OK, it may be me who may carry the disease … I may be jaundiced by my experiences with partnerships, but frankly I don’t see the need.
Unless your partner brings a unique skill-set that you can’t hire in, contract out, or simply acquire for yourself – or, provides a lot of capital then is willing to sit back and let you work your magic – I think that you would be well-advised to rethink your need for partners.
I was having coffee this morning with my insurance broker / friend who expressed a desire to acquire some residential property.
To digress, I would normally suggest commercial property for its superior income-generation ability (assuming that you buy / manage right … but, that’s another story), but in his case: he has a 50% share of a small broking practice that turns over $2.5 million a year and puts around 30% on the bottom-line.
If you set aside one client that provides about 25% of this revenue, that’s about $300k per year that he can pretty much safely ‘bank on’ as income year-in-year-out … with upside as he grows the practice.
So, income isn’t his ‘problem’ … for him it’s equity and taxes:
1. Equity: broking practices (as do many professional practices of other types and in other markets) tend to sell for a multiple of earnings (i.e. profits) or simply a smaller multiple of revenue; for insurance brokers in his market, right now, it’s bout $2 for every $1 of revenue. Since he has a 50% partner, he’s currently ‘worth’ about $1.8 – $2.5 million (depending upon what happens with that one big client) plus whatever equity he has in his house.
Again, not a lot of risk in that equity figure, and it will grow with the practice, but not a lot … his practice would need to double in size before he’s worth $5 Mill. (and, if that takes 20 years, then he’s really gone nowhere, slowly).
2. Taxes: How does a professional in a professional practice protect against taxes? The answer is that they don’t: these are the soft targets for the tax systems of most countries!
So, if he doesn’t need the income, then it may very well be that residential real-estate provides a suitable solution to his tax/equity ‘problems’ … one that fits into his investment ‘comfort zone’ (assuming that his Number is circa $5 Mill.):
If he buys Tax Cashflow (or better) residential property, he may have enough income/purchasing power to acquire enough property that he can afford to wait 20 years to supplement his ‘retirement’ when he eventually sells his practice.
So, what does this have to do with partnerships?
Not much, other than he asked if I wanted to go 50/50 with him on a small block of apartments … I said ‘no’.
The reason is that our interests may diverge: and if one wants to sell and the other doesn’t, what happens?
And, what’s so special about a block of apartments that we couldn’t each buy one on our own for about half the size/price of one that we could buy together (eg a duplex each instead of a quadraplex).
And, if you’re the type of person who needs a bit of motivation/hand-holding, you can always do what a friend and I did (in fact, this was my first-ever property acquisition):
We researched and found together two apartments in a new construction.
We negotiated a reasonable price from the bank-in-possession (it was a foreclosure) since we were buying two, and a reasonable loan … then we simply executed two sets of loan and purchase documents, one set in each of our names.
Sure enough, he ended up selling way before I did … but, it had absolutely no impact on me 🙂