personal Experience)

Consider only working with a partner on specific deals you need specific help with. If you are able to find, fund, fix, and resell/rent a property by yourself, then a partner may not be needed. Consider only using a partner if needed.

5. Take control of the risk you’re taking on.

If you are the “money person” in the deal, then listen up. While it is said that money/capital is very easy to come by, assuming that a real estate deal is solid/profitable, it does not mean that this money has to be “dumb money.” If you are the person contributing the majority of money in the transaction, make sure you feel 100 percent confident that your money is protected and accounted for. Aim to work with a partner you can describe as a hard-working investor who is experienced, tenacious, accountable, and ethical.

In conclusion, always aim to have clarity with regard to your entire situation. Aim to think long-term about what is best for both you and your potential partners’ businesses, reputations, and future dealings together. Sometimes the best deal is the one not taken.

Did we miss anything?

Please comment below.

About Author

John Fedro

John Fedro has been investing in manufactured housing since 2002. John now spends his time continuing to build his cash-flow business in multiple states while helping others enjoy the same freedom he has achieved. Find John here.

5 Comments

  1. Sandra McGinty

    OMG. You have NO idea how spot on this article is about partners. I’m stuck in a bad partnership that I agreed to out of fear. I thought I couldn’t do the deal or manage the property on my own. Boy, was I wrong. I have limited math skills; my partner in this one house has great math skills… but in the end it doesn’t matter. I can handle the expenses for the property. I’m doing just fine in other properties in which I have no biz partner!! In the end, I do about 90% of the property management and the partner sits in another state paying 6 bills a month. Yet he gains half the profit. It is not his fault; it is mine entirely. Now I want to renegotiate the agreement, but it’s a wee bit too late. The seller in our creative acquisition in this property just died. He was my former husband that through this deal was bailed out of a bad situation. With that, many things change. The partnership is the least of it. Good article.

  2. Curt Smith

    Hi John, a great topic especially appropriate for commercial deals that often have cash raise needs exceeding most folks own resources. The simplest being a partnership of investors into an operating LLC where the duties and powers are specified by using an attorney to write the operating agreement.

    #1 spend the money to use a real estate contract attorney to write the LLC operating agreement.

    #2 but way way before #1 vet who you partner with. Personality types is an obvious compatibility test. IE dance before marriage.

    #3 From my experience the biggest issue is whether the operating partners actually own other rental / businesses that are tenant facing and those businesses are well run?

    The terse summary of advice I have is: Only allow yourself to be a managing partner with other managing partners only if the other partners are successful business owners of similar deals (parks, SFRs, self storage). This may mean you won’t partner in any deals given the often mis-matches won’t pass the above critical test. Then you are better served is my view! Then use debt relationships instead of partnerships or equity partnerships. Debt is much easier to deal with than folks who have a say in daily operations.

    Readers may wonder,,, well if I don’;t have any experience managing a mobile home park, my best chances are to partner with someone who owns one or a few. Yes if you can find a managing partner who has experience AND your talking with this person over months, visiting his park(s), talked to the in the park managers, talked over book keeping and find this person runs a tight ship AND you can convince HIM to take you on in a new venture then you may be net net a head and might proceed. Its this experienced partner who may feel on the short end of the deal, so its upon you to hold up your end.

    My comment focuses on you being the more experienced and the partners you take on just not having the same experience (or any experience) running a tenant based business means the un-experienced partners are NOT likely make the major changes to ones weekend (and week night) family life etc and how you may be forced to pick up the slack OR the other prospect the business suffering from absentee ownership and very slow responsiveness to typical tenant / ownership issues.

    Someone suffers when there’s imbalances between partners, other partners or the business. Success and happiness need not go hand in hand. Spend time with everyone before you make the leap. Read between the lines if they can’t meet on weekends, take calls / return calls quickly. Never respond… This is how running the business will be like…

  3. Yes definitely an agreement between the two will be good before partnering on a real estate deal. Becoming a partner in a real estate business is not an easy thing. One should think twice before investing as it has high risk involved in it. Keep writing these type of blog, really it is very helpful.

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