Partnering in real estate offers immense opportunities to leverage diverse skills, resources, and knowledge. By understanding the specific roles each partner can play, the risks involved, and the market conditions, you can form effective partnerships that maximize your potential for success. Whether you’re a deal maker, a loan partner, or a money partner, each role is crucial and brings unique value to the table.
Partner On Any Strategy
Regardless of which real estate investing strategy you ultimately choose to utilize, you can partner with others on that strategy.
- Want to partner on long-term buy and hold rentals? That’s fine.
- Want to bring in partners to help you with short-term vacation rentals? Yup, that works!
- Want to partner on fix and flips? Looks like we’re both doing some rehab.
- Want to buy apartments? Let’s grow to 10,000 units together.
- Want to Nomad™ or house hack? Sure.
And these are just a few examples… really any strategy you want to utilize, you can do it with partners.
It can be for any lease duration: long-term leases (1 year or more), short-term leases like nightly or weekly vacation rentals, or medium-term leases anywhere in between.
It can be any property type from single family homes, condos, townhomes, duplexes, triplexes, fourplexes, commercial 5+ units, industrial, retail, or mixed use.
3 Partner Roles
Partners can fill one or more of 3 roles:
- Deal Maker (also known as Deal Partner or Syndicator)
- Loan Partner
- Money Partner
Let’s briefly go over what each role does so you have a better understanding.
Deal Maker
The deal maker is usually the partner that finds the deal, coordinates buying the deal, runs the deal while you own it, and coordinates the sale of the property when you’re wrapping up the partnership.
This is typically the role that does the most work for the partnership. And, there’s typically more work than just running the investment because there’s extra work for running the partnership.
Loan Partner
The loan partner is the partner that is getting the financing on the property. They usually have great credit and, in some cases, a strong balance sheet with assets that allow them to qualify for the loan on the property.
Money Partner
The money partner usually provides the money to do the deal.
They’re the ones putting up the money to complete due diligence before closing on the property (and/or reimbursing the deal maker for money they put up in advance of bringing other partners into the partnership).
They also typically provide the total investment to buy the property which includes:
- Closing costs
- Down payment
- Rent ready costs
- Reserves
- Any cumulative negative cash flow
They may also be responsible for additional capital calls required by the property should the partnership require an influx of cash for the unexpected.
Each Role Can Be One or More People
Sometimes you’ll have more than one person filling a specific partnership role.
- You might have more than one deal maker (it might be a couple, some good friends, an entire team, etc.).
- You might have more than one person signing for the loan (the lender may require anyone with more than a certain percentage ownership in the partnership to sign and personally guarantee the loan, or you may have a seller stay on the loan with creative financing and the deal maker get a hard money loan for additional money for the deal, etc.).
- You might have more than one money partner (the deal maker may contribute some of the money to put the partnership together, and there may be an additional partner or several additional partners that put up the money for the deal, etc.).
So, while I may use the term “partner” in the singular, one person sense, I do mean that it could be a single person, two people, several people, or a large number depending on the partnership specifics.
Partners Can Play Multiple Roles
Partners can take on multiple roles.
For example, sometimes the deal maker is required by the lender to sign (or co-sign) for the loan.
Often the deal maker will need to spend some money up front during the deal acquisition phase to fund the finding, earnest money, and due diligence on the deal. Sometimes they are reimbursed for this by the money partner; sometimes they’re not and it is just considered part of their contribution to the deal.
Sometimes the money partner is also the loan partner. Or, sometimes the deal maker is also the loan partner and signs for the loan.
Partnerships Can Be Local and Long-Distance
Some partnerships are put together to buy properties locally where all the partners live near each other and the properties they’re buying.
Other partnerships may be put together where they are buying properties outside their local market—often to take advantage of a preferred real estate market with different (suspected to be better) market conditions.
For example, if you happen to be in a market where it is hard to find cash flowing properties, a partner with knowledge of a market with better cash flow conditions might find one or more partners in their local market and invest in properties in the market with better cash flow. Sometimes the deal maker partner lives in the better cash flow market; sometimes they just have knowledge and/or resources to be able to invest in the preferred cash flow market.
Sometimes the partnership is based on relationships and the partners are geographically dispersed.
For example, a family investing together to buy properties in a preferred market that may not be local to any of them.
Partnership Scalability
Depending on which role you’re playing, partnerships can be highly scalable.
However, there are typically limitations for all 3 roles.
