It costs more to buy a single-family residential home than it does to plunk down the cash to buy a share of stock or an ounce of gold. This reality of investing leaves many newbie investors wondering whether or not they should find cash partners for real estate when they’re ready to buy. After almost a quarter century in the property business, we can say the answer is an unqualified “yes.” Except when it’s “no.” Or perhaps we should say “yes” but with a few caveats. Nobody wants to be left holding the bag when a real estate deal goes bad, so here are three mistakes to avoid.
1. House by House Only: You might think you’ve found the greatest partner since Batman took in circus performer turned Boy Wonder (AKA Dick Grayson) but don’t, under any circumstances, add their name to your Limited Liability Company. In other words, don’t make them a 50% partner in your entire business venture. Want to partner on a specific house? Fine. Do it with our blessing but keep the arrangement on a house-by-house basis only. The problem with making a cash partner an equal on your LLC is that it becomes hard to get rid of them if something goes wrong and you find out they’re actually sort of slimy. Partnering on a house-by-house basis allows you to isolate and contain the financial damage generated by choosing a bad partner.
2. Get it Writing: While they didn’t invent writing just so real estate investors could outline their agreements with business partners, it makes a lot of sense to take advantage of a written contract. For all practical purposes, if it’s not in writing, it might as well not exist. Even though the law recognizes a handshake as a binding agreement, it can get tricky to prove in a court of law. Doesn’t matter if it’s your brother, mother, or dear old grandmother, write down such particulars as how the profits are to be split and who contributes what to the deal. Don’t say we didn’t warn you!
3. Five Deal Rule: You shouldn’t feel weird about about asking a potential cash partner to provide evidence of success. We like five deals as a rule of thumb. It’s quite simple and goes like this. After hitting your local REIA meeting and asking around to get a general opinion of “John Doe,” you need to go straight to the horse’s mouth, Mr. Doe himself, and ask him to provide details about five deals he’s participated in and the corresponding addresses. If this makes you cringe, you’re not ready for a partner. The real estate industry has a long history of scumbags screwing newbies out of their money. Tell him the truth, that you don’t want to become another financial horror story. If the guy claims to be a guru but can only come up with one deal as evidence, say “Thanks but no thanks” as you walk quickly in the opposite direction.
The lowdown on finding real estate partners is that there are two sides to the equation. You’re either going to be the one with money to put up or the new guy bird dogging deals. If you’re the successful investor with cash to spend on deals, you should be glad your new partner has the sense to screen the people he partners with. If you’re just starting out and have no money to invest, but want a piece of the action by finding deals, you can’t afford to waste your time with a “successful” investor who really isn’t.
When it comes down to it, screening for a real estate business partner is a lot like screening for a marriage partner or a roommate. There are plenty of characteristics and personality traits that make for a great partnership, and just as many that result in a match made in Hell. Unfortunately, there is no one-size-fits-all screening method. At some point, you have to stop researching – or risk scaring off all potential investors with your paranoia – and take the plunge. Watch for self esteem and work ethic issues. You also should talk to them enough to see if they think like an employee or an entrepreneur. This might sound out of left field but an employee mindset is obsessed with things like regular paychecks and a time clock mentality. You want to partner with someone who is in it for the long haul, realizes that the financial benefits might be a long time in coming, and understands that success often requires working more than forty hours a week.
Good luck, and may all your cash partner choices be wise ones.
The Creating Wealth Team
FreeDigitalPhotos.net / Stuart Miles
