Venturing into real estate investing for the first time can be a bit scary.  Pretty much everything is an unknown and it can cause you to lay awake at night wondering if you are going to lose all your money and put your family at risk.

I had those same sleepless middle of the night worries when I purchased my first flip project almost a decade ago because even though you read about how it’s supposed to go, now it’s your money (and usually friend’s and family money) on the line, which raises the stakes.

This anxiety and fear can often cause us to make short sided decisions that make us feel safe, like trusting the wrong person, spending too much money on get rich quick shortcuts, or giving away a percentage of our company to partners because we think the other person will save us.

Ironically, it can be these errors we make in an effort to bring more safety, that cause the downfall of our business before we even get started.

I don’t want you to misunderstand, I’m a huge advocate for building a team and partnering with others with complimentary skillsets.  However, not all partnerships are the same.

There are two main partnership structures that I see quite a bit and in my experience one works far better than the other.

Joint Ventures (JV’s) – This is simply a partnership on one deal, one type of deal, or one aspect of business.  Outside of that deal, however, both parties otherwise retain their identities.

I’ve done lots of JV’s on deals, and almost every time they worked out really well.  You can set them up with a simple agreement that is typically just a few pages outlining who is brining what to the JV in terms of money, time, project management, etc, as well as how the proceeds will be divided upon completion.

A JV has a clean and clear starting point and ending point (typically the purchase and sale of a deal), and doesn’t bleed into other aspects of your business like your company’s books, marketing strategy, or other business relationships.

I always think of joint venturing as dating, because you can go out with someone and have a great time, but after the date you can go your separate ways or you can choose to do it again.

There are shared expectations for what a date is, and there is very little expectation to be involved in the other person’s life beyond that individual date.

Equity Partnerships on the other hand are the marriage of the business world.  When you decide to share ownership in a company, you are essentially buying a dog together, moving into the same apartment, and merging your bank accounts whether you like the in-laws or not.

This type of partnership divides the ownership percentage amongst several parties and is typically spelled out in a much longer document call an Operating Agreement, which is attached to the business entity itself.

In this situation all aspects of your business are merged.  The partners need to be synched on the business goals and strategy, how money is spent, how everyone’s time is spent, marketing messages, and what happens when someone doesn’t hold up their end of the agreement.

It is a rarity to find an equity partnership that stands the test of time.  They exist, but they are the unicorns.  Unfortunately I have seen many more equity partnerships fall apart than to thrive, often for the same reason a marriage falls apart, differences in expectations.

There are an infinite number of decisions and aspects of a business that the partners need to agree on.  It’s often after people enter into a partnership, even people who feel fairly synched, that they start to find that their assumptions about the hard questions they never asked in advance are quite different than reality.

After many years in real estate and witnessing lots of different partnerships (some which I was a part of) succeed or burn out, there are the three questions I always recommend asking yourself when trying to decide whether it makes sense to start a business with a partner.

What is each partner bringing to the table and could I potentially hire someone to fill this role instead of giving up equity?

I constantly see new investors who have worked really hard to lay the ground work for a successful business, give up half their equity to someone who is a marketing guy, “good with numbers,” or has a degree in some field that the business owner perceives as valuable.  It’s almost always skills that can be hired out for a fee.

Many times it’s an area that the business owner feels they don’t understand very well, doesn’t enjoy, or are afraid they might mess up.  Because of this, they feel that it would be easier and somehow more effective to give a portion of their company to someone who seems skilled in that area rather than hiring for it.  You can easily hire a marketing firm or accountant to work hourly as a contractor with clearly articulated outcomes at a fraction of the cost and commitment.

There is also the argument that in the beginning there isn’t any money to pay a professional to do certain tasks, so it is easier to pay them through ownership in the company.  I would challenge that these beginning stages are the perfect time to be learning and doing that task yourself as the business owner.

It’s true that you will need to outsource some roles over time in order to scale, but having the willingness and understanding to be able to do virtually any role within the business is invaluable when hiring that role out later.  During the beginning stages, before you have the funds to hire someone (and the overhead to support), is the perfect time to practice wearing all those hats.

What are all the shared agreements between the partners?

Often the extent of understanding between partners when starting a business together is just what the business is going to do, i.e. we are starting a lawn care business, a house flipping business, a coffee shop…

Tucked amongst what a business partnership is going to do, however, is about a million agreements that each of the partners need to have a shared understanding on.

Some of the big ones are sometimes referred to as the 5 D’s.

Death – What happens if one partner dies?

Divorce – What happens if a partner gets divorced?  Could the divorced spouse get half their share and become another partner?

Drugs – What happens if one partner develops a drug or some other destructive habit?

Disability – What happens if one partner becomes disabled and can no longer contribute in the same way?

Disinterest – This company seemed like a great idea up front, but 6 months in it is taking twice as much time as I thought and not really making any money.  Now what?

These are all scenarios that could occur and should be agreed upon, but even beyond these larger possible circumstances, there needs to be an agreement on the details that will have a huge impact on the day to day business like:

How much time is going to be spent by each party doing what roles?

What is the exit plan you are working toward and when?

Is this a secondary business or is this the primary source of income for each party?

How much money does each partner plan to take out of the business on a regular basis?

What will each partner do if there isn’t profit to pay themselves (ie they can’t pay their personal bills because the business isn’t making money)?

How much debt is each partner comfortable with?

Why does each partner want to start this business in the first place?

Many partners assume they will figure all this out as they go and that can lead to some very difficult conversations down the road.

What is my goal and is it possible to get there without partners?

This is the simplest and at the same time possibly the most difficult question to answer.

Are you starting this company to be the biggest and best in the world?  Do you just want to create enough income to live on comfortably?  Are you unconcerned about money and want to start this business to serve a social need that is important?

Your reason for starting and growing a business can evolve over time, but the decisions you make as to how you run your business will be massively different based on why you are starting it in the first place.

Until you are clear on what your goal for the business is, having any success is going to be very difficult because you have no way to even measure what success looks like.

The secondary question after determining your goal for the business is simply whether it would be easier or more difficult to achieve that goal with a co-owner or partner.

In the personal relationship world, it’s almost always better to date someone (a lot) before marrying them, because it gives you the chance to really get to know them and test out what a more serious commitment would be like.

In the same vein, I almost always recommend JV’s over partnerships whenever possible.

If you feel any uncertainty or like you are rushing into a partnership, don’t ignore those feelings.  Ask yourself the 3 questions above and don’t take the answers lightly, because most likely the decision you make will have a significant impact on all aspects of your life.

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