How does one bring value to a partnership? I was asked this question last week while speaking with a young man who is interested in real estate investing. His conundrum is that he only has a small amount of capital. Thus, he wanted to know how he could provide value to a partnership that would provide him an equity stake in a deal. Unsurprisingly, this exact question is bandied about among new investors and old. Not all partnerships are on equal footing from day one. Within this blog post, I hope to provide some insight into how to provide value, earn equity, and become a partner when there is no money to invest on your end.
Bird-Dogging the Deal
The first and most popular way to obtain an equity stake in a deal is to be the one to find the deal. This means that if you are the hopeful investor with no money, your value is in finding the property, seller, or bringing people together. So how does one find the deal or bird-dog? Answering that is not as simple as it sounds. The short answer is that there is a lot of time spent scouring neighborhoods, property listings, tax records, looking over tax dockets at the courthouse, going to those properties, talking with the owners or agents, and becoming familiar with every aspect of the property. Once a property is identified, what is the deal?
Any investor that will bring money to the table will want to know the numbers. The non-money investor needs to have all the numbers crunched and know that deal backward and forwards. Know the value add and how this deal can be a good buy. Is it simply return on investment or is it an appreciation play? What is the value of the deal? Know the goal of the deal. Simply buying a property is not enough; it is important to know how the deal will bring value to the partnership.
Once you have found the property, be it commercial or residential, you then have to be able to show the money investors how they are going to see returns on their investment. There are numerous apps, programs, and websites that can help you prepare a pro forma on the property. Investors want to see numbers. Numbers control the deal. Know your numbers.
Finding the Right Partners Once You Have the Deal
Once you have a deal put together, how do you find the right partner? It is simple to say “networking” and shrug, but that is not a genuine answer. Websites like Best Ever Commerical Real Estate, meet-up groups, and talking with your banker, real estate agent, lawyer, accountant, or insurance agent are good places to start. Those points of contact need to be cultivated to grow relationships. Organic relationships will generate more leads than you can possibly imagine. That said, there are plenty of money investors out there that are looking for deals. If you look enough, they will be everywhere. Investors are always on the lookout for new deals.
Once you have found a potential partner, it is paramount that you and they start the vetting process. You need to learn as much as you can about your partner. That does not mean their blood type and mother’s maiden name, it means that you need to make sure that your soon-to-be partner has the capital, has experience in investing, and is willing to be transparent with you — after all, this is a marriage of sorts.
Structuring Your Equity Stake
What does all your effort calculate up to in the deal? Is it 5%, 10%, 15%, 20%, or more of the deal? Is there an equity earn-out? Meaning, does your equity in the deal increase once the money investors have recouped their down payment? The answer to this question is that you need to have this number in your head when you create the deal. You need to understand and realistically value your efforts in putting this deal together. In the context of syndication, this is the role of the general partners. The GPs bird-dog the deals and it is the limited partners (the money investors) that bring the cash to the table. However, not every deal is a syndication. Most deals are simply buying a building, house, or multifamily property, but the concepts are the same.
Spend the time with your potential partner in outlining your partnership agreement. It is time well spent. Speak with a lawyer who handles partnerships, LLCs, and does real estate work. Do not cheap out on getting the right advice — these boxed agreements online will do you more harm than good. Get a tailored partnership agreement. Ask questions and understand the agreement as well as you understand your deal. Learn about the new ideas of the lawyer or your partner. Structuring your deal is as much an art as is putting the deal together. Find the right structure for you.
Good luck out there!