Regardless of the location, property type, or age of your first asset, investing in commercial real estate will require three things to ensure success: capital, experience, and calm.
If you lack any or all of these requirements then there is often only one solution: Get a partner! Just because you may not have the funds reserved for an investment property, or the knowledge on how to underwrite the amortization schedule for a loan, does not mean that you shouldn’t get the benefits of investing in Commercial Real Estate.
Partnerships are extremely common in the commercial market and are often the only way to invest in higher tiered properties.
Although it may seem simple, an investment partnership can be very complicated especially when outlining the goal of the partnership. Will the partnership be equal with all profits and losses shared (Equity Partnership) or will they simply be investing capital upfront with the hopes of a return down the line (Debt Partnership)? You will want to make sure you iron out these details prior to “Shopping the Deal.”
Although this relationship will be based strongly on the trust shared between you and your business partner/partners, you will want to secure the deal with more than just a firm handshake. The structure of any partnership should be set in place as a mutually beneficial relationship with the details of that relationship outlined in the partnership agreement.
Your partnership agreement should outline the following items: who will handle the day to day management of the investment property, how and when the monthly expense reports will be presented, how investment returns will be paid and when, how decisions concerning the property will be made, and of course how the partnership will end. Although it may seem a bit backwards, drafting the terms of your partnership prior to actually having a partner, it is extremely important to create a clear understanding of involvement in the project even if it may change during negotiations.
How do you find a partner? The answer is threefold. You network, then you network, and then you network some more. Your ideal partner can be found anywhere so you want to cast a broad net. The more you shop your proposition to potential investors the more you will learn about what makes your deal attractive or non-attractive. In this sea of “No thank you” and “Let me think about it”, you have to remember to stick to your initial terms. Do not be quick to promise away large amounts of equity in the hopes of getting a possible “Yes” from someone who doesn’t add anything to the deal. If the deal is good, you will find funding.
When trying to find a partner for their first deal, the vast majority tend to gravitate toward their family and friends. Why? Because they want to establish a positive group of investors that support their vision. Although these situations have a higher chance of a “Yes”, they can also strain the relationship. Establishing a partnership with a stranger, although harder, can be simpler to manage as it tends to remain professional.
To find these potential partners, it is important to network physically and digitally. There are many services which will allow you to shop your deal to hundreds, if, not thousands, of potential business partners. However, you will need to have a polished offering memorandum ready including detailed information on expected revenue i.e.: Pro Forma.
Regardless of who or whom you choose to be your investment partner/partners, you will want to ensure that they bring something to the table that can compensate for their portion of the profits.
Remember, in any business transaction one of three items can be brought to any deal: time, money, or experience.
If you are looking for a potential partner for your first or next commercial real estate investment, please click on the link below and register for one of our upcoming Commercial Property Academy Live Events. During the course of these four day events you will have the networking opportunities to make those ultra-important connections to get you one step closer to finding a potential investment partner.