Where to start when you are missing a piece of the game? You have the cash but not the time? The knowledge but not the cash? Experience, money, and time are three of the most common elements of getting started in real estate investing. Creating Partnerships can fulfill an element that you are missing to get started.
I currently have 4 real estate investing partners and finding a deal with my 5th. Two are siblings and three are friends. My first partner was my hardest catch. I had nowhere near enough money for a down payment. My husband already owned a home when we started dating so I hadn’t even gone through the home buying process yet! I did however have a year of property management experience under my belt. I used that to back up what I could offer to a partner.
I knew that I was a risky investment since this was my first deal. I offered my partner 50% ownership of the duplex and 5.5% interest on his cash invested. He decided to hold the mortgage and received monthly principal and interest payments amortized over 15 years. He is not only earning interest on his money invested but building equity in the house from the tenants paying the mortgage. I can’t forget to mention that he is 100% passive. We have gone on to do several more deals together but structured different ways.
There are so many possibilities when it comes to structuring the nature of your partnership but first you need to find a partner. I call it planting the seed. Start with identifying a list of people who could be potential partners. Once your list is defined talk to each one of them about what YOU are doing. Try to shy away from telling them you are seeking them out as a partner. Once people think you are soliciting them for something they stop listening. Tell them the details of what you are going to do and why you think real estate is a good investment. This can happen over multiple conversations. Each conversation giving a little more information and building the hype. When you are finally ready to sell them on a certain deal have as much information available as possible. Let them know you’ve enjoyed talking with them about real estate investing and you are now looking for a partner. Supply them with a Biggerpockets Calculator Report for the deal, the mls listing if applicable, and information on your personal finances. I like to include the personal finances because it carries weight that you have your own finances together. You could include a tax return, a credit report or a list of other investments and their performance. If you are relying on experience as your value then prove it. Show your research, how many books you’ve read on the topic, your construction experience, etc. It is important to remember that you are making this an opportunity for them. Show them how this will benefit them.
There are many ways to structure your partnership. It is completely up to you and your partner! Since that first deal I have accepted sweat equity from a partner, a complete 50/50 split on everything, that person finding and managing the deals and I’m the money, and using my sister for an FHA loan. The most common way is giving up equity to your partner. There is no right or wrong percentage to give. I gave my first partner a great deal and undervalued myself. I did everything but he made more money! That is okay! I wouldn’t (notice I said wouldn’t, not couldn’t) have done it without him and don’t regret that arrangement.
Once you have your structure in place make sure to put it all in writing. A common document to use is an operating agreement. This can be drawn up by an attorney and customized to your partnership structure. An operating agreement is commonly used when setting up a Limited Liability Company. You and your partner can do this or a joint venture. LLC’s and Joint Ventures are the two most common entity types for partnerships. An attorney can guide you on what will work best for you. Besides all the legal jargon, I recommended including terms that state what happens now and in the future between you and your partner in as much detail as possible. If there is ever any argument or confusion you can refer to the operating agreement to clarify. I find this similar to a tenant/landlord lease. A landlord can always refer to the lease to respond to tenant’s questions or concerns. In your agreement state who will be doing what tasks if any. Include what happens in the future. For example, if you sell what happens? If one partner passes, what happens? I highly recommend life insurance policies on each partner. If one passes the insurance proceeds can be used by the other to buy the equity from the family of the partner who passed.
A partnership may be overwhelming at first since there is a lot of risk, liability and dependability. Active engagement from an attorney and accountant can help lessen these fears and protect both parties. Once you have agreed on a structure run it by your attorney and an accountant. It is important to know how this will affect your taxes! Remember, one of the benefits of real estate investing is the tax savings! Make sure you are maximizing these savings by consulting your accountant. Another OPPORTUNITY for you to give your partner!