How to manage partnerships when investing

Setting up a great partnership is key when investing, but it must be done right. You need to build first on paper, align your goals and do your due diligence.

On a recent live stream shared on Property Hub’s Get Invested podcast, KnowHow’s Bushy Martin joined Jef Miles and Joe Tucker from Aus Property Investors, one of Australia’s largest Facebook communities for property investors.

Together the trio provided tips on how to build and maintain solid partnerships when investing in Australian property, especially when facing different challenges.

Establish a shareholders agreement

Putting a shareholders agreement in place from day one helps to mitigate risks and provide clear steps should any issues arise.

“Have a water-tight shareholders agreement right from the get go that spells out what all of the potential exit strategies are and all the what ifs. So if I get hit by a bus, what do we do? If there’s a crash in the property market and they’re vacant for months, what do we do? if the properties are damaged, what do we do?” Bushy said.

“Put all of those into a shareholders agreement, and do that while you’re friends and while you still love each other before you’ve done anything, because then when it gets ugly, then you can pull it off the shelf and all the hard decisions are made. And that pays dividends later on too, because in one of my future business exercises, we did exactly that, and when it got to the point where we decided we were going to go our seperate ways, we just dusted off and executed, and we’re all still mates and still catch up.

“So it’s the old story of build stuff on paper first before you do anything at all. And this applies not only to the arrangements you have with other parties, but the way you do property as well. If I look back now, everything we do now, we build on paper right down to the the last dollar and work out what the cash flow is going to be in year one, three, five, ten, 15 and beyond, before we even get serious about making offers on properties.”

Ensure all parties are on the same page

The success of an investment relies on all stakeholders are on the same page and have clarity on their specific roles.

“I see a lot of investors where one party is gung-ho and the other one is less, or worse, scared the hell out of it. That’s a recipe for disaster because it will self-sabotage down the track if you’re not both on the same pathway,” Bushy said.

Joe added: “And if you do get it structured correctly, there’ll be synergy that works because everyone has their piece of the puzzle. But it has to be written down. We know exactly who’s doing this, whose job is this. It makes a lot more sense”.

Do your due diligence

Bushy delved into his own ‘disastrous’ experience some years ago, which came about due to a lack of due diligence.

“So I had myself and two others, plus a developer and builder. We all went into it together. We didn’t sit down and really think about exit strategies in any detail because we were good architects and there’s some pretty average stuff being done in Alice Springs. Our view was we would build this Taj Mahal that was going to be so much better than everything else and stand out and win all sorts of awards, and that was our first mistake. And again, it took about eight months for these things to go from inception to completion, and the market completely changed over that time. So the asking price of what we needed to get out of them wasn’t even close to what people were prepared to pay,” he said.

“So it got finished, and it still looks good today, but in terms of its property performance it’s a dog. And then so we couldn’t sell it, so we had to put tenants in to rent it to try and bridge the bleeding hole that was developing because we borrowed every cent to do this thing.

“So then once it got ugly, one of the other partners got divorced. And of course that created a lot of issues because we then were forced to sell a couple of the properties and the developer that we worked with went bankrupt.  So it was an absolute disaster.

“We just really didn’t do our due diligence, we didn’t do any risk assessment, we just thought we knew it. And that was ego driven to some degree and emotionally driven because we weren’t really running the numbers. We missed the boat by a mile. So we we didn’t read what sort of accommodation the market needed, and we therefore didn’t price it the right way and we didn’t deliver in the right way. It was doomed before it started to be perfectly honest.”

Avoid timing the market

A common message, for both individual investors and those in a partnership, is to focus on the long-term, rather than trying to time the market.

“I see a lot of investors, whether it be in equities or property, trying to time the market. I think there’s a bit of folly in that. You can try and tilt the deck in your favour by looking at some leading indicators, in terms of the infrastructure, industry and growing incomes that are going to at least give you a better chance, but there’s no guarantees because you don’t know it’s the bottom until after the event. You don’t know it’s at the top until after the event,” Bushy said.

“The important thing here, and this is something I want to really emphasise, is if you’re investing for the long-term horizon or 15 years plus, then the timing doesn’t matter so much because if an area is going to go through its full cycle over that 15 years, then you’re going to be okay. So it desensitises the need to have to buy at the bottom and sell at the top,” Bushy said.

Listen to the full interview here.

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