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Editor’s Note: Dennis Fassett is a former corporate finance executive turned real estate investing “Cash Flow Mercenary.” Dennis specializes in single-family and multi-family cash flow properties and thoroughly enjoys assisting his fellow investors with their own strategies, including how to buy your first apartment building.
As an ongoing contributor to Mogul’s “Market News Updates,” Mr. Fassett provides us with his own unique, lively, and thought-provoking commentary on the timely industry news and events of today that are impacting our industry. And be sure to check out his other super-helpful Market News Updates. For now, enjoy...
From Dennis Fassett, Cash Flow Mercenary...
As real estate investing continues to be profitable, I’m seeing a lot of people in my market, and in other places, getting together via partnerships.
This is interesting because from where I sit, I don’t see a compelling reason for most of these folks to get together formally.
So when I saw an article about getting into REI-related partnerships, it piqued my interest.
So I thought I’d use his piece as a base to get into the couple of really key considerations that you need to think about if you’re thinking about jumping into something formal.
Why Go into it Together?
He starts by suggesting you ask yourself a really good question:
“Why am I doing this?”
And he says that there should be an easily identified, tangible benefit to investing with a partner versus investing on your own. It could be any number of items, but if you can’t pinpoint what it is, maybe adding a partner is not right for the specific opportunity you have in mind.
And he makes a good point by writing that while some partnerships are based on relationships and convenience, partnerships built on necessity and practicality have a much greater chance for success. Most partnerships should have some type of financial or operational consideration as a driving force behind their formation.
Financial Considerations
He continued by discussing some financial considerations, because when investing in real estate, capital constraints are usually the single largest obstacle to overcome.
There are many opportunities in the market, but not enough people to fund them. Should you let a great opportunity pass you by just because you do not have enough money? Chances are that if the opportunity is as good as you think, then the potential partners may be readily available.
He makes a good point by suggesting that even in scenarios where an investor has enough capital to fund an investment on their own, partnerships can mitigate the risk of going “all in” on an investment by defraying the cost with the help of a partner.
Operational Synergies
Something else to consider is operational synergies. Perhaps you’ve stumbled across a hidden gem in your neighborhood but you don’t have the practical skills to manage the permitting, construction or sales process of the investment.
While there is great truth in the idea that you may learn a lot by failing, you can also learn a lot by taking on a partner who has been there and done that. Amateur investors can save time and money by partnering with an experienced professional.
Formalize the Partnership!
The last part of the piece talks about getting it all down in writing.
And this is critical, because in any venture, it is important to analyze your risk.
One area that can be critical to safeguarding your investment, but is often overlooked, is the actual partnership agreement. This legally binding document should clearly outline the rules, responsibilities and rights of each partner.
It may seem obvious, but when push comes to shove, the partnership agreement is your only lifeline should things take a turn for the worse.
For example, if one partner is responsible for contributing capital but is consistently unable to pay, the other partner should have the right to replace such partner. Conversely, if one partner is clearly missing predefined budgets and schedules due to negligence or incompetence, the other partner should be able to rectify the situation through a buyout provision or penalties.
While many real estate partnerships do not require a lawyer to negotiate contracts, it’s a best practice to have any partnership with money at stake reviewed by an attorney to ensure that terms are fair and legally enforceable.
Some investors may prefer “handshake” agreements because they’re partnering with friends, family or colleagues.
They think: “We are best friends, so what could go wrong?”
That mindset is ground zero for an ineffective partnership.
There are a host of reasons to invest with a partner, but it’s imperative to always understand your risk. While it may seem appealing to invest with family members or friends, investments do not always perform as expected, and all members of a partnership need to be aware of and be prepared for this kind of situation from the start.
Howdy, Partner
Do you have a business partnership story to share – good or bad? We’d love to hear about it in the comments section below.
Dennis Fassett
earned a BS in Economics and followed that up with an MBA in finance. After working and corporate finance and banking for several years, he started buying single family houses, and quickly built a very nice portfolio of cash flowing rentals. When the credit markets started to dry up and he couldn’t get any additional single family mortgages he shifted his focus to apartment buildings. He now has over $3 million in rental real estate. He manages most of it his self and still has a day job. Dennis has even created his own Private Equity fund to buy apartment buildings.