At some point in every real estate investors career they will entertain the thought of working with a partner. In some cases, the right partner will be the best thing you can do, greatly accelerating your business growth. In other scenarios, you will almost instantly regret the partnership and look for ways to get out of it. Before committing to anything you need to take a step back and first evaluate yourself and your business. Knowing your strengths and weakness and where you need help is important in determining whether a partner is right for you. Not every investor benefits from a partnership, and in some cases, will set your business back months. Before getting involved with anyone there are a few basic questions you should put on the table. Here are five questions to ask before taking on a new business partner.
- Can we get along? There are many different types of real estate investing partnerships. Some are formed through close ties such as family members and friends while some are new acquaintances through networking meetings. Some partners want to stay in the background while others want to be an active participant in every decision. Regardless of how well you know your prospective partner or how active they want to be there is a good chance you will talk more than you think. Simply put you need to know you can get along and communicate with them throughout the process. There is no question there will be difficult times in the process. If you aren’t comfortable having tough conversations or making difficult decisions the partner may not be for you. You should expect to talk, text or email almost daily and be down each other’s throats as things come to completion. If you can’t get along, the partnership may not be worth the hassle.
- Are we on the same page? Just as there are many kinds of partnerships, there are also a handful of different end goals. It goes without saying, but it is essential that you and your partner should be on the same page. You don’t want to be at the backend of the process only to discover you have different visions for the property. Things can change on a deal to deal basis, but if you have a deal in mind you need to know what you both plan on doing with it. You should have a budget you are both comfortable with, a list price that you agree on and a backup plan you can live with. It is not a good idea to have a conversation at happy hour or discuss a deal at a networking event and dive right in. You need to sit down and talk about every aspect of what you are getting into. If you are not comfortable with things, now is the time to make changes or consider backing out. It is easier doing it now, than when you are three weeks into the project.
- What are our roles? In every successful partnership there are allocated roles and tasks. When both parties accept these roles is when you will find great success. On the flip side, when both parties want to control everything is when you get into trouble. An important item to hash out is who will do what and who is the final decision maker. In a partnership of two, there needs to be someone who can step up and make a tough decision. This could be anything from the tile used in the bathroom to the real estate agent you work with. In every rehab there are a dozen of these decisions that must be made and done so in a timely manner. You can’t sit down and deliberate every little item that comes your way. Time is money and the longer you wait, the longer the process. If each partner knows and accepts their roles the smoother the partnership will be.
- What value does a partnership add? On the surface, a partnership may seem like a great way to increase business or close an unexpected deal. The reality is that unless a partner adds value, there is little sense in working together. Each partner must have a skill set or a pool of resources that aids where the other is deficient. If you both have access to capital or both can do most of the improvements, you will just get in each other’s way. Here is where knowing your strengths and weakness is essential. Knowing specifically where a partner will help, allows you to decide if a partnership really makes sense.
- How are we dividing profits? The bottom line in any partnership is always the bottom line. You never want to be on the way to closing only to find that what you thought you were making is much less. As difficult as this may be to talk about, it is a conversation you need to have. Both parties need to be 100% committed to what their end of the profit will be. This number is based on the amount of capital provided mixed with the amount of work that is done. There may be a little back and forth negotiating, but you can’t proceed unless you are both satisfied with the resolution. If not, there will be animosity the entire project that can cause the bottom line to be impacted.
The right partner can have a positive lasting impact on your business. Always be willing to ask the tough questions before getting started so you can enjoy the full benefit of the partnership.
