Friends and Partners – Do They Mix?

I recently taught a class about using hard money and two young motivated entrepreneurs were in the room. They were in the front row and were eager to learn. I am always really excited to see the young, motivated new investors getting started. These two really reminded me of myself when I was getting started. Both had some great questions and stayed after the class to ask several more. It came up that they are high school buddies and were excited to go into business together. I must have cringed because I got a very strange look. I told them that I had to be candid before telling them I thought they were making a big mistake.

I explained that I have seen, on more than one occasion, best friends become enemies because of being in business together. One case there were lawyers involved, and these two were the best man in each other’s weddings. I mentioned that they need to be smart about how they enter business together. One of them suggested that they have a strong friendship and that they would make it work. I disagree for 3 reasons.

NO CHIEF: The primary problem I see with a 50/50 partnership is there are two chiefs and nothing in place to break the tie. If you have more than one chief, it is just like having none. No one person to take feedback and make a decision. If there is a disagreement about something, it could easily escalate into a much larger problem. Often times, the real problem is no longer the issue being disputed, but the dispute itself.

This is easy enough to handle if you are aware of it. Put something

in the partnership agreement that if there is a dispute that a neutral third party, picked in advance, makes the decision for the partnership. Another way to do it is to have defined roles and defined aspects of the business each is responsible for.

NO DEFINED ROLES: I did not get into this with them because of our limited time, but I sensed not much thought was put into it. They each had a vaguely defined role based on what they like or did not like to do, but did not have precise roles earmarked for each of them to take responsibility for. Of the partnerships that I have seen go bad, this is the leading culprit. One partner believes they are doing most of the work, or at least more than their share. They start getting disgruntle and stop working so hard, or they might keep their issue to themselves until they let it out with an explosion. It typically does not go well to explode on a business partner and friend.

Much of this is avoided with specific defined roles and penalties if things are not getting done.

NO GOOD REASON TO PARTNER: One of the gentlemen was a mortgage broker and one was a Realtor. They believed that having each of these professions inside a company would make the company stronger and better equipped to be successful. They believe that their profession outside the business provided enough value to be included in the partnership.

I love partnerships when they are set up correctly and for the right reasons. In fact, I believe partners are essential to reaching your potential, but the reason to partner is to help you get something done you could not do without the partner. In their example, either one of them can get the skills the other is bringing without a partner. For example, I can go find and use a mortgage broker or a Realtor simply by paying the fee. I don’t see a compelling reason to partner with someone to get skills I can get without the partnership. I see this with people wanting to partner with contractors a lot. I feel strongly there are better ways to in-cent a contractor than to partner.

One of the other questions from the audience that day was how do you build a rental portfolio with no income. We were talking about how to use hard money to purchase several properties with little or no money down. His question was extremely valid because many business owners have trouble showing enough income to qualify for conventional loans. Of course my response was, why don’t you use a partner? You can find and rehab the house and they can purchase and refinance it. You can share the profit anyway the two of you agree. This is a prime example of when a partner makes a lot of sense. One partner might not have the knowledge and/or time to locate and rehab houses and the other cannot qualify for a loan. They both need each other.

One final thought is you might consider a joint venture on a deal by deal basis. This way you can easily define roles, responsibilities and profit splits and you don’t get tied to someone long term. I really like partners on individual deals where each partner is free to do other deals on their own as well. This is exactly what Travis in our office did on his first town-home development. He brought in partners to help with the funding and did the deal. Now he is doing these deals without partners because he no longer needs them. It was truly a win-win on the first deal, and there are no hard feelings on anything he is doing now. This is exactly how I believe it should be done.

Should Long Term Real Estate Investors Focus On Cash Flow or Growth?

There are really two sides or two strategies to this debate. I lean one way for sure and will explain why but, I am also open about this and understand that other people have goals and strategies that differ from my own. In this article I want to briefly talk about both strategies and then give you some ideas to expand what you are trying to accomplish.

I want to define a long term investor as someone who is purchasing real estate with the strategy to hold onto it for at least 5 years but in most cases much longer. This is a great way to grow wealth and although it can be slow, it will guarantee financial freedom if the strategy is done correctly.

When we discuss lending the staple in the industry is the 30 year fixed rate loan. The advantage to this loan is that your principal and interest payment will remain constant for 30 years even though rents should increase. This loan also comes with the lowest payment in the market helping you to maximize cash flow. I put 30 year loans on my properties whenever possible. (This becomes more difficult as you get more properties which might be a topic for a different article). I like the cash flow because it gives me control and I can choose where to invest it.

The disadvantage to a 30 year loan is that it takes 30 years to pay off the house, assuming you make the minimum payment. If you are a believer in paying off your rentals then a shorter term loan might be a better strategy and will give you the discipline to actually do it. Because interest rates are important to a lot of investors it is important to know you will get a much better rate with a shorter term loan.

