Finding an Investment Partner

May 7, 2019

If you don’t have the capital to fund a property on your own, you may be considering pooling money with someone to complete the deal.  Before you leap into it, there are a few criteria you should evaluate before hastily adopting a partner.

 

Are you each putting in an equal amount?

     Balance This is a big one.  Ideally, you enter into it as 50/50 financers, but what happens if you have 60 or 70 percent of the funds, and you’re looking for a partner to come in for the remaining piece?  All is well if both parties are perfectly content with the arrangement, however, if the partner with the smaller stake dwells on the fact that they’re receiving an understandably smaller return, this can fester into resentment.  Will the minority investor feel like they’re being used by the majority investor, or can your partnership overcome this?  There’s nothing worse than one person feeling there’s a, “rich partner,” and a, “poor partner.”  Drawing up an agreement won’t cure this ailment, so choose wisely if the partnership is going to be lopsided from the onset.

 

Is your risk tolerance compatible?

    risk tolerance Understanding the risks, and each of you accepting them wholly and equally, is essential to qualifying this as the right investment to warrant a partnership.  Don’t deny your partner – or yourself – the truth.  Is this investment going to satisfy the risk appetite of someone who day trades, or is there some severe FOMO (fear of missing out), and a nagging urge to return to a more volatile market?  Conversely, will a more conservative partner have unbearable anxiety, and suffer a bout of buyer’s remorse while waiting for the property to sell?  If one partner feels like this is a waste of time, while the other believes the sky is falling, this will not be a good fit.  Know your risk tolerance and take the time to understand theirs.

 

Is your investment horizon the same?

  horizon Everyone needs to be prepared to invest for the whole duration – one partner cannot pull out mid-deal to pursue another opportunity.  Consider the possibility that the property has been renovated, but the sale is delayed – do you and your partner both have the flexibility to remain invested?  Reduce your stress, and choose a partner who is financially stable and can see it through alongside you, without relying on immediate repayment of their principal.

 

Can it get awkward?

  two guys meeting Absolutely.  Talking about money with a friend, a colleague, or a family member can seem uncomfortable, but if you can’t have the critical conversations, don’t pursue a partnership.  As much as you’re trying to discover whether the person across from you is going to be a good fit, be prepared to answer all of your own questions with the honesty that you expect from them.  If you encounter difficulties while your money is tied up, it’s going to have very real consequences in the space you share outside of doing this deal.  Are you risking a friendship?  Are things going to get weird at work?  Is Christmas about to get awkward?  Will it be the same as before?  You should be toasting your success at the end of the deal, not screening each other’s calls.

 

After addressing all of these factors, finding the right partner to invest with might seem daunting, but creating a great partnership is worth the effort.  Be selective in who you partner with, and be prepared to say, “no,” if you don’t mesh. 

 

Future you will thank you.