Summary: Having a real estate partner is a common occurrence in real estate. It can be a great way to turbocharge the growth of your portfolio. However, they are fraught with risk if you don’t set them up correctly from the start. One of the most important factors in a successful partnership is your choice of partner. In this article, I’m going to cover the characteristics we look for when choosing a real estate partner.
[Disclaimer: We are not accountants, lawyers or financial advisors, so please consult your own team of professionals about the topics covered in this article.]
Over the course of the last 20 years, Leti and I have had numerous partnerships, both in our start-up businesses and in real estate.
I described my (not so great) experience with real estate partnerships in a past article. In brief, I partnered with a close friend for years and as a result of my experience, I avoided partnerships for the next decade.
Leti and I grew our portfolio alone for years, without real estate partners. As our portfolio and net worth grew, we became more confident in our position that investing alone is superior to partnering.
That all changed when we started working on our mindset in 2019. This mindset work opened our minds to new possibilities. We challenged ourselves to look at partnerships differently.
Is our position on partnerships right? Are all partnerships bad? Is it possible that partnerships could be better than investing alone?
Ultimately we realized that our thoughts about partnerships were simply limiting beliefs. We stopped ourselves from seeing the potential benefit that partnerships could bring.
As a result, this caused us to change our thoughts. Our new thought was that real estate partnerships can work if you set it up correctly up front AND you choose the right partner.
I covered the former in a past article. You can CLICK HERE to read that article. In this article, I’m going to focus on the characteristics to look for in a real estate partner.
Characteristics to Look For in Real Estate Partners
So let’s dive into the characteristics we look for in a partner. I wanted to point out that these are things we’ve learned over the years and may not apply to your specific situation. So feel free to pick and choose the characteristics that resonate with you.
Generosity of Spirit
This is a big one, maybe the most important characteristic. I learned it early on when I partnered with one of my closest friends. I entered into that partnership telling myself that I would approach it with generosity. Preserving the relationship was so important to me. I knew that I did not want money to get in the middle of our friendship. Even when my friend borrowed over six figures and hadn’t paid me back for years, I maintained that generosity of spirit. To this day we are still close friends and yes, he has since paid me back in full!
So when I go into a partnership, I really want someone who is not going to nickel and dime me or horse trade. If you don’t know what horse trading is, it’s the type of person who is constantly measuring their own contributions and comparing them with yours. If there’s an imbalance, they’re going to let you know one way or another.
Complementary Goals
A lot of people look for a partner who has complementary skills. I personally have an aversion to the idea of partnering with someone because they have complementary skills.
The reason is, we are strong believers in your ability to learn “how to fish.” This means you can learn to do it all: find properties, analyze properties, learn how to negotiate, learn how to get financing, learn how to take advantage of the tax breaks, operate a property, etc.
The risk with partnering with someone who can do something you don’t yet know how to do is that you abdicate responsibility to the other person. It could actually handicap you rather than help you grow.
I think it’s more important to have complementary goals. In our situation, our partner wanted to accumulate real estate professional (REP) hours, so he wanted to take the lead on the day-to-day operations. Accumulating REPS hours was his goal. That worked out well for me because I didn’t need the hours. I had too much going on with my other properties. So our goals were complementary.
Now look what would have happened if he was looking for a real estate partner with complementary skills. He didn’t have much experience with operations but I did. So his expectation would have been for me to manage the operations. He would likely abdicate responsibility and take the back seat on operations. This wouldn’t have worked because his expectations would not match what I wanted, which was to take the back seat on operations. Also, he wouldn’t have gained as much experience in operations and learned how to fish.
Calm Under Pressure
When you invest, there will probably come a time when you’re going to be stressed. Maybe the economy tanks, maybe the deal goes bad, maybe you get sued.
Whatever the situation, this is when you want a partner who is calm under pressure.
While it’s normal to get emotional, emotions like fear get in the way of problem solving.
