What does it mean to bring in partners to invest with? It means you are pooling money together to buy real estate and income generating properties. Instead of getting money from a bank or mortgage lender, you're bring partners together to purchase property. Essentially, you're creating an real estate investment partnership and or club that buys properties.
The most common way to increase leverage is by using other people’s money by taking out loans - at a good, meaning low interest rate. However, in this situation, the lender generally holds all the power, because you are being held responsible for their money and you are subjected to the consequences if the investment property deal falls through in some way.
But there is another way, and that is by taking on a partner (or more than one) rather than a lender. With partners, it is possible to share the responsibility a bit more, and you are more flexible in how the investment is made and how the profits (or losses) are distributed.
Basically, there is more room for negotiation and you can often more faster on buying property since you access to the funds - you and your investing partners have more control. No need to wait for the lender to approve your investment property purchase.
As with lenders, potential real estate investing partners will want to know that you have a good credit history and FICO score. To recruit partners in a investment property deal, you’ll want to write a solid business plan outlining your goals and objectives. This will show you’re serious, and that you have thought it through.
Unlike with lenders, you get to be as choosy about your partners as they are about you. In fact, you must be selective. Banks and mortgage brokers have a reputation to uphold and they always work by the book, but some people are capable of stealing, cheating, and even jumping over the border so that they don’t have to fulfill their responsibilities.
Choose your investing partners wisely: partners with a good credit profile, that show consistency in action, and have integrity. Choose them with the same degree of carefulness with which you select a property. A great investment opportunity can fall through if you’re in on it with a bad partner.
Family members and friends don’t always make the best partners. It’s easy for emotions to get involved and cause decision-making that is not in the best interest of profits. If you become partners with a relative or a good friend, you run the risk of coming upon a situation where you have to choose between the relationship OR financial success. It’s better to get involved with a partner with whom your relationship is all business, not personal, and who is objectively seeking a good financial outcome just as much as you are.
Furthermore, unless you have a silent partner who is contributing to the deal, (and even in that case) you don’t necessarily want a ‘yes man’ or 'yes woman.' Someone who doesn’t challenge your ideas and strategy is not much of an asset to the deal. Rather, look for a partner who brings ideas to the table as well as financing, so your proposal and offers are stronger.
Ideally, every partner should have at least some experience in real estate investing, share common investing goals (e.g. a lump sum sale or a small but consistent income?), have another reliable source of income, and be willing to work through even the tiniest of details in figuring out a solid, mutually beneficial partnership.
Even when you’ve decided upon a partner (or more than one), it’s essential to work out every detail in contract, just in case. Think of every possible scenario, discuss them with your partner, come to an agreement, and write it down with an attorney supervising. You’ll want to cover all the bases, including:
- What will happen in the event of a death of a partner or if someone loses their job
- Divide up responsibilities (Are they silent partners or are they involved in upkeep?)
- What the goal is for the investment
- Who holds title (tenancy in common or joint tenants?)
- How decisions are made (one managing partner, or by consensus? How will ties be broken?)
- The terms under which a partner can leave or dissolve the partnership
- Tax issues (who gets the tax benefits, who prepares the K-1, who pays the accounting costs, etc.)
- How often and in what manner partners will communicate and keep each other updated
- Insurance issues
- Bookkeeping responsibilities
- Set up a company
There are several different ways to formally establish a partnership. Explore all of your options and decide which one best serves your goals and situation: a real estate investment trust (REIT); a tenant in common (TIC) project; as partners in business, in a separate limited liability partnership (LLP); as a limited liability corporation (LLC); The possibilities range widely. Examining the benefits and drawbacks of each arrangement will help you and your partner(s) arrive at a shared conclusion and hopefully, shared profits.
TIP: There’s no need to do this alone—make your life easier by getting information from a number of resources and experts, agents, brokers, friends, co-workers.
The Best Investing Partners
Good partners often have different backgrounds and thus fill gaps within the partnership. For instance, one partner might have more experience in accounting and negotiating contracts, while the other member of your team has skills as a carpenter and developer who loves to remodel properties.
As for limited partnerships, limited partners are more willing to contribute money if the general partner also has money invested—there’s then more incentive for this partner who's initiated the deal to make it work.