Have you ever come across an opportunity that you think would be a great investment? The location is in your target area, and the returns look good. You’ve run the numbers, and this seems like it could be a homerun. However, there’s one thing that’s stopping you from making an offer. You don’t have enough cash to do the deal. Now what? Maybe you should find an investment partner.
Before grabbing a partner, there are several other options here that you might consider. You could borrow money from a relative or a close friend. You could look into hard money, or contact the seller and see if they would be interested in a seller financing type of deal. These are all ways you can get creative to get the deal done. However, if you pursue one of these options, this could also potentially change the scope and profit of the deal. You could end up making a lot lower return on your investment.
Leverage Partners to do Bigger Deals
What if you had some contacts that were also investors? What if these contacts had similar types of goals as you? You could then pool your resources, and have a larger amount of money to buy a bigger deal. Bigger deals sometimes reap bigger rewards.
Taking on an investment partner can be a good option when you want to put together a deal that you might not be able to do yourself. But if you decide to do this, there are many things to consider. You should break this down into several important steps: 1) select your investment partner, 2) structure your investment agreement 3) identify your goals and strategy.
Selecting your Investment Partner
Let’s first take a look at selecting your investment partner. You need to know their background with investing in real estate. How many previous deals have they done? Do they currently have the resources to put into a deal with you? Do they know what they are doing? What types of properties do they like to invest in? Which parts of town or neighborhoods are they interested in? You will want to partner with someone that has similar types of goals as you.
Deciding on how to split up the work is something you will want to do as part of your partner selection as well. Are you looking to buy a property and rehab it and flip it? If so, you will need to figure out which person is going to manage contractors for any work that needs to get done. Would you get the quotes or estimates, or would they? Which person is going to manage the budget? You don’t want to commit to a project only to find out that neither of you have the time to manage the rehab.
What if you both decide to go together on a rental property? The same types of questions apply here too. Which one of you is going to be in charge of showings and screening tenants? Take maintenance requests and schedule repairs? Manage the monthly income and expenses?
Structuring the Deal
Now on to our second major point of consideration. Once you make the decision to have an investment partner there are some things you need to do to protect yourself. You need to figure out how you are going to structure the commitment you and your investment partner have decided to take on. Are you going to be partners for one deal? See how things go with one project before deciding to do another? Or is this more of a starting a business type venture, with many deals planned?
You also need to discuss how things will be split financially. Is this a 50/50 partnership, or will one person have a larger share of the ownership? Make sure you document all of the details, including how much money will be used to acquire the property.
What type of entity are you forming for this? Use an attorney, and make sure you have the proper paperwork in place. Spell out in writing all of the expectations, including how the responsibilities are being split up. Ask each other questions, and document both them and the answers until all of the details have all been figured out.
Identify your Long Term Goals and Strategy
This is when things start to get real. When deciding what your goals are going to be, here are some things you should consider.
1) Are you doing one property or several? How often are you going to do a deal? What happens with the proceeds, are they reinvested or cashed out?
2) What are you going to use as your funding sources? Are you starting with hard money, but planning to transition to private or conventional financing? Do you both want to pay over 30 years, or is 15 or 20-year financing more to your interest?
3) What is your timeframe? Are you looking to acquire a certain number of rental units per year, or do a certain amount of flips per year? For how long will the partnership last? An older partner might want to have an exit strategy after ten years, while a younger partner may be constrained financially to a very limited number of deals per year.
Hold Each Other Accountable
You will want to talk to your partner about the specifics and hold each other accountable. It may get uncomfortable, but you need to call each other out when needed. When projects aren’t completed on schedule, or come in over budget, this can seriously affect your profit. You need to be comfortable enough with your investment partner to make sure they stay on track. Stay focused and stay on course.
It’s not an easy decision to decide to take on an investment partner. If done right, you and your partner may be able to work on more deals, and complete them more quickly. Thus, earning more money, and who wouldn’t want that?