Tips on Partnerships?

[Samantha Miller]

Hey BP! How do partnerships work in the real estate investing world? For example, let’s say me and 1 or 2 other individuals want to partner on a flip or BRRRR type of deal. Each might bring varying levels of value, work, etc to the table. Someone’s got the capital, someone’s got the time, someone’s got the experience, etc. Sounds like a great team, but how do you structure it (financially/legally) so everyone gets their fair share? Is an LLC involved? If using some financing, who takes out the loan? How do you ensure everyone is protected from someone walking away with profits? It’s not something I’ve looked into yet so there may be some obvious answers out there, but just wanted to hear from others and get a general idea! Thanks in advance!

[John Franczyk]

One of my former partners taught me that in forming partnerships, the Golden Rule applies, namely, he or she who has the gold makes the rules. If you're forming a new partnership with a money source, chances are that the money source will command a greater share of the partnership. The person who will do all the work can increase his or her share with an objective analysis of the deal that requires a healthy amount of high school-level math, but that is otherwise not complicated. Just remember that few intelligent money sources will be interested in paying exorbitant returns to an investor who professes to be willing to find deals and do all the work. Those sources will see ten to twenty deals a day, and they have the luxury of choosing the deals that give the best returns. Further, they may not admit it, but those sources are more likely to invest in the individual than in the deal. A finance source will generally gravitate to a fair-to-average deal that is managed by a rock star than to a stellar deal that is managed by someone who would screw up a two car funeral.  When you've established yourself in the first few deals with the money source, you can command a bigger share of the partnership in subsequent deals.