Top 3 Tips for Choosing a Partner for a Real Estate Investment

Tamara Simon | Rental Property Guru

I wanted to purchase my first rental property. I had no intention of having a partner invest with me and then this great opportunity came my way. The owner of this single family home had been a landlord for many years. She had just gone through small claims court with a tenant over a security deposit dispute. The tenant won in small claims court. The landlord had receipts for repairs that totaled $4,000 and a detailed move-in checklist signed by the tenant. The judge still ruled in favor of the tenant.

This owner was done with being a landlord so she told me she wanted to sell the property. Then she said the magic words “I want to sell on contract and be cashed out in 5 years.” The price was right, I knew the rental amount would cover the mortgage payment & taxes and the home was in move in condition. It had brand new carpet and the interior was freshly painted. The owner wanted $20,000 down. I asked her if I could have 24 hours to have an inspection done and that I would make an offer in 24 hours after the house passed my contractors inspection. The owner agreed to my request. I had $20,500 dollars in my bank account at that time. That was all the money I had.

Now I had 3 options as I saw it.

Purchase the property and have no money in reserve.

Pass on the deal and wait until I had more money for the next deal.

Find a partner.

I had been working in property management for 8 years at this point, I knew all the things that can go wrong and saw how landlords get in trouble with no cash reserve. I also knew that the right “deals “are hard to come by and opportunity does not always knock twice. I evaluated my comfort level for risk and decided I wanted to have a partner invest in this property with me.

I knew 3 people who could be potential partners. My first 2 choices did not work out. One was not ready to invest even though she had asked me for 3 years to find a property we could invest in. The second person did not have the money and then I spoke to my third choice. I told this man why this was an excellent investment for a rental property, ran the numbers for him and told him my expectations for this property and our partnership. One of my conditions for our partnership was that he would be a silent partner. He asked me what that meant and I explained “when I ask you to write a check, you will be silent”. This clarity on our roles has proved invaluable to our success as partners in this real estate investment.

Top 3 Tips to Choosing the Right Partner for a Real Estate Investment

Do you have the Same Goals

Are you planning to hold the property long term to create retirement income or are you more interested is appreciation and selling in 5 years or less? Are you the kind of landlord who wants to maintain your property or do you prefer to be a landlord that specializes in deferred maintenance? You need to be on the same page.

Do a Background Check

Does this person have any pending lawsuits or other legal problems? Are they willing to share tax returns and financial information with you? Even if someone has been your friend for years or is a relative, you really do not know their true status until you have the information in hand. This relationship is like a marriage; you are taking on legal and financial obligations for another person. Their problems can harm your financial future.

Have a Written Partnership Agreement

Decide who will be responsible for the bookkeeping, repairs to the property, answering calls, texts and e-mails from the tenant, rent collection, showing property and screening prospective tenants. It is important to have your roles defined, major expenditures should be discussed but do you really want to have to fight over a $40 light fixture with your partner? Find an attorney to advise you and complete the final draft of your agreement. This is also the time to have an attorney help you determine on how you want to hold title for this property. For this investment, I hold title as Tenants in Common with Right of Survivorship. Ask an attorney what that means and what the best way to hold title would be for your situation.

Follow these guidelines to save yourself time, money, and grief. My first rental property was purchased in 1991 with a partner. We both put in $10,000 to purchase this property. Our first tenant stayed 5 years and the only repairs we had during that time was replacing the refrigerator. We also paid a contractor to clean the roof and gutters every fall. I really did not need to have a partner, we were lucky no major expenses came up those first 5 years, no vacancy, just rental income for 5 years. Do I regret my decision to take on a partner? Not for a second! I had peace of mind for those first 5 years instead of constant stress over potential cash flow problems. The property was purchased for $115,000 today it would sell for just $475,000. It is a positive income producing property. Over the past 27 years we have had to invest money to maintain the property. We have replaced the carpet, painted the interior and exterior, replaced the stove, furnace, and roof. I had time to save money and build a reserve fund over the years. So as expenses came up (and they always do) we were prepared instead of panicked.

Yes, I have to share in the profits with a partner but we also share in the risk and expenses as partners. I went on to purchase other investment property on my own over the years. When a great investment property comes your way do not let fear or lack of funds stand in your way. Consider working with a great partner.

Tamara Simon is the founder and Designated Real Estate Broker at Rental Property Guru, as well as the former owner of Koss Property Management. Tamara has helped thousands of Real Estate Investors succeed as landlords by providing coaching and educational services. With over 25 years of experience as a private landlord, professional property manager and educator, Tamara offers a common sense approach on how to analyze real estate investment markets, and deal with the risk and rewards of being a landlord. You can reach Tamara at tamarasimon@comcast.net or (206) 850–3630.