Let’s imagine a situation where a deal goes bad. Some people can never get past blame. They blame their partner for entering into a bad deal or mis-managing a deal. They are so focused on blame and their own fear or anger, they don’t ever look for a solution or it takes weeks or months of unnecessary stress to get over it.
In contrast, whenever something like that happens, we consciously let ourselves experience the emotions for a short period of time. The goal is as short as possible. As short as 90 seconds. We aren’t there yet but I can tell you that we don’t let ourselves stay in our emotions for more than a few hours.
From there, we tell ourselves, “maybe instead of life happening to us, this is life happening for us.” If there’s another party involved, we try to put ourselves in the other person’s shoes with empathy. This helps us control our minds and it facilitates the shift to solving the problem.
We were in a situation one time when a seller refused to sign paperwork on the last day of the year. We needed to close before the end of the year and if we didn’t, we were going to lose hundreds of thousands of dollars in tax savings. There was another one of our students involved in the transaction, and they remained calm the entire time. This allowed us to focus on problem solving rather than hand holding, which is what we would have had to do if they weren’t so calm.
This is the benefit of having a partner who is calm under pressure.
Ability to See the Big Picture (Focus on the Relationship)
What do we mean by the big picture? The big picture comes down to long-term relationships. If you had a choice between hitting a home run on one deal at the cost of a relationship vs. doing well over the course of a lifetime and at the same time, forming a life-long friend, which would you choose?
If you chose the former, you’re not someone we would ever want to partner with, and I think many of you would feel the same way.
So what does that look like in practice? This is approaching every decision with the big picture in mind. Asking yourself, what’s the right answer to this problem if my priority is to be close partners over the long-haul.
For example, let’s say that your friend is in financial trouble and he asks you if it would be OK to sell a property so he can pay off his debts. Imagine in this situation that it’s not the best time to sell. You’re still going to make money on the deal, but you’d probably be leaving money on the table if you sold now.
By focusing on the long-term relationship, the answer is obvious. You do what’s best for your partner because it helps him/her now, even though it’s not the best financial decision for you. This move not only helps your partner, but it also deepens the relationship. Imagine if you’re in the same situation in the future, if you chose the right partner, they’d do the same for you.
Follow Through
The last one is follow through. In other words, do they follow through and do what they say they are going to do?
This one is pretty obvious and probably doesn’t need much explanation. Nobody wants to work with someone who is unreliable. Especially when there’s money on the line.
Everyone has to do their part and nobody wants to be carrying the other person’s weight.
The good thing is, this one is pretty easy to screen for, which is what we discuss next.
Screening for the Right Real Estate Partner
It’s one thing to know what you’re looking for in a partner, it’s another thing to figure out how to identify these traits if you don’t already know them well.
What we’d recommend is to spend some time with your partner and really observe and look for the above characteristics.
One way to do that is to spend time analyzing deals with them. You can easily see if they follow through on what they say they are going to do.
I think another great way to screen your partner is to present them with scenarios and have a discussion. What do I mean by scenarios? I’m referring to all of the bad things that could happen. For example, how do you handle a major disagreement? The type of disagreement where both parties are at opposite ends and completely disagree on the path forward. How do you handle the scenario I mentioned above where one partner needs the money and wants to sell but the other doesn’t? What if you both get sued by a tenant? Or what if the property drops in value significantly? What if the property isn’t cashflowing for years?
Think of every potential bad outcome and discuss it. The more you can think of and discuss, the better.
Our Future of Real Estate Partnerships
So what happened to us after we started working on our mindsets in 2019?
We entered into a partnership with one of our Zero to Freedom students in 2020 on a 13 unit multifamly property! And if you’re curious, this partnership has been working beautifully for the last year and a half. A big part of our success is…we chose the right partner!
From there, in 2021, we entered into another partnership in several more of our Zero to Freedom students. This time on a 160 unit multifamily purchase!
As we look to the future, we look forward to being a part of many more real estate partnerships with our students in 2022 and beyond.
Want to learn how to build a significant source of income from investing in real estate while reducing your taxes? Join us in one of our courses, Zero to Freedom, or Accelerating Wealth.
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