This is what will happen to your property if you get sucked into a partnership. Partnerships are like crab traps, once you get into them, they are nearly impossible to get out of. Partnerships are like crab traps. You can get into them easily but they are nearly impossible to get out of. While the crabs are in the trap. There are no real decisions to make while in the trap. The crabs are happy to eat all the food that gets fed to them. While the property is collecting rent and there are no major repairs, there is no incentive to get out. Everything is glorious during the partnership!
The partners are collecting rent. There are no major expenses. Everyone is happy. The real reason why getting out is so hard part is because it’s rare or if not impossible to get partners to agree to when to sell an asset or how much.
Just last week, I had to different sets of investors who were unable to make a decision to either sell the property or raise the rent. Each set of partners are losing thousands of dollars each year because they can’t agree on what to do.
Nothing happens. For a very long long time. Deferred maintenance is what happens. Decades go by and the first thing to go is the roof. Water starts penetrating the building. Ceilings collapse, rents aren’t collected, tenants move out, and tweakers move in. Eventually, one of the partners is seriously ill or dead and nothing can be done with he property because there is no clear title. Even if the partners are still alive, there are so many liens on the property, it becomes worthless. You see the city or county will keep boarding up the property to keep vagrants out. The city piles on late fees on top of all the board ups and weed removals. This happens over decades.
None of the property carcasses you see when you are driving to work happen over night. The property disintegrates. The LLC dissolves and all that money that went into purchasing that piece of real estate goes POOF. The only thing left is the foundation which is a fitting tombstone for a dead partnership. There is a solution for a bunch of people who want to pool resources to purchase real estate. It is not a partnership. It’s called private equity.
This is how private equity works.
Bobby gets all excited about a property he found that can be purchased at a discount. The problem is Bobby doesn’t have all the money needed to purchase the property so he reaches out to Johnny for some money. You see Bobby and Johnny have been friends for years and Johnny has been diligently saving money but isn’t familiar with real estate. Bobby knows real estate and Johnny has money. It’s a beautiful thing. Johnny lends Bobby money to purchase the real estate. They agree to terms of the loan and Johnny wisely protects himself by recording a lien on the property. This prevents Bobby selling the property without getting getting his money back.
There are different types of loans like interest only, principle & interest and Principle & interest with a balloon. You can also have an additional agreement that includes a bonus or profit sharing when the property is sold. At limestone investments, we can help you structure these types of private equities. Bobby is driving the boat and Johnny is getting residual income. If Bobby decides to sell the property, he won’t have to argue with anyone and he can reach out to us to get top dollar. Johnny get’s his money back. Everyone wins! In summary, you need to avoid partnerships at all costs unless you simply want to throw money away or destroy a friendship. A more elegant solution to the same problem is to form an equity partnership where both parties are protected and clear title is establish.