Why are we talking about Real Estate Investing Partnerships?
All over the internet, you will find real estate investing partnerships being touted as the answer for any excuse a newbie has for not buying their first investment.
Don’t have money? Find a partner to provide capital.
Don’t have time? Outsource the time-intensive tasks to a partner.
Don’t have knowledge? Partner with somebody who does, and bring the time and money.
While these answers sound great the question remains, is partnering really the best option?
After all, it is always better to own the real estate yourself, right? …right???
Let’s dig into the types of partnerships, and then we will discuss the pros and cons to help you decide the best course of action going forward!
Types of Partnerships
The reality is that you can structure a partnership in any way you and the other partner(s) agree.
This, like creative financing, is a chance to let your imagination run wild, and find the best solution for everyone involved.
Here are some of the most common forms of partnering on real estate deals.
Joint Venture’s, commonly referred to as simply “JV” are a very common partnership formed by two or more real estate investors.
JV’s are full partnerships, and often involve the forming of legal entities such as an LLC to purchase the asset(s).
Most joint ventures split the workload/equity fairly equally, as it is a joint effort.
Joint ventures are most commonly used when two (or more) real estate investors join forces to tackle a larger deal.
Debt Service Partner
Finding a debt-service partner is a common method of financing smaller real estate investments for your own portfolio.
This is essentially using other people’s money to finance your deals.
This is great if you plan to buy and hold real estate without the use of a bank.
My friend Will utilizes other people’s money to purchase properties for the BRRRR method.
He buys, and renovates, the home with other people’s money, and then returns the money along with the agreed-upon interest amount when he refinances into a conventional bank loan.
That’s right, he is able to buy, rehab, rent, and refinance into a bank loan without putting a penny of his own money into the deal!
What a powerful way to scale the amount of real estate you can purchase!
This kind of partnership does not involve any equity split or taking title together. It Is essentially just a promissory note dictating how much money they are lending you, and how you will be repaying them.
An equity partnership can be structured for many real estate transactions, but I see this for fix and flip transactions most commonly.
I’m about to form an equity partnership with a friend.
I have a home under contract that we intend to flip. I sourced the deal and will manage the purchase, renovation, and sale of the property. He is providing 100% of the money for the deal, and we will split the equity 50/50 upon the sale of the property in a few months!
Side note, you could negotiate more than a 50% stake in equity for sourcing the deal and managing all of the operations, but 50/50 worked for us because we are hoping to do many more deals together!
Syndications are the professional level of partnerships.
Syndication is when a team finds a large property (most commonly used for apartment complexes) and then funds the purchase with money from a myriad of accredited investors. The team will then oversee the acquisition of the building, any applicable value add (renovations), and all operations of the property. Meanwhile, the investors sit back passively, enjoy the cash flow they receive, and wait for the building to be sold down the road for a large profit.
Syndications have become a very popular form of real estate investing in recent years.
This is nice for the operating team because they stand to make a large amount of money, and purchase real estate investments much larger than they could on their own.
These are also great investments for passive investors because they are able to invest a large chunk of capital with great returns, and minimal (if any) time/work required from them!
I would like to point out that the general partners (operating team) stand to make a substantially larger amount of profit than the limited partners (investors) due to the amount of work they are putting in, and the way syndications are structured.
That being said, in a good syndication, EVERYbody makes a lot of money!
Pros to Real Estate Investing Partnerships
As you can see, there are a lot of pros to using a good partnership in order to purchase real estate.
Partnerships can allow you to invest with less time, money, or knowledge involved in the deal, which makes them great for anybody who is short on one of these precious resources.
Partnerships, especially syndications, can also open the doors to purchasing much larger real estate investments than you otherwise could.
Cons of Partnering
The most commonly discussed con to forming a partnership is that you don’t maintain complete control of the deal.
Even in a debt-service partnership, you will be obligated to repay the partner (per the terms of your agreement). This is true, even if the deal doesn’t go according to plan, and you lost money.
For me, the biggest con to forming a partnership is the fear of letting my partner down. I know, this sounds silly, but given that the largest partnership I’ve formed to date is currently embroiled in a lawsuit, it is a legitimate fear.
Side note: the lawsuit isn’t between me and my partner. We are trying to get our down payment back from a lease option that didn’t go according to plan. None the less, it isn’t fun having somebody else’s money involved when things don’t go according to plan.
For this reason, you need to be sure you pick your partners wisely. Understand the terms of the deal, and ask yourself if the two of you would be okay if things don’t work out.
A final con is that you could be stuck with the other person for a long time!
If you form a joint venture, and two years down the road you and your partners can’t agree on how to operate the building, or one of you wants to sell the building, and the other doesn’t, it won’t be fun.
Choose your partners wisely!
Should you use real estate investing partnerships?
Depends entirely on you, and the partner you choose.
It can be a great way to jump-start your investing career, or tackle larger real estate acquisitions!
It could also complicate your life when things aren’t going according to plan.
Brandon Turner always says: “50% of a deal is better than 100% of no deal!” (pretty sure I paraphrased that). This mentality will take you a long way in life!
What other questions do you have about partnerships? Comment them down below so I can do a follow-up article to expound upon this topic more!
I hope this helped you understand real estate investing partnerships a little better.