The Beyond Multifamily series is hosted by non-residential commercial real estate investor and Best Ever Show host, Ash Patel. Ash’s goal for this series is to introduce you to the world of non-residential commercial real estate investing and teach you how to look at and underwrite different commercial asset classes.
In this episode, Ash takes on the topic of partnerships, covering partners in business, deals, and joint ventures. He also shares the six most important lessons he’s learned from mistakes he has made over the years.
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TRANSCRIPT
Ash Patel: Hello, Best Ever listeners. Welcome to the best real estate investing advice ever show. I'm Ash Patel and this is an episode of Beyond Multifamily, where we dive into topics other than multifamily investing. Today, we're going to dive into the topic of partnerships - partners in business, partners in deals, joint ventures, and I'm going to share a lot of the mistakes that I've made over the years, and a lot of the lessons learned, so hopefully, you don't repeat some of the mistakes that I've made.
My first lesson with partners goes back about 25 years. I was 22 years old, I had a full-time job, and I wanted a side hustle, so I started a web design company. And I spent all of my time after hours before hours, nights, weekends; you name it, I was working. And I hired somebody to be a designer. I was sales, marketing, back-office, customer relations, everything else, and the person that I hired created some incredible websites. We were on a roll; we had a lot of customers, we had a lot of money coming in, and all of a sudden, I had this brilliant idea to make this individual a partner with me. This seemed like a great idea at the time. I would have somebody that helps me with some of the high-level tasks, direction that we're going to take the company, when I get into situations, maybe they can help me get out of it... It wasn't a great idea, and in fact, it was the demise of this company.
So we continued to grow, we had a lot more clients coming in, we had a lot more money coming in, and the goal of this company was it was going to be a side hustle for everybody, while my partner ends up quitting his full time job, and we're making enough money to where he could support himself. At the time, he had a wife and young kids, so I felt obligated to make sure that he had enough income to replace his W-2 job that he quit.
Well, after a while this became a burden, where I would give him all the money that came in. I wasn't taking a salary. I wasn't taking profits. I was making sure that he was comfortable, had enough money coming in, and there was some resentment that came out of this. So at the end of the day, I tried to quit my job. And when I went into work, set quit my job, I left with a raise, a promotion, and an assistant, and this was so disheartening, that I was working all these hours in both jobs, and my partner was the only one benefiting from this. So at the time, I was just burnt out, and decided to give the entire company to my partner, and I ended up walking away from it. And to this day, 25 years later, he still retains some of the same clients that we had back in the day. But nonetheless, I think if I didn't make him a partner, if I didn't allow him to quit his job, and if I didn't feel the burden of him needing to replace his W-2 income, things may have been different.
The lesson learned there is if you don't have to give up part of your company, don't do it. There's other ways to reward people. You can do profit sharing, where they're not on the books, they don't have equity. If you want to sell the company, they don't have to approve of it. They don't have to sign off on documents. If you want to take a loan, they don't have to sign off on documents. Giving somebody profit sharing I think is a way better approach early on than giving somebody undeserved equity.
Many years later, when I was in real estate, I was always a one-man band. It was always just me in my office; I would find the deals, I would go in there, turn properties around, and I always envied other people that built companies with teams. People that they can hang out with, people that they can bounce ideas back and forth with, people that they can offload tasks to. And for whatever reason, maybe I was in a unique niche, I was doing value-add, non-residential commercial real estate; there just wasn't that many people that I knew doing the same thing. So I can make all the excuses that I want, but at the end of the day, I was a one-person shop. And I had a friend of mine who was a homebuilder. And he's like, "Ash, I would love to partner up with you on a deal. I think we could collectively do some damage together." And I thought, "Man, this would be great. This guy's built so many custom homes. He's a builder. That's a skill that I don't have. And I think together, we can do some great things."
So I presented him a couple of deals that I was going to close on, offered whatever partnership amount he wanted in the deals, and the one deal that he picked was an office building that we bought, and it was essentially half finished; the guy building it ran out of money. It sat vacant for five years. And I thought "Perfect. A homebuilder pairing up with me. We can turn this place around. I could use all of his expertise."
