The Pros and Cons of Forging an Investor Partnership
11 Jan 2022
5 min read
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Whether you’re just starting out as a real estate investor or have been in the game for a while but want to continue growing, there are various reasons to consider whether to partner with another investor. From the opportunity to be surrounded with experience, to having access to seed capital, investment partnerships can be mutually beneficial in a lot of ways. For many investors, however, they can also be the wrong business path to take.
While always a viable business option, it is one that requires much conversation, planning, and serious consideration for both parties. In this piece, we want to highlight some of the pros and cons of tag-teaming with another investor, particularly if you’re burgeoning investor yourself.
Experience – If you’re a new investor, creating a partnership that’s a mentorship can be the most powerful way to learn while on the job. Shadowing an expert can be a critical way to learn the ropes in areal-life setting, ask the questions that come to mind, and experience the challenges and joys of the real estate industry. A good mentor is an invaluable resource for any up-and-comer.
Delegating work according to strengths – Multiple investors working together means gathering different strengths and experiences and delegating assignments according to individuals’ skills and preferences. No one person is great at absolutely everything, even successful investors. One investor can be great at marketing while another can take over the budgeting and number crunching. Relying on each other’s strengths can make for a better project outcome.
Financing and capital – Working with a seasoned investor can have beneficial financial outcomes, including greater propensity for obtaining financing, as well as access to seed capital through the investor him or herself. An experienced investor will have the portfolio, connections, and presumably the required credit and assets to secure the capital needed.
Competing goals – This is where transparency and conversation is critical before any major decisions are made. While two individuals might have complimentary skills and get along great together, the partnership is bound to falter if professional goals don’t align. One may want to buy single-family properties while the other wants to invest in a multiunit.Ultimately, if the long-term goals don’t match, nor do the business plans to reach them, it makes no sense to create a partnership that is bound to be cumbersome or a flat out fail.
Split equity – This is an obvious point to make but still worth making. While there are benefits to teaming up with an experienced partner, you then give up equity in whatever project you both tackle. If the need for a partnership is heavily based on funds, there are other ways to keep 100% of the equity—such as private loans or bridge loans—without sacrificing a hefty percentage.
Failed professional—and maybe personal—relationship –Creating a partnership is one thing; maintaining it is something else. It takes effort and a united vision—and a rock-solid agreement—to keep business partners on track 100% of the time. Insufficient communication and a lack of involvement—or unequal division of workload—can lead to a domino effect resulting in a deteriorating partnership that can throw projects off schedule.
Forging professional partnerships should always be a symbiotic relationship where both parties benefit from it as a result. No matter the reasons for wanting to explore this as a potential business option, the final decision should be an informed one made with clarity.