_{This article was a collaborative effort, written by Ashley Kehr and Felipe Mejia.}

Have you ever stepped foot in a Crossfit gym and seen all the acronyms? WOD, AMRAP, CFWU, and so many others…

Felipe: Yeah, me too! I walked back out! It made me feel like I didn’t belong or that another language was being spoken.

The same rings true about real estate investing aka REI. When I was starting out, the same thing happened. Except this time, I decided to learn the verbiage. I wanted to learn about real estate more than I wanted to join Crossfit, which is probably why I am successful in real estate and not in Crossfit.

Being able to explain a deal or plan for an investment will require you to learn the language of real estate, as well as the acronyms, therefore proving that you took the time or have been around long enough to hear them. This is especially important if you are seeking out a partner.

Choosing a Partner for Your Real Estate Investing Business

The first step of real estate investing and partnering is to know what you want and how to explain your vision to your potential partner. When you can provide a clear picture or formula to a partner, there is no guesswork about the potential earnings or outcomes of a deal. If your goals and visions align with your potential partners, then that’s a good starting point.

While picking a strong partner is very important, we believe what’s more important is BEING a good partner! Will you be the type of partner that people want to work with or the type of partner that people dread calling?

Listen, when the money comes rolling in, all calls are fun to make. The not-so-fun calls are when you may need $1,000 in repairs and your three months of cash flow is wiped out. How will you tackle the tough issues together?

Planting the Seed

There are so many possibilities when it comes to structuring the nature of your partnership, but the first thing you need to do is find someone.

Ashley: I call it “planting the seed.” Start with identifying a list of people who could be potential partners. Once your list is defined, talk to each one of them about what YOU are doing.

Try to shy away from telling them you are seeking out a partner. Once people think you are soliciting them for something, they stop listening. Tell them the details of what you are going to do and why you think real estate is a good investment.

This can happen over multiple conversations. Each conversation gives a little more information and builds the hype. When you are finally ready to sell them on a certain deal, have as much information available as possible. Let them know you’ve enjoyed talking with them about real estate investing and that you are now looking for a partner.

Supply them with a BiggerPockets Calculator report for the deal, the MLS listing (if applicable), and information on your personal finances. Include your personal finances because it carries weight that you have your own finances together. You could include a tax return, a credit report, or a list of other investments and their performances.

If you are relying on experience as your value, then prove it. Show your research, how many books you’ve read on the topic, your construction experience, etc. It is important to remember that you are making this an opportunity for them. Prove how this will benefit them.

Real-Life Example: My First Partnership

Felipe: Let me tell you a story about one of my first partnership projects.

Flipping a property, to me, is always fun! There are challenges to overcome, and I always walk away learning something new.

This project, in particular, definitely taught us a lot. The house was N-A-S-T-Y. There were literally hundreds of rats in the house. Every piece of furniture in there had been chewed on or clawed by rats. Get the picture?

Not to mention, the house also smelled like old, wet dog and urine. It was so bad that the home inspector barely finished the inspection and respectfully left before we could even pay him.

We purchased the property for $70,000 cash. The after repair value (ARV) was $200,000! We had hit a home run—something people talk about for years before it usually happens. (Well, maybe not THAT much of a home run but definitely a notable one.) We sold the property for $220,000.

Anyway, the plan was simple: My partner and I were to go half-and-half on everything and split the profit. As the project got underway, here is where things got hairy.

What if I am able to work four hours one day, and he can only work two hours (or the other way around)? What if I get sick and can’t work for two days, or what if my partner, Billy Joe Bob (not his real name), had a car problem, etc.?

BJB (see why acronyms can be important?) and I quickly encountered this issue. Luckily, we were friends and were able to sit over coffee and talk this out. We found an easy fix: We would work for goals, not time.

For example, I was good at floors and he was good at paint, so we started assigning tasks versus worked hours. We quickly identified our strengths, and man, did we work a lot faster and more effectively. It was crazy how much time and money we were wasting by not utilizing our individual strengths!

Dividing Labor in a Fair Way

Just like with BJB and me, when a partnership uses its strengths and plugs (the connections you have with others), the plan for the partnership runs a lot smoother. Do not hold your partner to an “amount of hours worked” or a “clock in and out” quota. It is better to hold each other accountable based on goals. This way, you’re doing what you’re good at and not dreading the next day.

If BJB would have asked me to paint a wall, I would have cringed and dreaded coming in to work the next day! Since I was better at floors, I was able to have fun with my goal of having the floors finished by a certain time.

Another example of projects we split were the water heater and the driveway. Both of these projects had to get done, and we were both trying to handle them. BJB was excited about making sure the house had efficient hot water, and I wanted to ensure the driveway looked good for pictures at the sell.

We both wanted to work on our projects, but for some reason, we felt we needed to oversee each other’s work. However, we both realized that for the best interest of time and money, we were more effective doing the things we liked and not having to sit through each other’s work.

Let me be very clear about this topic. Sometimes my work took longer; other times, it was easier. This didn’t matter anymore, because we were doing what we liked instead of being dragged into something we did not like. Man, did time and work efficiency fly when we made this change!

So again, are you a good partner to work with? Will you use your strengths to benefit the other partner or will you squeeze your partner for all of his or her time and not use your own strengths?

Structuring a Partnership

Once you have your structure in place, be sure to put it all in writing. A common document to use is an operating agreement. This can be drawn up by an attorney and customized to your partnership structure.

An operating agreement is commonly used when setting up a limited liability company (LLC). You and your partner can create this or a joint venture. LLCs and joint ventures are the two most common entity types for partnerships. An attorney can guide you through what will work best for you.

Besides all the legal jargon, I recommend including terms that state what happens now and in the future between you and your partner in as much detail as possible. If there is ever any argument or confusion, you can refer to the operating agreement to clarify.

I find this similar to a tenant/landlord lease. A landlord can always refer to the lease to respond to tenants’ questions or concerns.

In your agreement, state who will be doing what tasks, if any. Include what will happen in the future.

For example, if you sell, what happens? If one partner passes, what happens?

Ashley: I highly recommend life insurance policies on each partner. If one passes, the insurance proceeds can be used by the other to buy the equity from the family of the partner who passed.

A partnership may be overwhelming at first since there is a lot of risk, liability and dependability. Active engagement from an attorney and an accountant can help lessen these fears and protect both parties.

Once you have agreed upon a structure, run it by your attorney and an accountant. It is important to know how this will affect your taxes!

Remember, one of the benefits of real estate investing is the tax savings. Make sure you are maximizing these savings by consulting your accountant—another OPPORTUNITY for you to give to your partner!