Learning from Your Wins and Loses in Real Estate
LOS ANGELES – Sometimes losing is winning and other times winning is losing. I have been part of and seen many great partnerships. I have also seen and been part of some not so great partnerships. What I have learned over the last 14 years in real estate is that partners are essential to success, but they can also single handedly derail your deals, your career, and your dreams. To reach your potential you need to use them, so let’s talk about reasons you would want partners and a few reasons why you don’t.
What are the Benefits of Winning and Losing?
In the real estate market you see a lot I’ve seen partner’s work so well that it has literally made people millionaires. One client always comes to mind when I talk about partnerships. This duo has been able to amass a fortune that would not have been possible separately. They should each clear a million dollars in income this year, and have started building a nice little nest egg of rental real estate. Here are two reasons it worked for them and could work for you.
When You Lack Something
The number one key for a successful partnership is when the partners each bring something to the table, making the company or joint venture stronger. One common example I see is when one person has a large network, experience, and a knack for finding deals, while the other one is real analytical and can run the numbers and line up the financing. Another example on more of a deal-by-deal case that I see a lot is one person with the deal and the other with the money or the credit. The point is, each person brings value and each person benefits from the other. The last thing you want is to partner with someone who brings the same value as you.
“Most of the time in these partnerships, I stay in control and manage everything”
I have structured a handful of partnerships with larger deals when there is a lot of upside, but just as much downside. Most of the time in these partnerships, I stay in control and manage everything (this of course is agreed to by all the partners.) I will use some partners as advisors and we may have votes for major decisions, but most of the time the partners are passive investors just looking to add cash to the group for a return on their money. This is a great way to do large deals, because it gives you the ability to do them and it will spread your risk over a group of people instead of loading up all your cash into one deal.
Although I have seen partnerships turn ordinary people into million dollar performers, I have also seen partnerships put people into bankruptcy. I have also seen partnerships ruin friendships and marriages. This is not to be taken lightly. Here are a few downsides.
When You Start Bringing Your Marriage Problems to Work With You
The saying “it is good until it isn’t” could not be truer than when dealing with a partner. A partnership is going to be much like a marriage. If it goes bad it is not always easy to get out of, and sometimes it could cause both emotional and financial disaster. You don’t marry someone unless you are fairly certain it is going to work, so I suggest you approach your partnership with the same caution.
Things will go wrong and the arrangement will be tried. The key for this to work is that you have a plan when the unexpected happens and the ability to work through it. A good partnership agreement is the first step, but it goes beyond that. One person needs to be in charge to make the final decisions, unless you have an odd number of partners and agree to go to a vote. If you want to do everything 50/50, then have a plan in place for when there is a disagreement. Who will ultimately make the final decision? It is also a good idea to have a buyout clause where either partner can get out if necessary, for a price. Partnerships are not always paradise, which is ok. You just need to plan for the rain.
Losing Your Hard Earned Cash
I see this a lot when the discussion of how expensive hard money is comes up. I just heard this again last month at a class I did in Colorado Springs. Someone who is out there doing deals said that he couldn’t justify paying 15% interest for the short-term loan because it was much higher than he could get at a bank. Of course I understand that, and I believe that although it is a great tool, hard money is neither for everyone nor for every situation. In this guy’s case, I was going to agree that he should not be using hard money if he can get bank loans and is ok limiting the number of deals he could do.
That is when he told me that he really is not limiting himself by using banks with large down payment requirements. He said that he had plenty of cash partners that put up the money for the down payments. “What do they get for putting up the money for the down payment?” was my next question. The response? 50% of the profit! Ouch! I said either you are doing marginal deals or I think you might learn something in this class. If you are doing profitable deals, my guess is hard money is much cheaper than 50% of the profit. Of course you are not spreading your risk like we talked about, but the idea that hard money was too expensive was not really a good argument. After going through the class I was able to show him when and where hard money might come into play, and showed him how it would be cheaper for him than using a partner. I guess we will see what happens, but he said he loved the class and will be calling us for his next deal.
In this example, it might not make since to spread your profit because you really don’t need the partner. If the response was he wanted to spread risk or this guy found the deal, or knows something I don’t, etc., my response would have been different; but simply sharing so much of your profit when you have other resources did not make since in his case.