Let’s say that you and a friend both become aware of and interested in investing in real estate around the same time. You both begin attending local meetups together, reading books, listening to podcasts, evaluating the market, and reaching out to various local real estate professionals.
Then, the time comes where you are both ready to invest in an actual deal.
Now, the question is: should you go out, create an LLC and do deals together?
From my experience, the answer is unequivocally no.
You don’t want to go all in with a friend – or really anyone – when you are initially starting your real estate investing career. The way people act in the context of a friendship may be entirely different than the way they act in a business relationship when their money is on the line, which is entirely understandable and expected.
However, this doesn’t mean that you cannot do deals together. Rather than immediately creating an LLC together, the less risky approach is to create separate LLCs.
Your LLC will own a portion of the deal and your friend’s LLC will control the rest of the deal. Continue to use this approach for a full year to make sure you can work together effectively.
After the year-long test period, ask yourself the following questions about how things went:
- What are they like as a business person?
- How do they handle any challenges that arose?
- What type of character do they have?
- How did they react to mistakes that were made by either them, you, or a member of your team?
- What did they prioritize more, themselves or the deals?
- What is their communication style?
- Did they put forth more, less, or an equal amount of time and effort as you?
- Is this someone you can envision yourself creating a long-term business with?
Again, whether you are long-time friends or merely acquaintances, you cannot know how they will handle important business decisions, disagreements, or issues until you actually experience it first-hand. Rather than jump into a business marriage, test the waters by dating for a year.
I see the following scenario happen time and time again: someone learns about the power of real estate investing. They read all of the books and blogs, listen to all the podcasts, and even attend in-person meetups and conferences. They learn the ins and outs of their market. They learn how to evaluate deals. They reach out to real estate agents or brokers and begin to analyze on-market deals. Maybe they even send out a direct mailing campaign. But, after going through this process for a few months or a year, they realize that securing a deal isn’t as straightforward as the books, podcasts, conference, etc. made it out to be. The is officially honeymoon phase is over. Over the course of the next few months, they put less and less effort into finding deals until they stop entirely.
If you were to go all in with this person from the start, you would have wasted an entire year spinning your wheels, just to be back in the same situation you were in before you partnered up – with the exception of maybe having less motivation after not doing a deal for a year. Even worse, you do a deal together and this “friend” disappears in the middle of the business plan or does something to jeopardize the deal.
Forming a partnership is a great way to quickly and effectively scale a business. But it needs to be the right partnership. When considering partnering up with a friend – or anyone – don’t immediately go all in. Instead, keep things separate by creating individual entities or by doing deals individually for at least a year. At the end of the year, if this person is still there, answer the 8 questions outlined above to determine if it is worth officially partnering up or if you should both go your separate ways.
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Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.