Partnerships for Real Estate Investing
Partnerships can be a very lucrative decision for real estate investors. A partnership’s definition is “a legal relation existing between two or more persons contractually associated as joint principals in a business ” – in real estate, partnerships can be used for many applications. If you have time, knowledge or money, then you are a perfect candidate to partner with someone with different qualifications. Say you have money, but don’t have the time or knowledge – there are many investors who have time and knowledge, but don’t have or they are out of MONEY! If you have them all, money, time and knowledge, then you don’t need to partner, but most of us don’t have them all, therefore, other solutions can give us more flexibility for buying properties. Partnerships are just one solution to this problem.
Let’s talk about how a partnership can work in lease options. Say I find a good home that would sell for a good profit on an option, but the seller can’t sell to me on an option. They must have their cash out of the home, therefore, you have to pay cash or get a mortgage to make it work for the seller. If you don’t have cash and can’t get it, why not partner with someone who has the cash? Isn’t half of a good profit better than zero? And on the other hand, that someone with money, may not have the time to find or manage a property, but they would like to get in on real estate investing. In this case the person with the money would be responsible for paying cash for the home (with a reasonable interest rate on that money) or acquiring a mortgage for the home. The partnership pays the mortgage payments with the rent received from the home. When the tenant/buyer exercises their option – all profits are split or rolled back into the company for more deals. Partnerships are flexible and can be worked any way both partners want.
Picking a partner is important. Many good friendships end over business, so be careful who you partner with. A good friend is not worth losing over any amount of money. If you are the money person, you want to pick someone that is aggressive, detailed on record keeping, honest, fair, trustworthy and experienced. If you are the manager of the property you want a partner who has money to work with, is honest, fair, easy-going and most of all – hands off. They must trust you to do your part of the partnership.
Create a legal partnership agreement. All details of how the partnership will work, should be worked out, documented and signed prior to any business transactions being started. Go through your plans together. What do you want the partnership to do? What happens when things don’t go well? Go through worse case scenarios and make sure that all of your solutions are worked out before they happen. What happens if the well goes out and it will cost $3500 to fix it? What happens when the tenant doesn’t pay the rent and knows the system and gets the judge to extend their time before eviction – and then damages the home severely? What happens when you have to go to court? Who will represent you? Etc. I use LLCs- Limited Liability Company’s for my partnerships. Having an attorney draft the operating agreement is a very good idea. Both my partner and I review them. When we get all of the changes or corrections made. We both sign 2 copies. One copy goes to me and one to my partner. Talk to an attorney before you start a partnership. Poor communication and lack of documented procedures is the number one reason why partnerships have misunderstandings. Misunderstandings cause hurt, fear, and disappointments, all of which bring partnerships to ruin.
I currently have 6 partners that either do the money end of the partnership or they ‘bird-dog’ for me. Bird Dog partners are ones that find the properties and many times manage them also. Many successful investors have partnerships with multiple people. Partnerships create synergy. With Synergy you can do more than you could by yourself. Here’s an example: by myself I might only be able to purchase 4 homes this year. With a partner, I might be able to purchase 10 homes – more than double what I can do myself – therefore, synergy – doing more than twice as much together as you could do alone. So, why not partner?
Great article Wendy, on benefits of P'ship.
You're right as rain, a good P'ship can benefit all partners & a good little group can accomplish more than a sole operator.
BUUUUUT...please, please get it in writing, as there's not much worse than a P'ship gone bad, and specially an oral one...as a practicing lawyer I've made lots of $$$ over the years on bad, weak, & unwritten P'ships...but as a REI who does use P'ships in a number of deals and ways, I have lots of respect for a good, well written and conceived P'ship.
John, I agree. I've always believed that ambiguity in contracts hurts everybody. A well written contract isn't flowery or lengthy or nice looking. The benchmark of a well written contract is where a stranger to the transaction can pick it up cold and be able to discern what the parties' intentions were. After all, that "stranger" might wind up being the judge if the matter gets litigated.
"Where a stranger could pick up the contract..."
While I never heard it put this way, I love it and that certainly would be the acid test.
The example of the stranger to the transaction picking up the contract and trying to understand what the parties intended, I've found, is an effective way of getting the point across to people. It creates a picture that sticks in their minds.