Real estate partnerships are very similar to marriage. Some of them are great and last forever, while others never make it out of the honeymoon period and end up fighting over the wedding gifts. Just like you would want to get to know a potential spouse before deciding to tie the knot, you have to make sure you know the person you're trusting with your real estate investments.
If you don't take the time to get to know the person, research their background, get some references on them and see what other types of deals they have done, you are taking an enormous risk with your money. This person may not have the same goals or objectives from real estate investing as you do. They may have a different set of ethics and standards. Their personality may be a total clash with yours. There are dozens of things that can make a real estate partnership go sour. However if you do it right, they can be extremely profitable.
Having a compatible real estate partner will let you close on bigger deals and your risk is spread out between you and your partner. So what should you look for in a potential real estate partner?
Level of Expertise and Skill they possess
If you are a 'buy and rent' type investor, you want to make sure your partner understands all of the nuances of that type of investment. Or if you are looking to expand your investment portfolio through buying and flipping houses then you want to find someone who has a high success rate in rehabbing and reselling. Always ask yourself “What will this person bring to the partnership?” You should also be asking yourself “What will this person expect me to bring to this partnership?” If the expectations of both parties don't match then your real estate partnership is doomed.
Sometimes a partnership involves one party doing all of the work and another putting up all of the funds. This seems like a simple enough philosophy but just because someone has money to invest doesn't mean they understand real estate. For instance if they think you are going to buy a property, fix it, market it, find a buyer for it and close on it all in week then they are going to be extremely disappointed when that doesn't happen.
You have to take the time to educate your financing partner on the time frame involved in your type of investment, the unexpected costs that can pop up and the realistic time frame for getting a return on their money. If you don't do this then you are going to end up with a partner who calls you every fifteen minutes asking if you have their money yet.
Who do they know?
While it is possible to have a successful real estate partnership with someone who is brand new to the business, you will have a much higher success rate if you are dealing with someone who is “known” in the industry. Someone who has a reputation for getting deals closed and making money can open doors for you that otherwise would have remained closed.
A real estate partnership does not always have to be a 50/50 arrangement. If one party is going to be taking on additional risk or workload then the partnership should reflect that. Before you enter into a partnership with anyone you should have an agreement drawn up by an attorney. Just like a pre-nuptual agreement can save you from a bad marriage, a well executed partnership agreement can save you from a bad real estate deal.
Excellent overview of partnerships Dan.
Good article, Daniel. Partnering can certainly be a great way to build up your business, however, as you said, it is exactly like a marriage. You absolutely need to know what you're getting into before moving into one.
We actually put out an article on the same topic this past week, containing some additional benefits for partnering:
Partnerships: The Benefits of Teaming Up in Real Estate Investing
I hope it helps add to the conversation.