5 Qualities to Seek Out in Your Next Real Estate Partnership

by | BiggerPockets.com

A business partnership is often compared to marriage, and I get why. How well you know and trust your partner can not only determine the success of your partnership, but also your ability to make decisions together and overcome challenges.

While most of us wouldn’t blindly enter into a lifelong commitment with someone we don’t know, it’s less common that business partnerships or joint ventures are approached with the same level of seriousness.

Rather, investors and entrepreneurs could be making the decision to partner up out of fear of personal risk, with the goal of spreading out that risk or sharing resources. Or maybe they just haven’t thought it through. Haven’t we all heard the horror stories about a friendship that goes awry and a partnership that dissolves after all the work of setting it up, acquiring properties, and starting to work through those deals?

Over the years, I’ve had challenging partnerships, and I’ve had truly successful ones. I’ve learned a lot from both.

Of course, when a deal or endeavor goes south, it brings to light any issues in a partnership that may have gone unnoticed during the good times.

So, what are the warning signs?

What should you be looking at before entering into a partnership?

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5 Qualities to Seek Out in Your Next Real Estate Partnership

1. Align your goals.

Goal alignment is critical for a successful partnership. What are your long-term goals, and are you in sync with your partner?

Do you have the same amount of time and/or money to invest to reach those goals?

Perhaps you want cash flow to supplement your income. Or maybe you’re focusing on building net worth.

When I first started out in real estate, I wanted to accumulate buy and hold properties for passive cash flow and then pay them off by retirement. Of course, investing goals can change or evolve over the years, and they’re not the same for everyone. Is your partner on the same page?

2. Know your preferred exit strategies.

It’s often said that we should have an exit strategy in mind before even entering a deal or starting a new endeavor. Do you and your potential partner have the same exit strategy in mind? What about a plan B?

I was once in a deal where my partner and I both intended to fix up the property and then sell it. After doing the work, the market changed, and we weren’t able to sell it at the price we wanted to.

Since my money for the deal was borrowed and I was paying on it monthly, I wanted to rent out the property for some much-needed cash flow until the market came back. My partner preferred to let it sit until we were able to sell. At that point, since we had different opinions on how to exit the deal, I ended up having to buy him out.

free-mentor

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

3.  Seek out complementary skill sets.

Rather than having the same skills, it may be better if your skill sets complement one another’s.

Also, when it comes to real estate partnerships, being handy doesn’t hurt either. For example, years ago I bought a property with a relative who was an electrician, while I was a painting contractor. So, if needed, we could jump in and do the work at cost.

4. Define roles and responsibilities.

While many folks start out doing the work themselves to save money, each partner’s role and his/her responsibilities need to be clearly defined. Who’s doing what? And how will both parties be compensated moving forward?

Maybe maintenance or management will be done by a partner or maybe it’s best to outsource that. Another thing to consider is what will happen if a partner can no longer participate in his/her role or perform it effectively.

I’ve been in deals where there roles and compensation weren’t figured out ahead of time or there was no schedule for the work to be completed, and it did put a strain on the partnership. After all, both parties expect it to be a fair exchange.

5. Prepare for change.

This is one of life’s certainties: Things change. So, it’s best to have certain protections in place. For example, what do you do with the properties if something were to happen to one of the partners? Do you have a buy/sell agreement?

Of course, there are other things to consider as well, like entity selection, tax considerations, and how much liability or risk you’re willing to take on.

If everything checks out and you’ve joined a solid partnership, it can have a huge impact on your deals or your overall business.

4 Ways an Ideal Partnership Can Help You

Done right, partnerships can give you an edge, enabling you to do things that would otherwise be a much bigger challenge.

What becomes easier in a good partnership?

1. You can share the work load.

If you’re going at it alone, without a partner and without outsourcing, you are wearing all the hats, so to speak. Everything revolves around you.

When I owned my own painting company and most of my business revolved around me, I had a really hard time getting away or taking any kind of break. Now, in my note company, if my partners or I want to go on vacation, we can do so, and we can cover for each other.

2. You can focus on your strengths.

Not only can you take a break when needed, but you can also shift your focus to what you’re best at, and your partners can do the same.

