Partnerships can be very lucrative for real estate investors. A partnership is “a legal relation existing between two or more persons contractually associated as joint principals in a business.”
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 yet have run 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, so other solutions can give us more flexibility for buying properties.
Let’s talk about how a partnership can work with lease options. Say I find a good home that would sell for a good profit on a lease option, but the sellers can’t sell on an option. They need their cash out of the home, so, you’d have to pay cash or get a mortgage to make it work for them.
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? On the other hand, someone with money may not have the time to find or manage a property, but they would like to get involved in 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 the 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. Choosing a partner is important. Many good friendships end over business disagreements, so be careful whom 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, easygoing–and most of all–hands off. Your partner 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 figured out, documented, and signed prior to any business transactions take place. Go through your plans together. What do you want the partnership to do? What happens when things don’t go well?
Anticipate all the “worst-case” scenarios
Make sure that all of your solutions are worked out before they happen. What if the well goes out and costs $3,500 to fix it? What if the tenant doesn’t pay the rent, works the system and extends their time before eviction, then damages the home severely? What happens when you have to go to court? Who will represent you? Etc.
I use Limited Liability Companies (LLCs) for my partnerships. We have an attorney draft the operating agreement. Both my partner and I review them. When we get all of the changes or corrections made, we both sign two 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 documentation are the two biggest reasons partnerships have misunderstandings. Misunderstandings cause hurt, fear, and disappointments and ruin partnerships.
I currently have six partners who either provide the money or “bird dog” for me. Bird dog partners find the properties and–many times, manage them, too. Many successful investors have multiple partnerships.
Partnerships create synergy, and with synergy you can do more than you could by yourself. Here’s an example: By myself I might only be able to purchase four homes this year. With a partner, I might be able to purchase ten homes–more than double what I can do myself. So, why not partner?
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