First, if you’re the deal maker, you’re typically limited by:
- The number of amazing, partnership-worthy deals you find
- The number of money and loan partners you can find
- Your limitation of the work you need to do the deal and manage the partnership (or oversee the others on a team you put together to do that)
If you’re the money partner, you are typically limited by:
- The number of amazing, partnership-worthy deals to invest in
- The amount of money you have yourself (or have access to)
If you’re the loan partner, you are typically limited by:
- The number of amazing, partnership-worthy deals to do loans on
- The amount of loans you can qualify for
Realize that getting involved with a partnership—especially one where you are the minority partner who can’t control what the partnership does—might limit your ability to easily get out of the partnership.
This can negatively impact your ability to scale.
For example, if you have money invested in a partnership and your return on equity has been steadily declining (a very common thing for real estate investments that do not re-leverage up), you may not easily be able to get out to invest your original capital and profits into another, higher-return deal.
Similarly with loans… if you signed for a loan, you may not be able to get your name off that loan and it may limit your ability to sign for new loans on additional investments you want to make.
And, it also applies to the deal maker. There’s a lot of work that goes into running the deal and the partnership. It may take time (and other resources) away from you doing additional future deals. These future deals may be much better than the partnership deal you’re unable to exit from.
If you were investing on your own, you alone control whether you should exit out of a deal to pursue another, more profitable and/or less risky deal. That’s not always the case with partnerships.
Risks of Partnerships
The risk you have as a partner in a partnership varies somewhat by role.
But, there are also risks that all partners share.
Let’s first look at the role-specific risks.
For example, if you’re the deal maker your risk is often limited to the time you have invested, your reputation for finding and running the deal, and possible lawsuits.
Lawsuits could be from all the people you’re dealing with related to your role of running the deal: tenants, contractors, etc. Lawsuits can also be from the other partners who are not happy with the deal or how you’re running it.
The risk for loan partners is often in the form of a risk to their credit. However, if there is a foreclosure and a deficiency, they may also be open to risks of a deficiency judgment from the lender.
It is important to note that the loan partner is typically protected by a healthy-sized cushion of down payment, so the money partner is typically the first in line with the risk of price declines.
Your risk as the money partner is often limited to the money you have invested in the deal or money you agreed to put in should the partnership need additional capital. However, if you have a significant ownership interest (which is very common for money partners) and are involved in making decisions for the partnership you open yourself to some additional risk from those decisions.
For all partners—regardless of role or agreement to the contrary—there may be pressure (and therefore risk) to provide one or both of the following:
- Management of the deal if the deal maker is unable or unwilling to continue in their role.
- Additional capital if the money partner is unable or unwilling to provide additional capital in the case of a capital call.
Partnership Profits
How quickly might you expect to see profits from a partnership? Again, this depends on your role.
For example, it is not uncommon for a deal maker to be paid upfront for work done to acquire the deal. Plus, they may be paid ongoing for work done on the deal. This may be in addition to receiving ongoing profit from their ownership interest in the deal along with the other owners and profit at the time of sale or dissolution of the partnership.
Loan partners can be paid upfront for lending their credit and balance sheet to being able to get the loan. They can be paid ongoing either as an ongoing fee and/or as their share of profit as an owner in the deal. They may be paid at the end of the partnership. Or, any combination of the upfront, ongoing, or end compensation.
The money partner is not usually paid upfront. It is their money after all. It would be like them giving money and immediately getting some of it back. However, money partners are usually paid in the form of interest and/or profit from the deal as an owner. They are often paid ongoing and/or at the end of the partnership. Although there may be times when a money partner has their profit deferred by foregoing receiving regular distributions in exchange for compounding of their returns internally and being paid out at the sale or dissolution of the partnership.
The real estate investing strategy utilized by the partnership will also dictate the characteristics of the profit size and speed. Some real estate investing strategies—like short-term rentals, fix and flips, and student rentals—are more likely to produce quicker, short-term profits. Other strategies—like long-term buy and hold and Nomad™—tend to have lower, slower upfront profits but more significant returns in the medium to long term.
But there’s a lot of variation in this, and we discuss this when we discuss each individual real estate investing strategy in other resources (other books and courses).
Deal Sourcing
Finding deals is usually done by the deal maker; that’s part of their defined role. Deal makers are also usually the ones finding the money partner and loan partner and putting the group together.
There may be times when the deal is found by the money partner or loan partner, and they look for a deal maker to take over the responsibilities of coordinating the partnership and running the deal because they lack the time, desire, or knowledge to perform that role. That is relatively uncommon though.
The real estate investing strategy often dictates the methods that a deal maker utilizes to find deals.
For example, if the partnership is for buying properties creatively, the deal maker is likely to utilize marketing to find flexible and motivated sellers to buy properties from utilizing the 6 different creative financing methods.
