EP16: Partnership Deep Dive: Debt vs Equity & Our Real Life Examples with Amelia & Grace
Welcome back to another podcast episode! This week we’re doing a deep dive into partnerships in the world of real estate investing. We’re so excited to share with you the different types of REI partnerships, how we have structured our own partnerships, and also things to consider when it comes to implementing partnerships in your own REI business.
Two Types of REI Partnerships: Debt & Equity
Equity Partnership
With an equity partnership, both parties are owners of the property. They both have a piece of the pie. And while your partnership style will depend on exactly whom brings what to the table, in the end, you both own the property.
Pros of Equity Partnerships
Equity partnerships allow you to buy more property, with more credit available and more funds available in general. Also, with equity partnerships, you are merging two strengths together, making for a very powerful partnership and two parties who are typically willing to really give the project their all.
Cons of Equity Partnerships
If you wind up not getting along with your partner, in the long run, that can get quite uncomfortable. Make sure that every so often you reassess your partnership (agreement) and its functionality. It also typically comes with a longer timeline because these types of partnerships operate for years. Make sure the person you partner with is someone you get along very well with.
Also, many people don’t want to split the piece of their pie. And while 100% of nothing, is still nothing, you need to make sure you have a strong operating agreement for things that might come up. This partnership reduces risk and increases the availability of capital between the parties.
Debt Partnership
A debt partnership is at the very simplest, a loan. Think of it just like you are borrowing money from a bank, except these funds are coming from an individual person (often referred to as a ‘private investor’). This type of partnership and loan comes with a specific timeline, interest rate, payback period, etc.
Pros of Debt Partnerships
These partnerships are often much shorter, and once you’ve paid back your investor, you’re all in, on your own. There are also a lot of people looking for dept partners - maybe they have extra money they are looking to invest and you have the know-how and expertise to allow them to invest with your REI project. Ultimately, in our opinion, the biggest pro of debt partnerships is that they are short term and once you’ve paid back your investor, the property, and income, are all yours.
Cons of Debt Partnerships
Debt partnerships typically come at a higher cost. You have a higher interest rate to borrow private money, so typically you have a much shorter timeline for these; BRRRs, flipping, etc., where there is an exit strategy and end of a timeline. These types of loans also typically last under one year and you must pay off the loan in full by the end of that year.
How To Find REI Partners
A great place to look for equity partners is in your own backyard. Talk to family and friends, interact with colleagues, and post on social media that you’re looking for new partnership opportunities. Show them what you’ve done, what you are currently doing, and build that ‘know, like, trust’ factor with them to make them want to know more. Another place to find great equity partners is through your local real estate investing groups and meetups. All of the people in that room are already interested in what you do, so look there to network and structure new partnerships.
To find debt partners, look for investors who already have that extra money. Whether it is equity in their home, a self-directing IRA, or someone with a higher income (doctor, lawyer, etc.) but who doesn’t have the time to do the project themselves. These kinds of people typically want to be hands-off (ideal for a debt partnership), so you are their boots on the ground.
Tips for Partnering
Put yourself out there and don’t be afraid to ask for partnerships, but don’t try to partner too early.
Negotiate and include a management fee if you will be doing the property management yourself.
Make sure you outline a reassessment of your partnership after 1-2 years.
A final piece of advice about partnerships:
Be cautious, but optimistic.
Thank you so much for listening! We would also LOVE to hear more of your burning REI questions or episode ideas so shoot us a DM on Instagram!
See you in the next episode!
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