This individual that I partnered with had a big company, he had partners in his company, and he was doing very well. We did things right in the beginning. Before we closed on the property, we signed an operating agreement, we had lawyers involved... And for the Best Ever listeners that are not intimately aware of what a partnership operating agreement is, it's basically a prenup, similar to a wedding for a partnership. If things go bad, this operating agreement basically defines how things get settled. If you are at odds with your partner, where you're not even speaking, you go back to the operating agreement, and it defines how you can separate, who gets what, and it's basically a fair way to make hard decisions.
Back to this office building. So I was excited, we went out and celebrated a few times right after we closed on the property, and when time came to roll up our sleeves and get in there, he came in with his foremen, a couple other tradespeople he brought in, and we created a task list of all the things that needed to be done. Everything from replacing railings that were shoddy, replacing entry doors, installing sump pumps, finishing all the construction that was left behind, or that was done incorrectly.
I was excited, man. For the first time ever, I had some help in my business. And a couple of weeks go by, and I call my partner to follow up on how the progress is coming along, and he tells me "Yeah, you know, my guys are residential guys. They're not commercial, so they can't really handle this project." And I'm thinking "Wait a minute, electric is electric. Plumbing is plumbing. Drywall this drywall. Why is this so different?" And I don't understand it to this day, but his crew was not comfortable, or just didn't want to do the work, so it fell back on me. I had to go out, hire contractors, manage them, get everything done. It took six months to get this building inhabitable. And during that six months, I got a lot of pushback from my partner. He kept asking "When are we going to start making money with this building?" And I'm like, "Man, look, it's a process. It takes time." We bought something that wasn't really finished. We couldn't get an occupancy permit for it. It needed a lot of work. We kind of knew this going into it, but nonetheless, he kept the pressure on, "Hey, we got to start making some money on this. I've got to have some money coming in. I'm getting pressure from my wife. What's going on?" And again, it just takes time. And during that whole time, all of this was falling on me.
Finally, there was an end goal. We got this building to the point where it was inhabitable, we got our certificate of occupancy, and one night I arrange for two potential tenants to come view this building. I call my partner, excited... Keep in mind, I did all the marketing to get these two tenants. So I call my partner, I'm like, "Hey, we've got two people that are potential tenants. I think we can get them to sign a lease. Will you meet me at that building tonight at seven o'clock?" And he says no. And I'm like, "What do you mean no?" He's like, "No. That's not what I do. Hire it out." And I said, "Look, no, we can't hire it out. If we get a realtor involved, they're not going to be as passionate or as knowledgeable on this project as we are. We know this town. We know this building. We're gonna sell it unlike anyone else." And that doesn't work. He still insists that I just hire it out, and he gives me a lecture about how he built his business and he no longer has to work in his business. So he's certainly not going to work in mine. That's never how I did things, man. I'm a boots on the ground type of person. I'm the one that gets things done. So I proceeded to meet with these potential tenants, and a short time later, we ended up signing them. We signed two leases. And over the next few weeks, we may have gotten one more. And my partner comes up to me and he says, "Ash, I have an opportunity to invest in another company, and I would like you to buy me out of this building." And man, I was devastated. We put a lot of money into the down payment, we put a lot of cash, equally, into the renovations, and if I was to buy him out, we couldn't get a loan for more than what we already got out, and so I would have to come up with the cash to buy him out. I asked him, "What do you want for a buyout amount?" and he said, "Every dollar that I put into it." And man, that was a tough one.
So I thought about it for a while... And at the end of the day, he wasn't adding value. If anything, it was bringing back that same resentment that I had 25 years earlier, with the web design company. So I pulled it together, got the cash, got him out, we're great friends to this day... But shortly after I got him out - maybe it was just me being more motivated that "Now it's only me, I'm not working for free while somebody else benefits; all the work that I put in, I'm directly benefiting from." So within a few months, this building was fully leased, and I've owned this building now for probably seven or eight years, and it's always been fully leased. As a matter of fact, it is a 100% female-tenanted building, every single business owner in there is a female; anytime there's a vacancy, the tenants will find somebody to fill that vacancy, because they want to control who's in that building with them. It's been a great building.
The lesson learned there - have very clear expectations of your partner. Don't be like me and assume that because this person is a homebuilder, he is going to use his homebuilding skills and his contacts in his network and dive in and do all of the renovation tasks. I could have very easily clarified that upfront, and I failed.
