Real Estate Investing: Why You Should Consider Partnership Deals

by FI Fighter on April 27, 2015

in Real Estate Thoughts

Drain - 1

There are many ways to look at life — Some people prefer to look at things through a “glass is half full” lens, while others will only scrutinize on why something won’t ever work. You have your look-on-the-brightside optimists, and your eternal pessimists… When it comes to real estate investing (and life in general), I much, much prefer to surround myself with positive-thinking optimists to help me achieve my life goals.

When I first got started with REI, I used to think that I had to do everything myself. My first 5 real estate deals were all purchases that I funded and held title exclusively in my own name. Last summer, I finally realized that if I ever wanted to achieve “bigger and better” things, I would have to become much more resourceful and think outside the box.

The easiest (and best) way to do that, I found, is to assemble a team of like-minded individuals with the same goals and objectives. Collectively, we are much more powerful and capable than any one individual could ever dream of becoming on their own.

Learning From Elders

One reason why I became so swayed to investing with partners was because of a life lesson I learned from an older relative. I have an uncle who had many opportunities to invest in Bay Area real estate partnership deals back in the day, but could never do so (or hold on for long enough) because he always held on to misguided FEARS and DOUBTS.

There are a few stories that standout in particular:

I once had a partnership on a 4/2 single family home in Campbell. We got in at under $100,000, but I was always worried about the future… When would we sell? What if my partner double-crossed me? What if I needed access to capital? These worries kept me up at night until one day, I finally decided to just sell and end the partnership. We barely broke even when all was said and done… Today, that house in Campbell is worth over $1.2MM.

Later on in life, I had other opportunities to invest in Bay Area real estate. There was a proposed 4-way partnership deal to win a home in a desirable Palo Alto neighborhood. Then there was a deal for a 4-plex… But I never liked the sound of a 4-way partnership… 25% equity stake? That’s nothing! Or so I thought… It’s all hindsight now, but I sure wish I had 25% of $2MM+ now!

Live and learn.

Not compelled to make the same mistakes as my uncle, I opened up the doors (and my eyes) to some lucrative partnership deals last August…

The Santa Clara Deals

As readers may know, last summer, I won 2 partnership deals for some townhouses in Santa Clara. These side hustles were a play on the massive redevelopment in “downtown” Santa Clara, and a bet on future explosive growth. The 49ers and Levi’s Stadium. Santana Row 2.0. High-tech 2.0 Boom.

At the time, I discovered some opportunities that piqued my interest, but I knew that I was not in a good position to be taking on another loan (more debt). Further, there was really no way for me to secure a deal without depleting not only my cash on hand, but also a HUGE chunk of my emergency fund… No matter how you cut it, if I was going to be attempting this solo, there was almost a 0% chance of me pulling this off…

But the more I analyzed things, the more convinced I was that I didn’t want to let “an opportunity of a lifetime” escape me. At that moment, I could hear my uncle’s voice whispering into my head, “Don’t make the same mistake that I did! Find a way to get this done!

So, I decided to get resourceful, instead… I assembled a 4-way partnership (the very one that my uncle was so previously opposed to), and instead of just winning 1 deal, we proceeded to push forward and win 2!

Looking back, it was a very hectic and stressful time trying to close two properties simultaneously, but now that the dust has settled, we are all so grateful that we persevered on through and accomplished this task!

Rental Property SH #1 was purchased for $490,000. The most recent comp is pending and the whispers on the street are suggesting that it will sell for about $580,000.

Rental Property SH #2 was purchased for $521,000. Similar comps are selling for $600,000+.

It hasn’t even been one FULL year yet, but if you wanted to, you could easily argue that these partnership deals rank right up there at the top as some of the best real estate transactions that I have ever been a part of. Regardless of 25% equity stake…

The San Jose Deal

Because the last two Santa Clara purchases were partnerships, it didn’t take me anywhere near as long as it usually does to save up capital for the next investment. As such, I was able to move on and secure another deal this past January, in the form of Side Hustle #3.

Similar to the Santa Clara deals, this latest side hustle was a play on the future growth of the North Valley of San Jose. This particular area is gentrifying quickly, and with the arrival of the new BART station in 2017, long-time commuters who are fed up with the tedious rush hour traffic should be ecstatic about living in a unit so close to public transportation that will effortlessly connect them to their jobs in the East Bay.

Again, I wanted in on the action before it was too late. Thanks to another partnership, we were able to close escrow on this property at $470,000. With properties flying off the shelves again this buying season, similar comps have already pushed valuations up to around $550,000.

Time Is of the Essence

In a seller dominated market, it pays to make haste… literally. By forming partnerships, we were able to act very quickly and put in strong, competitive offers to secure these properties.

As we are witnessing first-hand in the Bay Area, the difference in prices can be staggering even if you are just 3-6 months late to the party…

Those Santa Clara properties we won last summer and even the San Jose unit purchased earlier this year would no longer be cash flow positive at today’s prices, with a conventional 20-25% downpayment.

