Real Estate Strategy: Should I Partner?

I get this question a lot as I help "investors" in real estate. You see, I believe whether you are a user of real estate or a hands-length investor, if you are buying real estate, it is an investment -- therefore, you're an "investor". Some transactions could use more capital than what one party has or desires to use for the purchase. If more capital is needed, then the options are more leverage or more equity.

Sometimes even if the deal is leveraged to the max, one single investor just cannot come up with the required equity. Then his or her option is to raise more money through additional owner/members. When dealing with other investors you might want to consider the following:

How much do I know about my partner?

Do they have experience in dealing with real estate?

Does he have the financial strength to back up his obligations?

Are our goals in alignment?

Who makes decisions? How are they made?

What if there is a conflict? How is it resolved?

That is not a conclusive list of questions, and frankly in most cases you and the partnership will draft a business operating agreement. The operating agreement spells out in some detail the processes that the partnership should follow as they own the investment. Basically, it is important to not enter into a partnership relationship lightly. Partnerships have opportunities for conflict. However, if operated properly, partnerships offer a way to buy larger properties or diversify a portfolio.

Today, investors are facing very difficult lending conditions and partnerships offer some benefit to the lender. For example if the loan is issued joint and severally, then the lender is secured by all parties who sign the note. Additionally, loans are typically not leveraged as high today as prior, so more equity is required. If you are like me, my pockets only go so deep.