But if the partnership is buying larger apartments, they may utilize the services of commercial real estate brokers (and maybe some marketing to owners of apartment buildings directly) to find their deals.
So, the real estate investing strategy may dictate how deals are found for partnerships.
Analyzing Deals
Deal analysis is similar to what an individual would use, except the profits must be divided up amongst the partners.
Use The World’s Greatest Real Estate Deal Analysis Spreadsheet™ for analyzing rental properties, but realize that the capital gains from the sale and the ongoing cash flow and Cash Flow from Depreciation™ (True Cash Flow™) benefits will need to be distributed as was agreed to in the partnership agreement.
We discussed in the profits section above how different partners can and are typically compensated, but realize the compensation is typically coming from the profit (capital gains and/or True Cash Flow™) on the partnership property.
Market Conditions
What are the ideal market conditions for partnerships? And what are the challenging market conditions that make running partnerships much more difficult?
The ideal market is where you can find desirable deals for whatever strategy you’re planning to use in that market.
If you’re doing fix and flips, you need to be able to find partner-worthy (profitable even with the added overhead of the partnership) deals that you can fix and flip. The same applies to long-term buy and hold, Nomad™, house hacking, BRRRR, real estate entrepreneurship, wholesaling, etc. You have to be able to find those deals in the market where you’re running the partnership.
It is important to note that the partners don’t need to be in the same market as the partnership. For example, if you can’t find the types of deals you need in your local market, but you can find them in a remote market, you can put together a local partnership that invests in a distant market.
The markets that tend to be better for doing partnership deals are markets with properties with good cash flow, especially with reasonably sized down payments. Also, markets with strong appreciation and rent appreciation so that the returns improve as equity increases.
It is more challenging to do partnerships in markets that have significant negative cash flow with reasonable down payments and markets with no or negative appreciation and/or rent appreciation. However, these markets might be ideal for finding partners that want to invest in real estate but can’t find viable deals in their local market. Then, you can put together a partnership that invests in other, remote markets that do have better economics.
Partnering With Self-Directed Retirement Accounts
Can you enter into a partnership with your self-directed retirement account? Yes. But, some roles will be limited, and the deal may be affected.
For example, if the deal maker wants to take their ownership interest in their self-directed retirement account, they will be limited in what they can do on the property since there are restrictions on what they can do for investments owned by their self-directed retirement accounts.
A loan partner may be able to take their ownership interest in a self-directed retirement account, but it may change the characteristics of the loan. For example, if you’re getting a non-recourse loan for a property owned by the self-directed retirement account, it will usually require a larger down payment. This can impact the return for the entire partnership.
A money partner should have no issues investing in a partnership with self-directed retirement account funds.
Conclusion
Partnering in real estate offers immense opportunities to leverage diverse skills, resources, and knowledge. By understanding the specific roles each partner can play, the risks involved, and the market conditions, you can form effective partnerships that maximize your potential for success.
Whether you’re a deal maker, a loan partner, or a money partner, each role is crucial and brings unique value to the table. It’s important to recognize that each partnership is unique, shaped by the strengths and contributions of its members. The deal maker’s ability to find and manage profitable deals, the loan partner’s financial stability and creditworthiness, and the money partner’s capital are all integral pieces of the puzzle that, when combined, create a powerful synergy.
However, the journey doesn’t end at forming a partnership. Maintaining a successful partnership requires ongoing communication, mutual respect, and a commitment to shared goals. Clear agreements and regular check-ins can help prevent misunderstandings and ensure that all partners remain aligned and motivated. This is all work that needs to be done by the deal maker role.
Additionally, being aware of the potential risks and challenges can better prepare you for any obstacles that might arise. From market fluctuations to unexpected expenses, being proactive and having contingency plans in place can help mitigate these risks. But even contingency plans don’t always go the way we hope, and it may require partners to take on unexpected—even undesirable—roles if other partners fail to perform as agreed.
Despite the challenges, the rewards of partnering in real estate are immense. The ability to pool resources and expertise can lead to greater investment opportunities, reduced individual risk, and the potential for higher returns. Moreover, partnerships can provide invaluable learning experiences and the chance to build lasting professional relationships.
As you embark on your real estate partnership journey, keep in mind the importance of selecting the right partners, defining roles clearly, and maintaining open lines of communication. With the right approach and a positive mindset, you can create partnerships that not only achieve your investment goals but also pave the way for future successes.
So, take the leap, explore your options, and start forming partnerships that will help you reach your real estate investing goals.