In this episode, I talk about how to set up a partnership in real estate. A partnership can be defined in a lot of different ways. It’s important that, when setting up a partnership, you understand that the roles and responsibilities that are defined in the beginning can have a big impact down the road.
In my real estate investing business, my partner is my wife. She’s not only my partner as in my spouse, but also literally my partner in my real estate investing business. We have divided the roles and responsibilities in a way that matches our individual strengths. We have over the years taken other partners for individual deals. Most often these partners were private investors. We have done a lot of 50-50 profit splits on flips. In these types of deals, the investor brings all of the funding needed to do the deal to the table. That includes purchase price, rehab, plus any other costs associated with doing the deal. My wife and I handle acquisition, rehab, marketing, and selling the property. This arrangement has worked well for us many times over the years.
More recently we have started paying investors a fixed rate of return instead of straight 50-50 splits. We also have started moving away from 50-50 splits in favor of better terms. We can do this because of our strong reputation in our real estate investing community, and also our track record of success. Because it makes a lot of sense to invest with a proven company, investors are willing to take slightly less profit in order to feel more comfortable with the company and specifically with the individuals that they are partnering with. I don’t say this to brag; I say this to illustrate the point that after you have experience and a successful track record, you can and should start finding better and better terms for your deals.
Lately, I have also been speaking to private investors about partnering on buy-and-hold investment properties. I have even entered into serious discussions about forming true partnerships on multiple deals. So instead of treating every deal separately, I have proposed profit splits that would carry over several properties with the same person. In these instances, a new LLC will be formed, with each partner getting a certain percentage based on their financial contributions as well as active participation in the properties. This can definitely be a win-win situation if it is structured properly.
The important thing to remember when structuring a partnership is that anything and everything is negotiable. There is not a boilerplate partnership structure that you have to agree to here. It is all about what you and the other party agree upon. Pretty much anything goes, but I highly recommend that whatever is agreed upon is written up properly by an attorney, so that everything discussed is in writing. I also highly recommend that, in addition to any mortgage or promissory notes, you always have a joint venture agreement that clearly defines and outlines the specific roles and responsibilities (including limitations) for each partner. In other words, if one person is solely the money partner, and the other person is solely responsible for the day-to-day activities, that should all be outlined in the joint venture agreement. Memories can get fuzzy, but the documents are forever!
Remember, everything should be reverse viewed by an attorney, and all parties should carefully read and understand every bit of documentation that they sign. But it is totally up to you and your potential partner to decide how things will be structured and how the business will operate.
However, I do feel the need to caution you. Partnerships can be tricky and they can go bad quickly. Think hard and make sure that everyone is protected and that there are contingencies in place if one of the partners should want to get out of the partnership.
Partnerships can be a fantastic way of getting more done than you could do on your own. Do not be afraid to partner with people, even if it’s only on a deal-by-deal basis. Partnerships have done great things for my company, and taken me farther faster than I could’ve gone on my own.