Solo Investing vs Partnerships: Weighing the Pros and Cons

Introduction: Real Estate Investing can be a lucrative venture, but deciding whether to go solo or form a partnership is a crucial decision that requires careful consideration. In this blog, we will explore the advantages and disadvantages of solo investing versus investing as a partnership in the context of a Fix and Flip, a BRRR strategy, or a short term rental (like Airbnb or Vrbo).

Solo Investing - Advantages:

1. Full Control: Solo investors have complete control over the decision-making processes. As a result, a solo investor is able to be nimble and respond quickly to opportunities. Without the need for consensus, a solo investor can take decisive actions as soon as an opportunity presents itself.

2. Flexibility: Operating solo provides flexibility in terms of project selection, timelines, and exit strategies. The solo investor can adapt to changes swiftly and/or pivot to a completely different strategy if market conditions change. One example of this arose in 2022 when the Fed raised rates multiple times in just a few months. Some investors who acquired investment properties with the intention to flip made a pivot to rental income when they found that they were not able to sell the properties at a favorable price because higher rates priced out many of their potential buyers.

3. Profit Retention: All profits go to the solo investor, leading to a straightforward financial structure and potentially higher returns on their investments.

Solo Investing - Disadvantages:

1. Limited Resources: Solo investors may face challenges in terms of financial resources, limiting the number and scale of projects they can undertake. Prior to 2008, the market was saturated with “no money down” schemes that required little-to-no capital expenditures from the borrower. Today, with higher rates and tighter spreads, lenders expect borrowers to have liquidity. Considering credit and experience, liquidity requirements for some investors may be higher than for others.

2. Skill Constraints: Individuals may lack certain skills required for various aspects of real estate investment, such as construction management or legal expertise. Relationships with licensed trades may be limited due to a lack of experience, and familiarity with things like permitting, property management, and short-term occupancy taxes could be a hinderance. Additionally, limited experience can also result in lower leverage, higher rates, lower LTV and ARV caps, and fewer options and features that are not available to investors with less experience.

3. Workload: Solo investors bear the entire workload, which can include initial acquisition, property renovation, property management, and refinancing or reselling the property. Carrying the entire workload can be challenging and time-consuming. Some have reported that they found it to be overwhelming.

Partnership Investing – Advantages:

1. Diverse Skill Set: Partnerships allow for the pooling of skills and expertise. One partner may excel in finding deals, while another may have strong construction management skills. One partner may have more cash available to invest, while another may have an electrician license and relationships in the county permitting office. One partner may have great credit while the other partner has access to construction materials at rock bottom prices. Taking advantage of synergies can lead to the whole being greater than the sum of its parts.

2. Shared Features: Partnerships provide access to a larger pool of financial resources and more features and benefits to both partners. Some projects have minimum experience requirements. Some features (like Advanced Draws and higher LTVs) may only be available to investors who have more experience. Partnering with an experienced investor can enable a less experienced investor to take advantage of features that they otherwise would not qualify for. This enables the pursuit of larger projects, multiple projects simultaneously, and/or access to different types of projects and features.

3. Risk Mitigation: Risk is shared among partners, reducing the financial burden on individuals in case a project doesn't yield the expected returns or in the event that the costs for a project end up higher than initially planned.

Investing as a Partnership – Disadvantages:

1. Decision-Making Process: Partnerships require consensus on major decisions, potentially slowing down the decision-making process. Typically, the more people involved in the partnership, the longer it will take for the deal to be reviewed and a consensus to be reached.

2. Profit Sharing: Profits are distributed among partners, which might result in a lower individual return compared to solo investing.

3. Conflict Resolution: Differences in opinions or conflicting interests among partners may lead to challenges in resolving disputes.

Conclusion: The choice between solo investing and forming a partnership for real estate investment purposes really depends on individual preferences, experience, risk tolerance, and access to resources. Solo investing offers autonomy and direct profit retention but comes with limited resources and a heavy workload. On the other hand, partnerships provide a diversified skill set, shared resources, and risk mitigation but require effective communication and conflict resolution. Ultimately, investors must carefully weigh the pros and cons to determine the approach that aligns with their goals and preferences.