Why All Partnerships NEED to End

Partnerships are so hard. People are all variables. There's no such thing as a perfect partnership. In fact, there's no such thing as an even partnership. We're going to talk about some principles and rules that we've implemented to have a successful partnership, what that actually means, why you need to put a defined ending in here. Partnerships are not designed to last forever except for marriage, but outside of that, partnerships have a defined ending, a defined purpose. How do you set that and how do you actually have success when dealing with other people? Hello and welcome to Multifamily Strategy. I'm Christian Osgood. Like, follow, subscribe. It helps us get this channel out to more people. We want to share these things that we learn while we're buying multifamily. I have a little over 200 rentals. We've learned a lot about a lot in a few years. Partnerships— I have gotten burned on so many. I've had a bunch that have done really well. What's the difference between them? I'll tell you right now. Number one, they need to have a defined end. Absolutely must have an end. How do you know when you're at the end of a partnership? When you've hit your goal. So when you're setting any partnership, you need to make sure everyone's moving the same direction. If one person's moving off this way, the other one's moving off this way, you're both pulling the same, you know, the same strength, you're pulling hard, if you're not headed the same direction, you're gonna go absolutely nowhere, or you're gonna end up somewhere that you didn't want to go. So in a partnership, what is the actual purpose? This is very specific. When I partnered with my first business partner, Cody Davis, the goal was we want to hit 100 rental units in the next 2 years. Do we think this is possible? He said yes. I wanted to retire my wife through this. He wanted to retire his mother through this. I wanted to build a house in Texas. He wanted to actually buy his mother that house. Our goals cost about the same and we're going the same direction with a very defined endpoint. Was it a perfect partnership? Absolutely not. We don't get along with everything, nor does anyone else. We don't always get along, though we often did. We had a lot of fun in that time. It was a very good partnership where both people pulled more or less the same the same amount of strength in the right direction. What we did find was there's some imbalances that came up. When I actually retired my wife, she came and worked full-time on the property management company. Now, when there's two Osgoods working full-time and one Cody Davis working full-time, that does not make an even partnership. And that's not anyone's fault, right? Cody couldn't have anticipated how fast we would hit our goals. So what do you do when you have these imbalances? You go back to the goal. Has anything materially changed? Absolutely. Now there's more people doing work on one side. So now basically it's twice the work, same equity. Doesn't matter. We're still on the way to that goal. Renegotiate nothing until you hit whatever goal your partnership set out. After we hit 100 units, Cody and I had a conversation. We looked at the pieces. Turns out he didn't love doing the property management side anyway. He said, hey, would you take the business and I will get the equity that you have in my original sixplex? You give that back to me, I'll give you my equity in the company. All we did was a simple equity swap. All of a sudden, the partnership was fixed. There's no more tension, there's no more dissonance. We have a partnership that is well aligned. We hit our goal. Now, at this time, you look at where your universe is at, where you both want to go. You can choose another investor, and that next adventure is going to have its own set of goals, its own defined timelines. For us, we made the push to another 100 units. And we went, hey, hospitality is something that we did on that journey, not our favorite thing. We need to outperform on that asset or otherwise pay down our loan if we want to pull hospitality out of our universe. So goal number 3 is we need to make some more money in our business to go ahead and buy out partners and close out the one deal that was not well aligned with our original goals. So 3 different adventures, same partnership. It looks different. Way different at each and every step. So this is one of the first things to remember. Another thing to remember, goals change, people change. If you don't have great communication, that's rule number 2, you need to be constantly communicating with partners. I had a deal, this was in the greater Seattle area, a 7-unit deal. The partner on that transaction decided partway through he wanted Cody and I to pay for the vacancy. Every month it was vacant even though none of us had contributed money. He felt that, oh well, because you guys live closer, I want you guys to manage it for free. And if anything is ever vacant, you owe rent to me because I think you're being wasteful. The guy lived out of state. He never contributed one thing to the LLC. Everyone had even money in the deal up front. I don't know where it went off or why this person is insane. However, what I do know is that we could have had more communication with them if we were regularly communicating. There was more talk around What are the goals and when are our check-ins? I don't think this confusion would have happened. This really happened at about year 1.5. We were having all sorts of problems with each other. It got really nasty and it got to the point where we had a fantastic deal and we, we exited it profitably. We sold the deal, but we didn't get to finish the project, which would have made astronomically more money. We lost the opportunity because we did not do a good job of communicating with the partner. One other example. One of our first deals, we had 3 capital partners. These were designed to be silent partners. The goal was to double their money in 5 years. Now, for many of them, we did that in 11 months. One of them reached out— this was about 6, maybe 7 months into the transaction— and said, hey, I want to be cashed out. I wanted to be more active in this deal. I really wanted the adventure doing it together. What we missed when we talked about his goals, he communicated a monetary goal But we didn't realize that he was really doing this not just for the money. In fact, not even primarily for the money. He wanted to do an active project with people. He wanted to help coordinate contractors. And we didn't want that many people in the driver's seat of the deal. Communication is key. Understand, yes, the goals, but then check in really regularly. Communicate, this is where we are. And most importantly, communicate when there's problems. If you have a problem going on, you're like, hey, I'm going to try to handle this, not bring it, bring it up to everyone. It's going to be okay. And then it doesn't get resolved. You have to come back and say, hey, I didn't tell you guys this for months. But we actually have a problem and it might cost us some money. Those conversations kill partnerships. Communicate the wins, communicate the losses, but be in constant contact with everyone who you are partnered with. One, it's gonna protect you against a lot of legal, but two, it's going to make for an easier transaction where you have a much higher chance of success. Number three, and this is my last one here, in a partnership, just like a marriage, just like a friendship, any relationship, you need to have humility. If there is one person there who goes, I'm doing more, I'm the most important, or we're going to do what I say— if you have a partner who is a tyrant, they will destroy all of the fun and the entire partnership. On the other end of the spectrum, don't be the partner who doesn't do anything. I have a ton of those. Sometimes you run into partnerships, and I'm often in this seat, where I'm doing 95% of the work with 50% of the equity in a deal. Now, this is by no means every partnership I have, but it does have a tendency to happen where you're just massively outworking other people. It's really important in your operating agreement to lay out this is what the anticipated roles are for each person and some of their responsibilities so that there's not any ambiguity. We have what we call the lab partner syndrome. If you've had a chemistry class or a physics class in high school where you do group projects, And there's always, and they're almost always the athletes, but you have the popular kid who pairs up with a bunch of the nerdier kids, the, the, the science geeks, and everyone does all the work and they sit there and they just kind of goof around and delegate and they're like, oh yeah, this is fun. We're doing well on the project. And they don't actually ever do anything. If you end up with them on your team, you have to find a way to try to avoid that. When it happens, go back to rule number 1. Finish the project, have the conversation, don't do more deals with them. Don't continue to make the same mistake. However, you can avoid this if you have very clear rules on you will do this task, this task, and this task, and you actually have the communication to follow up. The nice thing with the 3 rules is they all reinforce each other. So set clear goals with a clear stopping point for the LLC. Don't renegotiate until you hit that point. Have fantastic communication, and then designate clear roles with accountability for every single member without being a tyrant. If you can do these things, you will have a much more successful partnership than several of the ones that I had where I violated one of these three rules. I hope this was helpful. Again, share this with a friend. If you're looking into partnership or you have someone else you want to partner with, write down these three rules. I wish I did. I hope you find this helpful. We will see you again on another episode of Multifamily Strategy.