Friday, April 1, 2011

partnering up

i've been talking to a few of my friends about the advantages in partnering up in real estate endeavors. the main advantage of this is that once you get to a certain size, the cash that you can generate can start funding expansion. consider this, let's say that i was 1 out of 10 individual investors, each of us operating separately. if i wanted to add another holding, i could take the income my one property is generating, let's say $5,000 a year, plus another $45,000 out of my pocket to get 20% down plus closing costs on a new property worth 200k. now, i'd be cash flowing $10,000 a year, which is great, but i had to have that $45,000 just sitting around.

consider that the 10 of us individual investors formed a partnership, then with each of us contributing nothing but the $5,000 from our investments, we could each participate in 1/10th of a $200,000 purchase that would cash flow $500. the ROI is the same (10%), but this was done without any additional infusion of capital.

of course, there are some downsides to doing this. your partnership agreement must be well drafted and you need to deal with people you know and trust. even then, there are times when folks will want to get out of the deal and take their pieces with them. you have to have all of those details sorted out. it can be messy. especially when you are talking about lots of people.

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