Ever thought about partnering on a real estate deal? Cut your risk by 50%? Get twice as much experience working for you? Do twice as many deals?
Real estate investing partnerships can be fantastic, helping investors do all of the above. Or they can be utter nightmares. So what do you need, to gaze into the crystal ball and know whether a potential partner is right for you?
Here are six traits to look for in a potential real estate investing partner, which you should never compromise on.
1. Capitalization: Can they swim in their cash like Scrooge McDuck?
Strong capitalization does not go without saying, because people make this mistake all the time in real estate. You need access to lots and lots of money. In cash. In reserve, not earmarked for anything else. Just sitting there in case there’s a problem.
Why? Because setbacks and unforeseen expenses are the rule, not the exception, in real estate investing. Budget for them, and then make sure both you and your partner have plenty of extra cash even if you go over budget.
2. Trust: Would you trust them to raise your children?
Investing partnerships, like any business partnership, are essentially a marriage. You share money and financial accounts. You share debts. You share responsibilities. You have to trust each other utterly and implicitly. If you can’t trust someone with what’s most precious to you (e.g. your children), you can’t trust them enough to be partners.
3. Expertise: Do they know cap rates from cash flow?
Are they green or do they have a golden touch? If you’re partnering with a newbie, make sure you’re an expert with a lot of deals under your belt (think double digits, at least). Also make sure they’re bringing more of something else to the table (e.g. cash).
If you’re a newbie, partner with experience, and review the details of at least a half dozen deals that the other investor has completed. Look beyond what they claimed their earnings were. How long did it take the deal from investment to return (i.e. when a flipped home sold or a rental property turned cash-flow-positive)? Did they go over their initial budget? What unexpected delays did they encounter? What unexpected costs? Be sure they’re a true expert, because you’re putting your money where their mouth is.
4. Strengths: What do they bring to the table?
Are they a contractor, who can do the renovation work? Do they have useful banking relationships? Do they know people at the zoning office, who can help get your property rezoned?
On the flipside, what are their weaknesses? Be sure your strengths and weaknesses complement theirs, so that you don’t end up with a glaring hole in your expertise and execution. For example, if neither of you has relationships in a key area, you could be in trouble.
5. Chemistry: Can’t we all just get along?
No. Not with everyone. Some people are too negative, too angry, too annoying, too sloppy or just too something for you to consistently get along with them. If you couldn’t be stuck in a cabin in the woods with them for a week, don’t partner with them. You’ll be spending a lot of time with this person, going through some difficult moments, having sensitive conversations about money and neighborhoods and sociopolitical issues.
Remember, business partnerships are a marriage!
6. Goals: Are you shooting for the same target?
This is not as obvious as it sounds. There are a lot of reasons to invest in real estate, from growing your net worth to passive income to active income to quitting your job to invest full-time to retirement planning… and many more. What is your primary goal? If you want reliable, steady income for retirement, then you have no business partnering with someone who wants to invest in high-risk, high-return rental properties. Likewise, someone looking to quit their job to become a full-time flipper should not partner with someone whose goal is in growing their net worth through buy-and-hold.
You may not need a soulmate, but you certain need someone you can “marry” for a while. Have open, frank conversations with your potential partners about your experience, your liquidity, your risk tolerance, your goals. Ask probing questions. Go out to dinner with your spouses. Ask for documentation of past deals. Consider pulling each other’s credit reports and criminal background checks. Get to know them well enough to trust them implicitly (or realize they’re only 99% trustworthy, not 100%, and walk away).
The moral of the story, partner beware; otherwise, your good friend Jim might turn out to owe money to the Russian mob and split with $50,000 of your cash. Don’t learn that lesson the hard way. ♦
Have a success or crash-and-burn story about your own partnering experience? We’re in the trust tree here… share them below!