Investing

The pros and cons of real estate investment partnerships

Open communication of expectations is paramount
  • Most of the reasons you would consider a partnership in the real estate investment business would be that someone has money, a deal, construction knowledge or will help manage a transaction.
  • Define exactly what the deal is concerning, who is bringing what resources, the amount of ownership and who is responsible for what throughout the project. This information should be on paper whether it is an operating agreement or something less formal -- it must be in writing.
  • Issues arise when partners don't trust each other or communicate expectations and ideas of how a project is going to work.

Partnerships are a great way to pool resources for real estate transactions when you only have half of what is needed. But we have seen them go sideways a lot in this business. Here, we’ll go over the pros and cons of real estate investment partnerships.

The best partnerships are when two or more people bring different resources or skill sets to the equation. What we often see is one person has a great deal but doesn’t have the experience or resources to do it himself or herself. Another common partnership develops when someone finds a property he or she wants to acquire and can do the construction but doesn’t have the money, so a partner who does is needed.

The partnerships that we have seen blow up are composed of people who do not communicate correctly. Real estate deals must close quickly, but if the members of the partnership don’t discuss goals, it can end up costing time and money — and be a disaster.

In the example of a partnership between a contractor and a “money guy,” the contractor runs the job, but the person with money has all the skin in the game, even if he or she doesn’t see what is going on at the property every day.

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If the job starts to go over budget or seems like it isn’t going to make money, the contractor can just disappear or even simply put the job on the backburner. The money provider then has to take over the job and figure out what to do, which then costs even more money. This is a very common scenario.

It’s important to set expectations. The same partnership from above can also go south if the contractor, who has all the “sweat equity” in the project, comes back to the money person and is upset about doing all the hard work while the other partner hasn’t spent any time on the project.

In the ideal partnership, good communication and trust are key. A business partnership should be with someone you feel is better at doing something than you are or has skills or resources to bring to the table that you need.

We have been partners since 2007, and it obviously works. We have split roles, so we each have our own roles and responsibilities. Even if one of us thinks we would do something different than the other one is doing it, we trust that he is doing it the right way.

We never try to manage each other, but we do have open lines of communication — which we’d advise any partners to do. These are the reasons we work so well.

Chris Haddon is an entrepreneur based in Washington, D.C., a partner at Hard Money Bankers and a co-founder of REI360.net.

Email Chris Haddon.