Getting started flipping or buying rental properties can be very difficult for aspiring investors. The biggest problem for most investors is finding the money to flip or the down payment for rentals. In some cases an investor has a lot of money, but no time to find deals, renovate houses or perform the other tasks needed to invest in real estate. In other cases an investor may have the knowledge and time to invest, but no money. A partnership can be a mutually beneficial way to invest in real estate if done right.
I don’t have a partner in my business, but I used to partner with my father. It would have been really tough for me to flip houses or sell real estate without a partner to help with the financing and mentoring. But, in some ways I think having a partner also held me back and provided a comfort zone that allowed to me to relax more than I should have. Having a partner in real estate deals can be a great way to get started, but if you don’t set things up right it can be a disaster and destroy relationships.
How does a partnership on fix and flips work?
Many people want to flip houses. For many it appears as a quick way to make a lot of money. I am approached by investors all the time who want to start flipping houses. Flipping is a very difficult business to get into, especially if you have no money. It takes patience to find deals, it takes time to make repairs, it takes expertise and knowledge to learn your market. If it were easy to buy a house with none of your own money, fix it up real quick and sell it a couple of months later for a $30,000 profit, everyone would do it!
Most people who want to flip houses do not take the time needed to learn their market, save money and research the costs involved when flipping. If you want to flip houses, but need a partner for to help fund you, you must bring something to the table. I don’t partner with people looking to flip houses, because I stay busy enough with my own deals and flips. If I was looking for a partner here is what I would want from them if I was the money source.
- Local market knowledge: I would want any investor to know what neighborhoods have potential. What previous deals would have been good flips. What the target purchase price and sales price would be.
- Know the costs: Many investors under-estimate the costs on a flip. Buying costs, carrying costs, repair costs, selling costs all need to be accounted for. I want details, not that a home meets the 70 percent rule.
- How will you get the deal: The hardest part of flipping is finding a deal with enough room to make a profit. Are you using the MLS with a Realtor or direct marketing or something else?
- What is my involvement: Do I have to do any work in the transaction? Do I have to determine value, find contractors or find the deal?
- Who will do the work? Will you make repairs yourself? Will you hire a contractor and do you already have a contractor? If you do the work yourself do you have the experience to do it right and quickly?
- What is the time frame: Have you planned out how long the process will take and is it realistic? It will probably take longer than three months to flip a house.
In a fix and flip partnership a typical split is the person who provides the money gets 50 percent of the profits and the person that does all the work gets 50 percent. Don’t expect your money partner on a flip deal to find the deal, find the contractor and handle the sale. What would they need you for?
If you are splitting up the money portion of the flip and the work portion of the flip it can get much more difficult. If you decide each partner will pay 50 percent of the costs and do 50 percent it can be tough keeping track of hours worked and finances. Most people who enter partnerships like this have jobs and try to do the work on the side. One partner ends doing more work than the other and gets frustrated. Or one partner puts more money in than the other and gets frustrated. The key is to make sure everything is in writing.
Here is a great article on how much money you can make flipping houses.
How does a partnership work with rental properties?
Rental property partnerships can be even trickier than fix and flip partnerships. I have 13 rentals and I don’t have partners on those properties either. The tough part is knowing how the partnership will progress through time. One partner may want to cash out in five years and another partner may want to hold the properties for thirty years.
It is also a little tougher figuring what the returns will be on rental properties. When flipping you know what the profit is after a flip. With rentals, you have equity pay down, tax advantages, appreciation and cash flow. Some of these returns are seen in the form of cash in your pocket like cash flow. Other returns like appreciation and equity pay down are not seen unless the home is sold or refinanced. Not only do you have to come up with a percentage of the actual profits (cash flow) that will be split, but you have to come up with a percentage of the equity that will be split if the properties are sold or if one partner wants to sell out and the other partner wants to keep the properties.
Things to consider with a partner on rental properties:
- Who does the work: Will both partners work to find properties or will one do all the work? How will repairs and maintenance be handled? Who will screen tenants or will a property manager be used?
- How much money will each partner put in: Will one partner put in all the money and the other do all the work? Will it be a mix of money and work?
- What percentage of the profits will each partner take: It can be very tough figuring profits with rentals. You will have up and down cash flow months and houses can be depreciated. With depreciation tax returns will show less profit than you actually make. You also need to have reserves in place for maintenance and vacancies. You have to decide what each partners role is worth and how profits will be split.
- What percentage of equity does each partner get: When you get a mortgage on a property the equity will slowly increase as payments are made and houses might appreciate as well. If you bought the property below market value you also increase equity. That equity does not good unless you sell or refinance, but you need to figure out what percentage each partner gets if you sell or refinance.
- What happens if one partner wants out: The biggest problem with rental properties and partnerships is ending the relationship. How long do you plan to own the property together? What if one partner needs money and wants out? What if the house doesn’t make as much money as you thought and a partner wants out? You have to figure out before the partnership starts what will happen if one partner wants out how to end the relationship.
As you can see it can be very tricky handling a partnership with rental properties. Determining the amount of work each person is responsible for is tough, determining an exit strategy is tough, determining what percentages each investor gets and when is also tough.
Why does everything need to be in writing with a real estate partnership?
If you decide to enter a partnership, everything has to be in writing. I don’t care if your partnership is with your brother and best friend, it should be in writing. There are multiple reasons why everything should be in writing.