When you see the window of opportunity slamming shut, forming a partnership can be the key to ensuring you get in before it’s too late!

Minimize Barrier to Entry

In a rapidly appreciating real estate market, one huge obstacle to entry is the intensive capital required to play. In the Bay Area, a “cheap” property is anything under $500,000. Even so, at 20% downpayment, we are talking about needing $100,000 just to get started. Even for those of us with cushy, well-paying tech jobs, putting together $100,000+ isn’t exactly the easiest thing in the world to do…

With partnerships, the barrier to entry gets reduced DRASTICALLY. Even with just one partner, that same $100,000 downpayment would get slashed in half to $50,000. In the case of my Santa Clara deals, with 4 total partners, that $100,000 was shrunk down to $25,000 for each member, which is a much more digestible figure!

Stronger Loan Candidate

There are many ways to structure a partnership deal, although I won’t be discussing those details in this article. But suppose you were to apply for a standard 30-year fixed residential loan, you will become a much stronger candidate through the use of a partnership.

For most borrowers, the biggest sticking point to securing financing from a lender is overcoming the debt-to-income ratio. With the right partners in place, this becomes almost a trivial concern.

When we were talking to lenders for the Santa Clara deals, we knew that debt-to-income would be inconsequential to us getting the loan. With each partner earning well over $100,000/year in gross income (~$600,000 collectively), we were not worried.

Further, things that typically might present a problem to a single borrower (PITI reserves for each owned rental property), are again negated by the strength of the partnership. When you are able to show multiple: 401ks, Roth IRAs, emergency funds, savings accounts, etc., having sufficient capital is usually the least of your worries…

Spread the Risks

Although many would argue that partnerships are inherently more risky with real estate deals, I would argue that they are actually safer (provided you select the right partners!).

With more investors, you have more “skin in the game”. If there is another market crash, for example, and your tenant vacates, you at least have another pair of hands to support you as you attempt to right the ship. Having to cover the monthly mortgage payment is never fun, but it’s a much easier pill to swallow when you get to the divide that bill by 2, or 3, or 4, etc.

Further, in a downturn, almost everyone’s biggest fear is losing their job. Should that happen to you, with a partnership, you’ll at least increase your odds and ability to weather out any economic storms. Now, in the unfortunate event that you lose both your tenant AND your job, you will have a fallback plan in place. Although it’s never ideal, having to rely on a high-income partner(s) to carry on the torch while you recover back from tough times is much preferable to having to miss bills and have to face a foreclosure or short-sale.

With the right partners in place, you’ll help pick each other up from time to time. Again, collectively, the fellowship is more powerful than any single individual.

More Eyes and Ears

Having partners helps me save on expenses. For each one of my local partnership deals, we elected to self-manage and not outsource the property management.

The reality is, we are all busy high-tech professionals. Work often gets in the way of so many things, let alone should we even think about having enough spare time to actively manage a handful of properties! However, with partnerships, I’m finding the PM part of the “job” rather manageable. Again, with the right partners, you each do your part to help each other out.

When there is a leaky faucet, I’ll go take a look at it during lunchtime. But the next time around, I’ll take a break and let one of my other partner’s have a go at it. When it comes time to do a lease-up, another partner will allocate some time out of their schedule to show the property to prospective tenants.

The same can apply to bills and accounting. For each one of my partnership deals, I don’t cash the rent checks, or make the mortgage payments. To be quite honest, I hardly even spend more than 5 minutes each month logging into our joint account to view recent activity. For the most part, I let my partners handle all those details… I’ve got other things to think about.

It’s also tremendously comforting to know that when a property does face a problem, I will have many attentive eyes and ears tuning in. We will have discussions together and brainstorm to try and figure out the best course of action to take. No matter how difficult the challenge, it feels a whole lot more surmountable when you know you won’t have to be facing the task alone…

And there doesn’t need to be any resentment or animosity. We each contribute in our own unique ways… But compared to the rental properties I own solely on my own, having so much less to think about with the partnership deals has been a welcomed breath of fresh air.

A Small Piece Is Better Than No Piece!

As my uncle taught me, having just a small piece of the pie is still better than having no piece at all! Looking back on my last 3 partnership deals, had I not elected to go the route of partners, in all likelihood, I probably would have ended up owning NONE of those properties on my own.

And that would have been unfortunate. Often times in life, wonderful opportunities present themselves to us, but seldom are we in a strong position to capitalize on them.

I realized that I am only one man, and no matter how hard I might try, I can only do so much on my own. I’m incapable of moving mountains… I need a lot of time to save up for a downpayment for my next property… And in the game of real estate, especially with the good deals, if you snooze, you lose! Rather than miss out on wonderful opportunities, I was honest with myself and accepted my own limitations as an individual. By bringing in a team of hungry, like-minded investors, I was able to pool together a tremendous amount of resources to collectively get things DONE!

Looking back, in a span of less than 1 year, I am certain each one of my partners would agree with full conviction that our partnership deals have been totally worth it.

