How to Partner on A Deal

Question

Hi everyone,

I am a 23-year-old engineer in the NYC area. I have yet to do my first deal.

I am interested in investing in NJ and CT multifamilies. Is partnering on a deal a good start to getting acquainted with the mutifamily investing process or do you suggest buying a multifamily on your own first? I have been out of college for a year and none of my friends are really interested in real estate. I would love to partner on a deal in the near future, but where do I find trustworthy partners? What makes a good partnership deal? In specific terms, how do I know a potential partnership is beneficial for me? I would love it if you can recommend resources.

Thank you

David Gotsill · Answer

@Jamila Thompson -

While I have no trouble understanding where @Moises R Cosme is coming from, I'm a big proponent of partnerships, both formal and informal.  If you have good answers to the questions that Moises poses, then a partnership could be good for you.  Some thoughts for your consideration:

Partnering on a deal can definitely be a good way of getting acquainted with multifamily. Is it better than doing a small deal on your own?  That depends on a lot of factors, such as whether you'd have the ability and gumption to go into a deal alone; the quality of the deal itself; the attributes of your partner and yourself, to name a few.  There is no one size fits all answer.

I think you find your partners in much the same way you'd find friends or (the other sort of) "partner".  You build trust over time with repeated interactions.  I met my two key partners here on the BP forums, where we discovered shared interests and goals.  Some of the best advice I could give would be to continue to be active on the forums, and to extend those connections to phone calls, video chats and (virtual?) coffee.

One question I ask myself before partnering on a deal is "What can I bring to the partnership?"  In the beginning, my answer was limited.  As I gained experience, my answer changed.  You're out there looking for a partner or partners, and in the end will have to take a chance with someone.  At the same time, they take a chance on you.

You ask "what makes a potential partnership beneficial for me?".  Isn't the answer simple - if it puts you in a better position than you would be without the partnership?  That could mean it allows you to learn something new, to get into a particular market, to get involved in a bigger deal, or any number of other things.  If instead you're asking whether a particular partnership is the best possible choice for you, that's not something that we can answer.  Some of the points that @Filipe Pereira and @David Lilley touch upon can help you ensure you're covering your bases.

Speaking personally, here are some key reasons that I chose a partnership (and will continue to do so): (1) I like my partners, as people.  We get along on a personal level.  Sure, we have some differences in investment goals and risk appetites, but we have been able to overcome these differences (*knocks on wood*) because we get along; (2) We have different skills and interests, that as a whole allow us to compliment each other; (3) Scale/Share the burden.  I would be unable, due to limited capital and limited time, to handle a "big" deal.  Big means something different for everyone, but in my current situation, I would have trouble getting beyond a 4 plex on my own (and with partners I've been able to 4x that); (4) Motivation.  This may sound silly to some, but it's absolutely true for me.  Having partners keeps me motivated and accountable.  I was a long time runner, and the years that my training suffered were when I moved to Japan and lost my training partners.  I train more and more consistently with other runners.  Same thing here.

Which is all a long-winded way of saying, Welcome to BP!  You're already on the right track, and good luck.

Filipe Pereira · Answer

Dave Ramsey always says "the only ship that doesn't sail is a partnership" and I tend to agree with him. I was also involved in a partnership (that thankfully just got dissolved last month) and it didn't end well for either of us.

There are 4 things (amongst many others) that you should consider when entering into a partnership. Ask yourself what happens in the following 4 scenarios, and add them to your operating agreement.

1. Death - What happens if one of you die?

2. Divorce - What happens if one of you get a divorce? Does the partner's ex wife/husband get 1/4 of the business?

3. Disinterest - What if one of you lose interest? Is there a buy out? Do they just release their portion?

4. Drugs - What happens if one of you become a druggie? Who becomes the decision maker? Does the druggie forfeit their ownership and decision making rights?

Partnerships are great if each partner has something that the other partner doesn't have and is willing to provide it in exchange for what the other partner has. Think of it as a bartering system. The problem with most of them is that valuing whatever each partner has is difficult, and that's what causes riffs. For example, if I am an equity partner (money) and you are a bringing the time needed to manage the deal, how much time is my equity worth? And what happens after you've expended all of the time, yet we need you to do more?

Long story short, be very careful with partnerships.

Basit Siddiqi · Answer

@Jamila ThompsonIf you partner on a deal with someone - make sure the partnership is compatible.List things that you bring to the table and look for things that you are looking for in a partner.The fact that you don't have any investment experience - you should look for a partner with experience.

David Lilley · Answer

@Jamila Thompson partnerships are key in this business. If you have the money to buy your first property on your own, then it may not be necessary but it absolutely will be in the future if you have the desire to grow.

You do not have to have ownership in one company for this to work so death, divorce, etc. are not really concerns. A partnership can start as a simple verbal agreement and then be put on paper in the form of an operating agreement once you create the single asset entities (LLC) that will own the real estate you buy. This operating agreement will address all the what-if scenarios.

Moises R Cosme · Answer

Jamila, 1. recommend buying a multi family on your own first, I suggest starting out with a 3 family first; this will be your first purchase, you will be able to owner occupy and take advantage of low money down programs.  Bridgeport is a good place to start if you can live in southern CT, Bridgeport has some rough spots but there are decent areas and the acquisition cost should be much more reasonable than anywhere in NY.  2. Stay away from partnerships for as long as possible; I have had a ton of partnerships over the years and they are tough - do things on your own for as long as possible.  I have a partner now - he's the right guy for me & we have been really productive, took me 15 years and a lot of grief to find the right partner.

Here is the key questions to ask:  why do you think you need a partner?  what do you expect your partner's job to be?  what will your job be?  I am sorry that I do not have resource to point you to.  The best partnerships I have seen have clearly defined roles and need.

I hope you find this helpful.. If yo do, please give me a vote.  Feel free to message if you think I can help further.

How to Partner on A Deal

Most Popular Reply