My personal belief is that if you are leveraged on your properties you can buy more properties and more properties create more cash flow and more growth. It is the best of both worlds. This is true only IF you are buying quality deals and have reserves and plans in place for the unexpected. As many of you know when I started investing with my wife we would leverage as much as we could and we purchased as many houses as we could. Needless to say that back fired and we lost almost everything. I share this because I want you to know that I understand that leverage creates additional risk. However, if you are purchasing properties that cash flow AFTER vacancies and maintenance there really is not much of a down side.

As you can see I am not a fan of paying off your real estate when you are in your growth strategy period. I believe this strongly for several reasons and have been quoted in major publications sharing my view. I do, however, think you should start paying them off as you get closer to retirement or when you are in a position that income becomes more important than growth. I also understand that many people have a different risk tolerance than me.

There is one thing I want to caution you about. I would not recommend purchasing property on speculation. Again, we learned this the hard way. If you purchase for cash flow, whether you choose to pay off the property or not, you won’t get hurt. If you cash flow and the house decreases in value, you keep it and enjoy the cash flow. If it goes up in value… well, you either keep it to enjoy the cash flow or you can sell it and take the cash. Don’t get caught up on any of the hype. In Denver the big thing right now is the light rail expanding North, West, and Northwest. Several new lines going in could of course increase the value of real estate, but that is speculation and if the market turns or the lines get delayed you could suffer.

In my opinion, if you are trying to grow your money quickly and are less concerned with the income, you should purchase as many properties as you can, especially those of you in Minnesota. Inventory is not as tight as other parts of the county and it is still easy to buy rentals with no down payment. To purchase as many properties as you can you need to leverage as much as you can.

I want to close by sharing one last opinion. Although I am a strong believer in leverage and being smart about it, I understand that it is not always the best way to go. In Colorado specifically, there are not many deals. Travis, Justin and I talk about this frequently. We all want more deals in Denver but cannot find them. If there are limited deals in the areas you want to buy, you need other investment vehicles to put your money. For some that is investing outside your area, which is what I am doing and for some it is paying off your loans, which I am also doing. If you want to buy more but cannot find the deals, by all means focus on paying off the loans. That is much better than leaving your money in the bank doing nothing.

The Power of Momentum

3 Steps That Will Guarantee Your Success

I am a big football fan. I watch every Bronco game, and the one thing that really stands out to me week after week is that momentum can often times win or lose a game. When a team can get the momentum on their side and stay motivated and consistent, they should always win the game. They only lose if the momentum shifts. Real estate is no different.

Once you get the momentum, you need to stay motivated. When you start to experience success, the last thing you should do is take it easy, which is probably what you will want to do. It is a good idea to reward yourself for your success, but do that and come back focused.

Sometimes it is hard to get the momentum in your favor because you are not sure what activities will get it going. Momentum always starts with a single success and builds from there; and it should be able to build as your confidence goes up. You should feed off your accomplishments. Here are three sure fire steps to get momentum in your real estate business.

Set your goal

This needs to be a short term goal that is challenging but realistic. Short term is thirty days or sixty days at most. An example would be to have a house under contract in the next thirty days.

Believe you have already accomplished your goal

I cannot overstate the power of this. You will accomplish the goals you believe you can, or better yet, believe you already have accomplished. The concept is simple, but the implementation is challenging. If you have never done a deal how can you believe that you will have one in the next thirty days? There are several strategies for this, but something that I have used with a lot of success, are affirmations.

Affirmations are statements that are repeated to yourself over and over until you believe it to be true. This works best when the statement is specific, personal, in the present tense, and positive. It is even more affective if the statement includes the goal as if you have accomplished it with the steps you took to get there. Here is an example of a statement that could be used to get a deal in the next thirty days:

“I got this house under contract that will net me $30,000 within a thirty day period by calling at least ten potential sellers every day from lists including, FSBOs, FRBOs and foreclosures.”

Once you have structured a quality statement print it out and put it in your car and one on the bathroom mirror. Say it out loud at least fifty times a day.

There are entire books and home study courses teaching this stuff, and all of it works. I recommend studying the law of attraction and picking up one or two strategies that works for you.

Massive action

Do ten times as much as you think you need to. If you think you need to knock on twenty doors a week or make ten calls a day, do that, but also send out mail, put up signs, call all potential referral sources and go to networking meetings. Focus all of your energy on accomplishing this one small goal.

To me, massive action means not watching any TV, not hanging out with friends, and not going out to eat. To me, massive action is working long and hard hours on productive activities. To me, massive action is doing what others are not willing to do. I know this is harsh, but it is temporary and could be necessary to get the momentum going. I like to compare this to flying a plane. The plane takes ninety percent of its energy to get off the ground but once it is in the air it stays consistent and gets results.

Once you accomplish your goal, set another one and do this process again. The momentum will build and once you have it you just need to maintain. While you maintain the momentum you need to stay consistent with your activities. I want to be clear that maintaining is not the same as massive action and you will not be working as hard, but if you feel the momentum start to slip, I suggest starting the process over again. It is really amazing how easy success comes when you get momentum that you can build on.