- People forget things: It would seem you would never forget the details of a partnership that involves thousands of dollars, but it happens. I wrote an article about private money a while back and mentioned I pay my sister six percent interest. She read it and was quick to remind me I pay her seven percent! We have everything in writing so there are no mistakes or fall outs from simply forgetting the terms.
- Partners need to know roles: If you are doing a flip with a partner and decide to share the work, how much time will each person put in? One partner may have a family emergency or may have to work overtime. How many hours will each person put in and what are the consequences if they don’t pull their weight? One of the biggest problems is one partner thinks he does all the work while the other collects the profit without doing anything.
- Exit strategies: With rental properties you have to know what happens if one partner wants bought out or has to sell. How is market value determined, how will costs be split, etc. With a flip what happens if you decide not to flip the house because the market changed?
- Use of professional services: If one partner is a contractor or real estate agent how will they be paid for their services? Will they get a higher percentage of the profits for their expertise or for saving money on commissions? Will the contractor or agent be paid like they would any other job?
- Rates, terms payoffs: If you are borrowing money from a partner all the terms of the loan or agreement need to be in writing. Some agreements are a pure profit split, but others might involve private money lending with interest rates, length of the note, etc.
- Decision making: Who has the final say on how much money to spend, how to repair a house, what properties to buy etc. What happens if the partners don’t agree? This is another big issue that can cause problems if not in writing.
A huge issue with partnerships is when one side either forgets or does not live up to their agreed upon obligations. If you have it in writing what the obligations are and what happens if those obligations are not met it will make a partnership much more successful. The partners will have more motivation to work hard and it will be easier to handle problems when they come up.
Do you need a partner to invest in real estate?
Many people ask me how to structure a partnership when they collaborate on rental properties. One question was:
“We have the money and knowledge to buy rentals, but we have the opportunity to partner up with another investor, how do we structure it?”
My answer was: Why do you need a partner? Why bring someone in to share the profits on a deal when you have the money and know how? You will make much more money on real estate deals when you do not have a partner. The purpose of a partner is to provide something that you cannot or do not want to provide. You give up some of the profits to spend less of your own money, use someone’s time or their expertise. If you don’t need any of those things, don’t give up your profits!
Do you have anything to offer a partner when investing in real estate?
I also see many people who are looking for a partner or a mentor to help them start investing. The problem is they want someone to show them how to buy houses, fix them up, find great deals and make a ton of money. But the person looking to be taught how to invest is offering nothing back to the investor, except for a willingness to work hard.
I have this partnership proposed to me over and over and almost every time there are huge problems on my side of the deal.
1. When I ask the person who wants help what they can offer me in return, they say determination, hard work, etc., but they list no specific skills. What can you do better than other people who will help me become more successful or help the deal be more successful? Are you good with computers? Do you have carpentry skills? Are you an expert marketer? Willingness to learn and work hard is not a skill and something everyone says they have. If you want to impress someone be as specific as possible about how you will help them make more money.
2. Most successful investors do not have time to train someone about the entire process of investing. They also may not want to train someone to compete with themselves! Don’t be put off if an investor does not want to mentor someone, because it is a very involved process that takes time. Paying for knowledge and experience is also an option and shows you are serious. Most people who want free help and have nothing to offer in return won’t even use that help if they get it and it is a giant waste of time for everyone.
3. Many aspiring investors looking for a mentor want someone to tell them how to do everything. I have had people come to me saying how do I make money flipping houses? Well, I could write a book on that and still not answer all of your questions (actually I did write a book on flipping). I point out articles for people to read or point them towards my book and they don’t want to take the time to read the articles or pay $6 for a book. They want everything done for them without doing any work. If you want to impress a potential partner or mentor, do your research and learn as much as you possibly can. The more knowledge you have the better chance you have of impressing someone enough to help you.
If you want to be a partner in a real estate deal you must have something to offer. You need to bring money, expertise, skills or pay for the opportunity. There are no shortcuts in becoming a successful real estate investor.
If you want help with investing in rental properties or fix and flips check out my Complete Blueprint to Successful Real Estate Investing.
Why did I end my real estate partnership with my father?
I partnered with my father on flips and our real estate team before I took over everything in 2013. The partnership was great to help me get started after I graduated college in 2001. I could have never flipped houses out of college, because I had no money and no way to finance all of the deal. In return for money to flip and knowledge I gave up most of the profits. For a while I was even doing the painting and on one house, most of the repair work. When I did the work myself I did not get a higher percentage, I was paid hourly. Flipping with a partner was great in the beginning, but at the end I was doing almost all of the work and I did not have the final decision in what to buy.
On our real estate team my father paid the staff, took care of most expenses and took a big chunk of my commissions. It was nice not having to worry about payroll and everything else, but I also sold most of the houses on the team and I was giving up a lot of profit by having a partner. My father also was tired of running the team and managing all the people.
I had wanted to take over everything for a while, but was worried about the time it would take to manage it all and what my father would think. I approached him about it and my parents said they were waiting for me to takeover, because they were ready to retire! I had my good friend joining the team who could help with the transition and a good relationship with my portfolio lender so that I could finance the flips. I ended up buying out my parents and taking over the entire business. I love having complete control and keeping the profits!
Partnerships can be a great way to get started if you need help. Partnerships can also be a nightmare if you do not have roles clearly defined or everything in writing. Partnerships also evolve and you may have to be flexible as people’s priorities in life change. My partnership with my father changed over the years until I ended up buying him out. We had everything in writing when we made changes and that helped things go smoothly.
If you enter a partnership make sure you take the time to set it up right. If you don’t need a partner it sure is nice having complete control and all the profits.