FINDING OPPORTUNITIES IN REAL ESTATE PARTNERSHIPS
Investing is a team sport.
Some of my best deals and experiences have come from investing with partners or working with others as a team.
I have also seen many real estate investors appear to violate Securities and Exchange Commission, or SEC, regulations. It was unintentional. Usually by newer investors. But not always.
They set up a partnership without seeking appropriate legal counsel.
Many of these partnerships should have been syndicated. But the partners putting the deal and investment together didn’t want to spend the money on a qualified SEC attorney.
If the investment goes awry, and the SEC views the arrangement as an investment contract, then the partners could have huge financial liabilities and end up in jail.
Real estate investors tend to be entrepreneurs. We treat investing like a business. We try new things to see what works best. Then, when we find something that works well, we might systemize it to make it repeatable.
Partnering is one of those things that many new investors try, but without learning enough first.
So how can we use partnering to improve our investing skills and returns without having to fear the SEC or wearing orange?
ONE. Compliment Strengths and Weaknesses
My wife and I were both working full time when I decided to start flipping houses. House flipping was strongly promoted by the local real estate investment association (REIA) and seemed to be the way to get started in real estate. How could we get started flipping houses while working full-time jobs?
I found a partner who was working full-time as a real estate investor. He had time available. I had some cash. We each put up part of the money for a house that we could flip. His schedule was much more flexible than mine was, so he managed the general contractor. Many decisions were joint.
We formed an LLC and had an Operating Agreement that defined the roles of each partner.
In the end we both made money. Not as much as we expected, but the investment was profitable. And we both learned a lot about flipping and partnering.
TWO. Partner to gain knowledge and experience
We have been partners in two mobile home parks. I was invited to participate in each of these and they gave me insight into different investment strategies.
The first was an expansion opportunity. The park had 36 mobile homes when we purchased it with space to develop and add more pads. We had to add electric and septic tanks for the new homes and increased the net income for the park. We later sold it for a significant profit.
The second mobile home park focused on reducing expenses. This was accomplished by moving ownership of park-owned homes to the tenants. The tenants would continue to pay lot rent but become responsible for their own maintenance. This reduced the maintenance expenses and liabilities of the park. This park was also sold for a significant profit and we were happy with the results.
THREE. Partner for Economies of Scale
My dad used to say that you need to buy real estate the way you buy bananas. Buy it in bunches.
To accomplish this, he liked to build out a street of duplexes. He would sell most, then keep some as rentals and manage some for others.
My preference is to buy multi-family investments such as apartments. It is easier to manage 100 doors in a single complex than 50 houses spread out in a city. The on-site maintenance staff is close by. A leasing agent does not have far to go to open a unit for prospective tenants.
The problem is that most of us are not able to buy a 100-unit complex with our own funds. Even if we could, we would prefer to spread our investment dollars out and have partial ownership in multiple apartment complexes.
The solution for us is to form a syndication with the help of an attorney with extensive SEC experience. This not only helps ensure that we comply with the SEC laws, but also protects our investors.
HELP US GET TO KNOW YOU BETTER
What are some reasons that you may have for seeking real estate partnerships? What lessons have you learned that you are willing to share?
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Mike is a retired aerospace engineer with a passion for real estate investing and teaching financial literacy. He lives with his wife in Daytona Beach, Florida.