In other words, if we could do it all over again, we would have done exactly the same thing. Well, perhaps not… If we could do it over again, we probably would have tried and partnered up on even more deals together…

Dream BIG!

Speaking of more deals… If right now you’re like me and trying to piece together a portfolio by adding a few select units here and there, you’ll probably quickly realize how long it will take playing this game to become really “wealthy”.

They say that with real estate investing, what you really want to do is eventually “play in the fast lane”. This means gaining access to BIG DEALS that novice investors don’t typically have access to.

How do you gain access to the big-league deals? In the game of real estate, cash is king! With the right amount of capital, you’ll quickly find many more doors opening up for you…

Since I’m just a tiny fish in an ocean full of sharks, if I want to increase my odds of massive success, then I know that I can only do so by partnering up with other investors! If I’ve got some capital, and you’ve got bit more, well, collectively we look a lot stronger than either of us does alone.

Now, instead of each one of us shopping for a retail MLS condo or townhouse listing… maybe we’re instead targeting an apartment complex, or office space, or a plot of land together?

Hmm… The possibilities now seem endless, when they didn’t before… Dream BIG!

It’s All Mindset

What is possible? What is impossible?

It’s all about your mindset.

I find it funny that partnerships in real estate investing carry with it so much stigma. When I talk casually with investors or friends, I often hear horror stories about why it’s such a terrible idea to partner up with someone… How no one can be trusted because everyone out there is selfish and only looking out for their own best interest…

What a jaded way to look at life, right? I prefer not to follow that line of thinking!!!

Instead of being doubtful of others, I like to flip the script and think about what a GREAT time we’re all going to have together trying to achieve the American Dream as a team!

Stop focusing on the negative, and find the positive in life! Give people a chance for a change and they might just surprise you!

My decisions to form partnership deals have helped me secure some wonderful properties that I would not have otherwise had access to on my own! You can be darn certain that I’m most thankful and appreciative of having the opportunity to work with such amazing individuals.

Forget about feeling jaded… I’m downright giddy these days…

It’s Not Easy

By no means am I suggesting that it’s easy to locate the right individuals to partner up with… Like finding the right significant other, it can definitely take a lot of effort! But just like with a SO, people will still put in the work necessary to find this person, because in the end, they know that it will be worth it!

I look at real estate investing the exact same way… Find me a good set of partners to team up with, and the sky’s the limit! We can take over the world together!! 🙂

Knowing what I know now, I’m almost left wondering why I didn’t decide to partner up sooner in my REI career? I definitely feel like the pros outweigh the cons and partnering up with others is something that I should have considered right from the start…

Moving forward, without question, I feel like if I’m going to attempt to tackle more ambitious deals in the future, I will need to do so with some like-minded partners who share the same goals as me.

The glass is half full… These next partnerships deals might just introduce me to some new best friends for life… We’ll have the time of our lives making a boatload of money and being extremely successful together!

 

How’s that for putting a positive spin on things? 🙂

 

Fight On!

{ 6 comments… read them below or add one }

1 Adam @ AdamChudy.comNo Gravatar April 27, 2015 at 9:19 pm

Your cash savings levels even with partnerships must have been incredibly hefty to manage those down payments. Cheers to future deals.

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2 Dividend HustlerNo Gravatar April 28, 2015 at 9:29 am

Thanks for sharing the insightful article FIF. I’m glad you’re able to think outside the box and mentally trained your mind to be more open and flexible. Like you, I know that you need a team. I myself whenever I meet new people, I intentionally network with hustlers, go getters, people who can lift you and most importantly, have a solid personality with honesty and integrity. Your intuition is usually correct. You can only do so much by yourself. Teamwork makes the dream work! Take care FIF and wish us the best! Cheers bud.

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3 No Nonsense LandlordNo Gravatar April 28, 2015 at 7:00 pm

Partnerships can be a blessing or a curse. I am looking at one now, and if the partnership agreement is sound, I may jump on it.

You just have to do additional research and make it happen.

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4 MorganNo Gravatar April 29, 2015 at 10:24 am

Many people dream of owning property, but in today’s economy, it can be very difficult to do so. That’s why it’s heartening to explore different types of property ownership that are becoming more and more popular.

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5 SeanNo Gravatar April 30, 2015 at 9:08 pm

Thanks for the post. I am seeing this more and more in the Boston area for similar reasons.

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6 Kathy @ Rental RealitiesNo Gravatar May 5, 2015 at 1:53 pm

I have always said “NEVER” to partnerships but I think now that any one deal is a smaller and smaller percentage of my overall investment, it doesn’t feel like AS much of a risk to go in with somebody else.

Basically if I could look at a purchase as “well if this didn’t go perfectly, that would be OK too” then I’d be in the right head space (for me) to collaborate. I’m probably not there yet, but I can see a future where I could be.

I’d be interested to learn more about how those work in practice – are some people silent? Is it a democracy? Are there decisions where somebody has to have the final say so the project can move forward? Maybe I get too caught up in the “what if” details about things that almost never happen.

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