One of my biggest strengths is raising capital, but my partners’ strengths are different, so they focus on things like acquisitions, research, and borrower management.

outsource-income

Related: 4 Lessons I’ve Learned From My Made-in-Heaven Real Estate Partnership

3. You can gain a fresh perspective.

Another big benefit of having partners is being able to bounce your ideas off them. Otherwise, it’s like you’re on an island, making all of your decisions on your own.

Having someone else with a fresh perspective can get you back on track or it could validate what you’re doing. It’s usually easier to solve a problem with a team of minds instead of just one.

4. You can scale up.

When you’re a small outfit or just one person, you can only do as much as you personally can handle. Scaling up into a full-blown business could be done more quickly with partners than without.

Personally, I think the best thing about having my partners is that we can build a bigger enterprise with a higher likelihood of continued success, one that also makes a larger impact.

So, have you considered a real estate partnership? If so, what planning did you do, or will you do, to make sure it’s successful?

Let’s talk below!

About Author

Dave Van Horn

Dave Van Horn is President at PPR The Note Co. - an operating entity that manages several funds that buy/sell/hold residential mortgages, both performing and delinquent. Dave has been in the Real Estate business for over 25 years, starting out as a Realtor and contractor and moving onto everything from fix and flips to Raising Private Money.

7 Comments

  1. Douglas Skipworth

    Awesome post, Dave! I often say that two of the best decisions I have ever made are marrying my wife (20 years this June) and partnering in my real estate business with my jogging buddy Dan (10 years this August).

    Here are two general rules that I have for my partnerships.

    1. Treat the partnership as your own sole proprietorship.

    Take a no excuses approach to success. You must assume that you are the one who is ultimately responsible for accomplishing the objective. Don’t wait for your partner to pick up the slack. Continually ask yourself and your partner, “What can I do to help achieve the goals?”

    2. Treat your partner as the sole proprietor.

    Be the partner you want to have. Defer to your partner. You should take the position that you are the junior partner working for the senior partner.

    I have found that the best partnerships are when both partners live out the two rules above for their other partner.

  2. Andrew Syrios

    This is a very good article on something a lot of people don’t think about much. Who you partner with is as important as the deal. Many partnerships break down over time so it’s important you align with your partners goals and can get along well.

  3. Curt Smith

    I’m in a partnership who bought a commercial deal. A common tactic to buy commercial. Group enough folks together to come up with the needed down payment.

    What I discovered is that even when all partners take the same boot camp, have the same initial energy, but only one partner has real world experience at running a real estate business and the other managing partners have no first hand experience running a real estate business with tenants etc, and have lots of family and day-job responsibilities there’s an imbalance and a “cant get there from here” issue when it comes to taking action immediately even if its 4pm Friday, or Sunday at 2. When there’s no first hand experience in real estate businesses you also have slow to no progress on typical real estate issues,, the deer in the head lights road block to solving common problems.

    I would suggest you choose business partners wisely based on their past performance in the same line of business you will be partnering for. Un-tested partners are a likely area of friction and imbalance unless you are lucky.

    We choose tenants based on at least 2 yrs in the current job, why do we choose business partners on much weaker criteria?

    If its their money,,,, Think twice or 10 times. The money is easy to find, but good partners who YOU are compatible with and will be good at doing the work of the real estate business are very hard to find.

    • Dave Van Horn

      Curt,

      You make so many great points. I often say “Money is only worth equity or a fee, not control of operations” since that’s where things can get complicated quick, and to your point, especially with partners who have little experience in your investment.

      Best,
      Dave

  4. Brent Washam

    We’ve had a 50/50 partner couple in a rental duplex since 1988, 29 years. It works well because of the type of people they are, good friends always willing to pitch in. Each couple kicked in $885 to close on the foreclosure purchase. It was my first of 10 multi-family properties. Now the duplex is paid off and we each realize a dividend of $600 per month from the cash flow. I remember two cash-out refinances so its been a lump sum cash generator at times, too. I do the books and most repairs, Karl is a cleaning and painting maniac when there’s a vacancy, which is a rare occurrence. Looking back our success is very much personality based. We’re each willing to give more than take and work hard when the occasion demands it.

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