The definition of the verb, to partner, is to work together, to connect, to affiliate, to share. For a business type relationship, partnering means sharing… the profits, the losses, the management, the control. Before you even consider what type of business partnership you think might be the most effective for your business, remember the words of John D. Rockefeller. “A friendship founded on business is a good deal better than a business founded on friendship.”
The inherent benefits of partnerships center around the word “sharing”…sharing the financial investment necessary to start the business and sharing the responsibilities required by the business to make it successful. Here are some Pros and Cons of forming a partnership for a real estate investment business.
- Having one, two or more partners means having more financial resources for the business. Sole proprietorships for startup and ongoing improvement/expansion efforts are more difficult and slower to qualify for bank financing. And the more people as partners, the less financial risks for partners.
- Having a partner(s) broadens the skill sets, expertise levels and networking resources available to the business. No one person knows every single aspect of real estate investing. You’ll need to cover aspects such as finding and evaluating available properties and their respective potentials, marketing expertise, construction and renovation know-how and management, sales and negotiations, etc. If you choose your partners strategically, you’ll be more able to cover each others’ weaknesses operationally. It also gives each partner the time to actually “work” their respective connections and networks.
- Having two or more sets of eyes is better than one in terms of spotting a potential mistake. What seems like an “automatic” real estate investment opportunity to one set of eyes may seem like a disaster to another. More rather than fewer sets of eyes also increases accountability; fewer things fall between the cracks if one person goes on leave, gets sick, or decides he/she wants out of the business.
- Partners have to share…the profits as well as the losses, the responsibilities as well as tasks necessary to make things happen, the goals as well as the control. If “sharing” is not in someone’s vocabulary and/or behavior, that person ought not to join together in a partnership.
- Personality incompatibility can be a huge problem in partnerships. One person could be a control freak and not know it; one person could be all talk and no action; one person could lack patience and simply explode and/or sabotage the business at any time.
- The lack and/or failure of both short and long term planning can put businesses in precarious circumstances and catch businesses flat footed.
We can’t say this last one enough…we all forget things and “hear” things differently so put your partnership agreement in writing and make sure all the partners sign it. Hire an attorney to craft your partnership agreement to ensure that all aspects of your partnership are legal, in compliance with all licensing requirements, and well defined in terms of partnership structure (general or limited partnership), goals, division of tasks, reimbursement payouts, secession plans, etc.