In this episode, I discuss the importance of partnering and learning to share profits in order to do more deals. I have talked to a lot of real estate investors who struggle with the idea of giving up profits. Most successful investors either profit-share on a regular basis, or did a lot of profit-sharing when they were starting their business.
When I started my real estate investing business, I purchased my first investment property (a flip) with a mortgage. For all of the other funds needed for the rehab and holding cost, I used my own savings. This worked out really well, but I knew it wasn’t the best way to scale my business or be successful in real estate. Very quickly, I was able to attract private investors. In order to work with them, I needed to give them a big enough incentive to want to work with someone very new to the industry. The arrangement that we were able to agree upon was structured like this:
The investor contributes all funding for the project excluding EMD. The reason why I exclude the earnest money is because, when I find a property, especially on the MLS, I need to be able to react quickly. I can’t wait for earnest money to be wired to me every time. So I put up the earnest money myself in order to secure the contract.
My contribution to the partnership is as follows: I find the house and handle all acquisition. Once the house is under contract, I begin working with contractors to get a quote on the rehab. Once we close on the house, I am responsible for all renovations: I manage the contractor, the budget, and the timeline. Once the house is renovated and ready for sale, I am responsible for getting it sold. Most often I work with my realtor to get it sold. I have listed houses myself in the past, but I feel that the results are better and my time is better spent working with a realtor.
Once the house is sold and the investor is paid back his initial contribution (all of the rehab money), I am paid back the earnest money deposit that I contributed, and the net profits are split 50-50. My deals don’t all look like this anymore, but I still have a few investors with this arrangement. Lately, I have been working more with a fixed rate of return on the money that I borrow. Although this may not give the investor the potential for very high returns, it does guarantee them a certain amount of profit regardless of how profitable the deal is.
The reason I titled this episode 0% of zero is zero is because it is absolutely crazy to get caught up in worrying about giving away 50% of the profits. If you don’t have the money to fund your deals, then you will not make any money. Does that make sense? Another way of looking at it is 100% of zero is zero. So if giving up half of the profits means that you would be able do three, five, ten, or even twenty deals per year, whereas without partnering you wouldn’t be able to do any deals, then it makes sense to partner. Even if you have to give up half the profits.
This business is about doing deals. If your profits are lower in the beginning, and that’s what it takes to get you started, I say do it. Once you build your business, and gain credibility and experience, you can start dictating better terms. Ultimately maybe you even can fund all of your own deals, but again, it’s difficult to scale if you’re not leveraging other peoples money.
Greedy people don’t usually do very well in this industry. Don’t be greedy, be hungry!