You may be thinking "But yeah, you didn't know that he wasn't going to help." It would have been very easy for me to walk through a scenario... "Okay, so here's what we've got to do. First, how do we split up these tasks? When it comes to marketing the property, how do we split up the tasks? When it comes to showing the property, how do we split up the tasks?" and it would have been very evident at the time; he would have said "We're not splitting up anything, we're going to hire it out", and I would have seen that we had philosophical differences on how to accomplish this task, and it would have been a revelation; I would have known that this may not be the right partner for me. Or I would have known that this is a money partner, and not somebody that I could count on. And maybe if I'm going to do all the work, I would set aside some compensation to where I get rewarded for the work that I put in. And we could have come up with a fair solution, but I failed in having those conversations. I failed in setting those expectations, and I failed by being so enamored, again, by having a partner, wanting to build a company, and it backfired again.
Break: [00:13:22.25] to [00:15:22.10]
Ash Patel: Best Ever listeners, a bit of a side note... I've done a lot of deals on handshakes and verbals, and I had a time where I put up all the money for, I think, an eight-unit apartment building. I wanted nothing to do with residential, didn't mind helping out this individual... He's a great guy, and I thought it'd be awesome to partner with him, park some money in with him, have him grow it... I forgot the details of the split, but the renovations on this property were supposed to be, let's say six months; they ended up taking a year and a half. So we went a year and a half with no revenue; no fault of this individual's, and COVID hit, the county was fighting with the town, he was one of the victims of not getting proper permits, because they were in a pissing contest... Nonetheless, a year and a half, no revenue... I still trusted this person blindly, I still do to this day... So not a big deal.
Well, when the apartments were renovated and rented out, it came time for a refi. And we had a disagreement on if we should do the refi now or later. My expectation was we do the refi as soon as we can, and this way we get our money back and just start splitting everything 50/50. And his expectation was there'd be a period of time where he gets to collect the rents, and only pay me interest on the money that I have out. The mortgage note was minimal, because it was interest-only at the time, and I thought "Man, I don't remember having that conversation." He recalls having it, or maybe that was his expectation. Again, I don't know where the mix-up was, but we didn't put it on paper. And I've done this so many times... And if it's somebody that I could do a deal with on a handshake, I'm confident we can work out a resolution if there's a conflict. And in this case, we agreed that we're going to do the refi right away. But at the end, he walked away knowing that this was not what I expected. And at the same time, I'm thinking, "Wow, I never would have agreed to that. Like, we're partners in this."
So nonetheless, if we had put things down on paper, a simple email to each other, a voice memo, a handwritten note that we scan in later, we would have had some reference. But we didn't. And again, luckily, this is a great individual, stand-up person, still good friends with him today... And it worked out. But Best Ever listeners, the importance of putting things down on paper - you don't need a 30-page operating agreement. You need a one-page set of notes where it's things that you agree on. And if there's something omitted from there, you know that you probably didn't discuss it, so it becomes easier 18 months down the road to figure out what you actually agreed on. Please, put things down on paper.
I'm going to share with you one more story, and this one's a bit of a tough one... So I have a friend of mine who brought me a deal, and it's a huge deal. It's $8 million. It's a property that we're flipping, selling it for 12 million. And brought a great deal to me. I put up a lot of the money for it. And I'm a commercial person, he's a residential person, and he's wanting to get into commercial. He's just tired of residential. So I figured "Awesome. This guy's got a lot of skills. He's got a wholesaling company, doing well... And if we can use some of the wholesaling skills towards finding commercial deals - what a win. Because not many people are doing that."
So as time goes on, we start the formation of a commercial real estate company, we put together a lot of the pillars that we need to build this... And in his business, he has done very well by systematically building it, and it's gotten to the point where it's a machine, it runs by itself... And as we started progressing into developing this company, we started to get to work, and it was me getting to work, and this person was basically the visionary, if you will. But the problem is I'm a visionary as well, and I would prefer to hire a bunch of integrators. I would prefer to sit up top and direct people, guide people, motivate people. And he wants to do the same thing. So you have two chiefs and no workers, and things just weren't progressing.
