Posted by Leo T. Ly on April 28, 2017November 20, 2017
When I first got the idea of penning this post, I was so tempted to headline it, “Friends With Benefits.” After conducting a little research at Google with the exact same search terms, I decided that I didn’t want my post to be appearing in the same search result as the ones that I got when I did the search. My post is about the financial benefits and synergies that I received when I partnered with my friend to invest.
With my friendship/partnership, I only received the financial benefits and nothing else. I don’t want to give people the wrong idea or the perception of any “additional” benefits when partnering with someone to invest. That’s what I am going to share in this post, the “financial” benefits when you form an investment partnership.
Friend First, Partner Second
I have a childhood friend that I’ve known since I was 10 years-old. We went to school together. He was the best man at my wedding and I was the best man at his. I know that I can trust him and he knows that I’ll have his back if he ever needed me. With such a close bond and a great deal of trust between us, it makes a perfect match when it comes to finding a partner to invest with. After all, if you can’t trust that person, then partnering up will be a bad idea.
Similar Investment Philosophy
Being friends for almost thirty years, I can definitely say that I know him very well. I have detailed knowledge of his personality, financial background, income and money philosophy. Suffice to say, he also has the same information on me because we have a lot of things in common and share very similar views on many things. Investment philosophy is no exception. We both are very disciplined savers. We take advantage of income tax rules and borrowing money to invest rather than for consumption.
The Ground Rules
Before we partner up, we sat down for a beer and discussed a few ground rules. We agreed to be transparent with each other and to always have our communication line opened. Anything can be discussed without judgment. If we encounter any challenges or obstacles, we’ll put our intellectual and financial resources together to overcome any challenges that come our way. The decisions that we make will improve and strengthen our partnership emotionally and financially in the long term.
Lower Financial Risk
When you invest alone with your own money, more resources are required. You have to put a greater amount of your own money at risk. This leads to less flexibility with your own finance. You may be cash strapped if too much of your money is invested into one investment. On the other hand, if you invest with a partner, you’ll most likely have to fork out less cash comparing to investing alone. You’ll be able to share the financial risk with your partner, which in turn lowers the risk for both of you. There will also be more wiggle rooms for you to make mistakes in a partnership. Overall, the combined financial power of two people is far more superior than one individual alone.
Combined Expertise
Having a buddy to be by your side and in battle with you cannot be underestimated. One great example is Warren Buffett having his buddy, Charlie Munger investing by his side all these years. Even though Buffett has gotten all the glories throughout the years, I think Charlie Munger deserves just as much credit as Buffett for Berkshire Hathaway‘s success.
For my own partnership (I am in no way saying that it’s even close to Buffett and Munger’s partnership), I feel very fortunate to have someone investing by my side and to be able to brainstorm solutions with me when I am facing a challenge. Someone who is able to mask my weaknesses with his strengths. When we combined our skills, expertise, and resources, the combined result is much greater than our own individual results alone. The sum is greater than the combined individual parts. Just think of it as 1 + 1 = more than 2.
Increased Human Resources
Another obvious benefit is the increased human resources and man power to do tasks. If you’ve ever invested in a rental property by yourself, then you’ll definitely appreciate having a partner. You can divide the administrative works such as reporting income taxes, collecting rent cheques, paying bills or handling tenant inquiries. Take turn handling tenant service calls and showing the property is much easier with two people. You’ll also have another person to help you take care and repair the property. After being a landlord for about four years now, I can say that owing an investment property with a partner is paramount.
Camaraderie
When you have a great partner to work with you, the camaraderie makes the work an enjoyable task rather than a choir. Both my friend and I don’t mind spending our free time working on the rental property. We are very satisfied and proud of the work that we completed at our property. Most of the time, our wives think that we had a guys’ day out rather than labouring our butts off to maintain our property (just a side note, we are pretty handy ourselves and can complete most property maintenance work around the house and we prefer not to hire overpriced contractors). The main factor for the success of our partnership is that we enjoy being around each other and we work well together.
Drawbacks Of Partnerships
Many people shy away from partnering with their family members or friends to invest due to the fear of an unsuccessful partnership will lead to a terrible end to their relationship. This fear definitely did materialize in many people’s unsuccessful partnership. From bad luck to incompetence to bad timing and to a lack of financial strength, these uncontrollable factors can cause any partnership to fail. However, I believe other controllable factors can be addressed and overcome to make any partnership successful.
The controllable factors that affect the success of a partnership are shared vision, shared power, shared profit, a difference in opinion, financial transparency, and expert knowledge. By addressing these controllable factors we are able to reap the benefits of our investment partnership. At the same time, the partnership will strengthen both partner’s financial positions.
We Share Everything
In order for our investment partnership to survive and thrive, the partners must share a single vision, goal, controlling power and profit. Our vision is to combine our finances to help each other build wealth in the long run. Our goal is to make money with our investments in the real estate market. We’ll put our ego aside and use our combined intellectual abilities to make the most informed decisions that will benefit us in the long run. The profit or losses will be shared equally between the partners.
Difference Of Opinions
Since the start of our investment partnership, I felt that we had been very fortunate not to have that many occasions where we have a difference of opinions. Whenever we are faced with a challenged or have new ideas, we always analyze the situation together and come up with alternatives to minimize our risks and maximize our benefits in the long run. The lack of an ego from both partners also makes settling our differences easier and more efficient. There is no need for tiebreakers. Oh yeah, when we make decisions, we always aim to have a win-win outcome rather than having a strict winner and a loser.
Transparency Issues
One of the most common issues that I’ve heard about the failure of a partnership is the lack of transparency in finances. Often, there is one partner having control of the finance and others don’t have any visibility into the financial health of the partnership. When financial issues appear, partners started to be suspicious of each other which often result in conflicts or resentments among the partners.
For my investment partnership, we started by setting up a joined account where both partners have equal access to the account. When there are expenses, we’ll have to provide receipts. This arrangement works well in two ways. We can manage expenses transparently and have documentations when we report our income taxes. As a result, no partner will be able to claim expenses without proof. Another practice that works well for us is that we always consult each other before making a purchase. Both of us will try to outdo the other when it comes to saving money. We get to brag to the other for a while when we save the partnership money and we do take our bragging rights very seriously.
Let The Expert Lead
Other drawbacks that cause major breakdown of a partnership are control and expertise. Everyone wants to lead, but not everyone is an expert in all areas. For example, it’s very often that the partner with the most capital invested in the partnership leads and set the direction of the venture. However, not everyone is a good leader and the partnership suffers if the partner invested the most resources lacks leadership skills and vision.
We overcome the power and control issues by letting the individual with the expertise in that area lead. The other partner will provide his support. For example, my expertise is in the real estate and finance areas so I will be responsible for setting the budget for our operation and manage the revenue side of our operation such as setting rental rates. On the other hand, my partner’s expertise is in renovation and organization. He’ll be leading the property maintenance and expense side of our operation such as paying all the bills on time.
My Two Cents
In order to fully benefit from investing with a partner, there must be a common goal and vision between the partners. They need to trust each other to have the partnership’s best interest in everything they do. They must be transparent and leave their egos out of the equation. Lastly, working to overcome all the controllable factors that don’t provide benefits to the partnership is crucial to the partnership’s success. Invest together, benefit and succeed together.
Have you invested with a partner before? Who would you choose as your investment partner? If you have been in a partnership before, what made your partnership a success or a failure?
