Partnering has been used in real estate as far back as the Roman Empire and maybe even earlier. History is great but what are the advantages of partnering up for real estate investors today? When does it make sense? Who makes good real estate investing partners? What pitfalls and potholes in the road should be avoided?
Real Estate Partnerships 101
Real estate partnerships have been used by the elite for centuries, and they are still used by wealthy, sophisticated investors now. Yet, partnerships are also one of the most powerful investment tools even for brand new investors as well.
The concept is simple. It just means two or more investors working together to achieve a common goal. It can be a money partner and an individual with the time to do the work. It can be a whole circle of money partners and one partner with the expertise and time to create profits in real estate.
There are a variety of ways to set up partnerships. They can be crowdfunded campaigns, informal agreements between personal contacts, Limited Liability Partnerships (LLPs), or LLCs. Everyone can have equal shares, or they can be divided up depending on the value of each party’s contribution. Regardless of the parties involved, every partnership should be inked and signed by every stakeholder.
The Advantages of Partnering Up
Why consider bringing in a partner?
To provide the “skin in the game” an asset-based lender may require
Reduce your personal risk in investing
Spread your resources across more deals
Get the extra funds you need to acquire and complete deals
Allow others to participate in your success
Do more and bigger real estate deals
Having more people invested in your success
Bringing in experienced individuals to help
Obtaining better terms on financing
Potential Cons of Partnering Up
What might some of the cons of bringing in partners be?
Having to split the profits
Giving up control
Extra reporting and accounting responsibilities
Smart Times to Partner Up
In advance when scouting for new property deals
When launching real estate crowdfunding campaigns
When other types of financing cannot be used
To reduce the cost of leverage
To provide confidence for future investors and lenders
When it helps to speed up and secure other types of financing
When you get stuck for cash
When taking on a new type of real estate deal
In some cases real estate investors simply won’t be able to raise all the funds needed to make a deal happen, or at least have the comfort cushion they desire. In other scenarios obtaining some partner funds can provide more flexibility, speed, and better profit margins. For example; obtaining a low LTV asset based loan for the acquisition costs, and using partner money to make improvements.
Who Can Real Estate Investors Partner With?
There are a wide range of potential partners out there, including:
Local individuals with excess funds
Other real estate investors
Real estate investment groups
Venture capital firms
The public crowd of peer and accredited investors
Local government and real estate and housing organizations
It’s normally best to start out looking for partners among those already in your network. Remember, when you approach others outside your network for funds they may want to know how many of your friends and family members have or have not backed you – and why.
Reaching out with partnership opportunities to those outside your inner circle can take various forms – everything from online crowdfunding campaigns, to private conversations over lunch, to live pitch events. Some investors create very detailed and lengthy credibility packages and prospectuses. Others work with a handshake.
What & Who to Avoid When Pitching Potential Partners for Money
What don’t you want in a real estate partnership?
Some of the worst nightmare real estate partnership scenarios involve:
Difficult partners that make it hard to make money
Overly involved partners that drain time and energy
Partners that may try to kick you out of the deal or company
Partners that ruin your relationships with other people in the industry
Those that may fail to perform, and even steal from your operation
While there may certainly be exceptions when it really pays to bring in a more experienced partner to run things, investors can normally avoid these situations by retaining firm control and legal boundaries.
How to make it Work
Choose Your Partners Wisely
You may not always be able to spot a scoundrel in advance, but some people are obviously going to be a pain to deal with on a daily basis. Others may give signals that their greed may encroach into your pockets. Trust your gut, and avoid all but those you really feel synergy with. It’s not ‘just business’, this is personal, and relationships are more valuable than money. So recognize when it is better not to jeopardize your relationships with partnerships and joint ventures.
Of the top 10 biggest mistakes when dealing with partners listed by the “Real Estate Finance Journal”, most center around the legal arrangements and written agreements made…or not made. It’s amazing how much money can change people. One day someone is your best friend in the world, the next you find out they emptied your bank account, took an extra mortgage out on your property, and skipped town. Even in less extreme cases, simple miscommunication or assumptions that haven’t been addressed can become financial nightmares. Make sure everyone is protected with very clear agreements in writing. Spell out the risks, each party’s responsibilities, and the remedies. It’s worth investing a couple hundred dollars in having an attorney draft an agreement for you – one that you may be able to use as a template for future deals and partnerships.
Ultimately partnerships are just as important and powerful as financing in real estate investment. There can be pitfalls for those that don’t take the risks seriously, and protect themselves with smart legal structures. Yet, with so many advantages, partnerships certainly shouldn’t be ignored. They could be what makes all the difference in getting you to where you want to be, and a lot faster.