The problem was as deals started coming in, I felt obligated -- because we set off on this path to do this joint venture, we've got this one deal in the works, we're going to make a lot of money on that, I felt obligated that any deal that comes in, we would split 50/50, even though I put up all the money; this individual doesn't have a ton of capital... So again, it became one of those scenarios where I'm putting up the capital, I'm doing pretty much all of the work, finding the deals, managing the deals, and this person - I felt obligated to give him 50%, because that was our agreement going forward. And again, we didn't have things on paper, we didn't have clear expectations... Had I walked through a scenario, "Hey, if we find a property, what's our roles?" it would have been very easy to figure out if this was going to work or not.
Nonetheless, it just put me in a precarious situation. Again, still great friends with this individual, we're continuing to do some deals where he's finding them... I just need to know that we have to define roles, we have to define capital contributions... Everybody needs to be equally-rewarded, based on their contributions, whether it's time, effort, money. And again, man, I just keep learning these lessons... So a lot of tough ones out there.
I will end this on a happy note, and I'm going to share with you that I've got two people that are family friends. And one of my rules is I try never to mix, family and money, or family and business together. However, these two ladies are probably 10 years younger than I am, and they are just absolute killers in real estate. One comes from the family office, real estate environment, managing probably a billion dollars in real estate. The other individual is someone who's been in the corporate world for a long time, went out, started a number of her own businesses, and I mentored her on commercial real estate about a year, a year and a half ago, and she's been crushing it.
So the three of us now have come together, and I think we've all been around a little bit, and we were a bit skeptical upfront, so we were cautious on how we entered this partnership. We were cautious on what kind of commitments we made. But we've been working together for probably the past six months to a year, and it's phenomenal. We're starting to put together the pillars of building a company. But initially, we all decided we're going to do one deal together, see how it goes, see how we interact with each other, make sure everyone's pulling their weight, make sure if you have to have a difficult conversation, you feel comfortable having it, and things get done. I have to tell you, we're making a lot of progress, we're doing a lot of deals. We are on the phone several times a day with each other, and the great thing is we all have different skill sets. But everybody is pulling their own weight. People are recognizing when somebody's overworked, they're proactively taking things off other people's plates... We've all did a bit of self-assessment and assessment on each other - this was very important - where we critiqued ourselves, and then we critiqued each other. Hey, what do you wish this person would do better? What are their strong points? What are their weak points? What do they need to improve on? And in terms of self-reflection, what are your strong points? What are your weak points? What do you need to get better at? What are you insecure about? And we had maybe a two-hour meeting and we discussed all of these things together. We were able to intimately get to know where each person is coming from, and figure out if there's things that one person really was not good at or didn't like doing, and the other person didn't hate as much; I doubt they would like something that one person hates... But we're able to divvy up tasks and realize that this person really despises reading leases, where I don't mind it as much, because you learn something new each time you read it... So this person knows that I'm kind of taking one for the team by doing that, and I'm helping them. So in return, if there's something that I procrastinate because I don't want to do, they will offload it for me.
But having these conversations often is very important. It took me a lot of years to be able to effectively work with partners, find the right partners, and have these difficult conversations. So Best Ever listeners, I urge you, if you are wanting to scale your business, wanting to grow your business, don't be over-eager about getting partners on board; have them tried and tested first, do a deal with them knowing that this may not work out long-term, and then build upon that if it does work out. Make sure you write things down, have difficult conversations when you need to have them, walk through entire scenarios. If you're a fix and flipper, if you're a multifamily investor, whatever you are, take a scenario and walk through the entire beginning through end, from due diligence to disposition, and envision you and your potential partner going through this journey together, and make sure each of you is okay with the tasks that you want to assign to that person.
Finally, set aside to do self assessments, assessments on team members, partners, and truly take time to identify what it is that you wish to change in somebody else, that you wish somebody would be better at, or you wish that they would do differently. Have a time where you can have these discussions, and I promise you, you'll grow from that.
I hope you learned a lot from some of my mistakes, some of my wins. Best Ever listeners, if you enjoyed this episode, please leave us a five-star review, share this episode with someone you think can benefit from it. As always, follow, subscribe, and have a Best Ever day!
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