A lot of people look for partners when investing in real estate. They look for a partner because they need money, they need expertise, or they want someone to share in the pros and cons. Investing in real estate can be an amazing venture, but it is not easy and it often takes a lot of money. For these reasons, a partner can make sense but a partner can also cause problems. Not all partners are created equal and many times a partner is not needed or can complicate the deal. If you are looking for a partner you need to figure out exactly what the roles of the partners will be, if the partner is needed, and everything needs to be in writing!
Do you need a partner?
A lot of real estate investors or people who want to invest in real estate want a partner. They do not want a partner because they need something particular, they want a partner because they have heard it can be good to have a partner and it might be nice to have someone to share the responsibilities with.
I am not a fan of partnering just to partner. I think you should only take on a partner if you need someone very specific and can create specific roles for each person. It can be very tricky and very risky bringing in someone else, especially if they are not an expert in what you are trying to do I have seen many people partner with a friend because it seems fun but now there are a few people who don’t know what they are doing working a deal instead of one. This does not increase your chances of success!
If you are scared to do a deal or to start something new because you do not feel you have the experience to do it on your own, another person who also does not have the experience will not help, in fact, it could very well hurt! Not to mention, if friendships or family are involved it can lead to some very awkward and flat-out horrible situations.
What can a partner bring to the table?
Not all partnerships are bad and there can be times when a partner is needed. Here are some things a partner can help with:
The most common reason to use a partner is that one person has money and the other does not. I think the best way to set up this relationship is to have one person do the work and the other provides the money. A partner can also save time if they have extra time for tasks that the other partner does not have. Partners can have the experience that will help the other partner, and networking is obviously a huge benefit as well. In some cases, a partner will be able to help with financing a deal and in other cases, a partner can provide the grunt work.
Are there alternatives to bringing on a partner?
I have done many real estate deals and very rarely use a partner. I prefer to be in total control and keep 100 percent of the equity. When you bring on a partner, they almost always want a share of the equity and the profits. This does not mean I do everything on my own. I have many people who help me and I have learned a lot from those who know much more than me. However, making someone a partner is not always the only option.
I borrow money from many people in the form of private money. I could bring people on as a partner and split the profits but I prefer to pay them an interest rate instead. If I do not do well on a deal that means I may lose more money than if I had a partner, but if I do well I make much more than if I had a partner. I also get to make all of the decisions which is even more important to me.
The alternative to bringing a partner in is paying someone. You can pay someone to teach you, you can pay interest on a loan, and you can pay someone to work for you. I also think that handling deals this way leads to fewer conflicts and misunderstandings. It is usually clear what each party is getting and if one party does not hold up their end of the deal, the relationship usually ends.
The video below is a rental property I bought with a partner.
What can go wrong in a partnership?
Many things can go wrong in a partnership! The biggest problems that arise in a partnership come from one party not doing what the other party expects them to do. Because the partnership involves equity, this can make the deal very tricky. To end the partnership, one party must buy out the other party or the asset must be sold. This can not always be easily done.
I think the biggest issue with partnerships is that the roles of each partner are not clearly defined. When you create a partnership each person needs to know exactly what is expected of them and what will happen if they do not hold up their end of the deal. If the roles are not clearly defined one partner or even both partners, or all the partners may not hold up their part of the deal. Not only can this be frustrating to those who are involved but it can destroy the deal if the work is not being done.
This is why a partnership that is there simply to make each person feel better about having someone with them is such a bad idea. The roles are almost never defined, the partners do not know what they are supposed to be doing, and in most cases, one partner does more work than the other and there are bad feelings. To throw salt onto the wound, the deal usually goes bad as well and people lose money.
How does a partnership work?
There are many different ways to set up a partnership and many types of real estate that a partnership can be used with. I have partnered with an investor when buying a large commercial property, and I used to partner with my father flipping houses.
As I mentioned the best partnerships with house flipping tend to be when one party does all of the work and the other party provides all of the money. The usual split I see with this setup is 50/50. Both partners get 50 percent of the profits. There can be many ways to set up a partnership but always get everything in writing! What happens if things go bad? Or if one partner gets sick or dies? Or if one partner runs out of money?
Rental property partnerships can be a little trickier. There is no solid profit number at the end of the deal and there is no set time when the partnership ends. Partnerships can still work with a number of different scenarios but again everything should be in writing. One person could provide all of the funding while the other does all of the work. Or there could be equal amounts of work. There is no exact way to set things up but make sure you need a partner as the exit can be tricky. What if one partner wants out but the other does not? What if one partner runs into financial problems and has to be bought out but the other partner does not have the money to buy them out? You could run into a situation where the property must be sold but no one really wants to sell it!
Partners can provide value to a deal but they are not always necessary. I think using private money lenders instead of partners can make things much simpler. If you really want a partner make sure as many scenarios as possible are covered and that it is clear what the responsibility of each partner will be!