Should you do Partnerships with Other Investors?

By Tom Zeeb, TractionRealEstateMentors.com  

Are two better than one? Is there strength in numbers? Should you do partnerships with other investors?

The answer is: “it depends”.

There are a lot of criteria to evaluate when considering if you should take on a partner in your business.

In my experience and from my observations, partnerships of inexperienced investors tend to feel good for those partnering up, but don't succeed because there is no real balance of skills and knowledge. And there are quite often very different objectives as well that make the two parties incompatible as long term business partners.

Inexperienced potential partners feel good together because both investors are struggling and afraid to get started. Therefore they feel comfortable with each other because they are in the same boat.

However, two struggling people with no experience do not bring much to the table. It is a partnership without any true benefit to either party other than having someone to share the ride with.

Intermediate to advanced investors also need to be cautious about partnerships.

Once someone has done a few deals, they develop their own style and method for doing business. This may clash with another investor, especially as entrepreneurs tend to be very independent minded and strong willed.

In the case of both the beginner and advanced investor, it is important to be sure that both sides see eye-to-eye on what their personal financial and business goals are.

For example, if one partner is younger and broke and wants to wholesale everything for quick cash and the other partner is older and more interested in cash flow and appreciation and wants to buy and hold everything, then the partnership is going to have trouble.

The same would be true if the partners had very different risk tolerances. If one partner wants to renovate everything for the “big bucks” but the other partner is scared of the time and money involved and just wants to wholesale for quick cash, then the partnership will have trouble.

At the end of the day, it is wise to remember that there is only one captain on a ship. It is a rare partnership that doesn’t have any serious friction.

For those partnerships that do work, the partners have a good understanding of each other’s personalities and of their own strengths and weaknesses and well as their partner’s strengths and weaknesses. They also share very similar goals and expectations for what they want to get out of the business partnership.

Partnerships can be out of balance because of overlapping strengths or both sides being weak in a certain area.

Double weakness = problems externally

Double strength = internal clashes

Do not underestimate this. Recognize where these overlaps occur and work with your partner to ensure that you find a way to account for the problems that can occur.

If you do find a good partner and decide to join up for long-term business purposes, be sure you legally construct an entity to protect yourselves from each other.

Have an attorney draft up an operating agreement that clearly states what happens if the partnership dissolves. Decide on the details of how you would split up front when you are still on friendly terms. Trying to do that once the relationship has soured is not easy or pleasant.

If you are just partnering up on an ad hoc basis for certain deals, use a Joint Venture (JV) arrangement. In all cases avoid the general partnership, as it provides no protection and actually makes you liable for the other party’s actions.

The main questions to ask yourself when considering a partnership are: Is your partnership profitable? Do both sides bring something to the table? Will two be better than one?

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Tom Zeeb has been featured by CNBC, The Washington Post, Kiplinger's Magazine, The Washington Examiner, Financial Lifeline Radio and National Real Estate Investors Association's Magazine among others. He is the President of Traction REIA, the Recipient of the National REIA "Honors of Merit" and the "Award of Excellence" for Best Real Estate Investor Association! Traction REIA serves the Greater Washington DC Metro Area. Check out www.TractionREIA.com and www.TractionRealEstateMentors.com for more information.