Partnership Paradigm: Part 2 – Up and Running
This is part two of a three-part series documenting the creation, maintenance and ending of a partnership we had for our first real estate investment. Read Part 1 here.
Our Colorado Springs properties were in our hands the spring of 2018 and we were excited to get investor experience. It wasn’t long before the marketing photos were taken and the main house and the carriage house were listed on AirBNB and VRBO.
At this point, my involvement with the investment became minimal as we awaited the arrival of our first child. Chad took on the responsibilities of checking the management reports. We met with our partners a few months later to discuss the property and operations. Later, we did monthly video calls.
Chad reviewed the budget and all the backup whenever the reports popped up in our inboxes. This included information from the property manager (PM) that our partners hired, maintenance items (if a lamp was replaced or if any repairs were needed) and bills from utilities to taxes.
Chad had a hard time figuring out where the data was coming from and how it added up. He reached out to our partners for clarification. They did not immediately have answers when we questioned the spreadsheets the PM had issued. We asked for clarification and either the PM refused to provide answers or our partners did not put the time in tracking down the information. Eventually, we did hire a new property manager, which we hoped would mean greater transparency.
When the financial reports were issued monthly, profits were also disbursed. In several instances, those funds would need to replenished the following month to cover expenses. We agreed to have the reports and the profit disbursements quarterly to prevent this. Additionally, we wanted to give our partners more time to prepare the information so they could get information about items they knew we were going to ask about. We hoped this would help with transparency and diligence in preparing the books.
By January 2019, Chad and I had enough capital saved to purchase another property. We scheduled a meeting with our partners to strategize for our next investment.
Our partners surprised us with the news that they were not interested in managing another property. They planned to start their own business in a different industry. We appreciated their being very clear about the future of our partnership. We were disappointed, but later realized it was a blessing in disguise.
Chad and I began looking into other types of real estate investments and researching strategies and markets.
The year went by and we hoped the quarterly reports would become more clear. However, our questions regarding bookkeeping continued to go unanswered. Chad continued to struggle to understand how the information was compiled. Frustrated, Chad spent a few days during Christmas break to create a spreadsheet that would help better organize where money was coming in and how it was being spent.
Despite the new spreadsheet, the bookkeeping did not improve and it was a sore point to request the information be populated so we could review the financials.
Chad did his own audit and found that our partners took withdrawals from our business account, only to put them back as it seems that they were confusing their other business accounts with this one. We asked questions about some of the money taken out and the answers were not clear. While bookkeeping was supposed to be our partners’ responsibility, they did not put the effort in to sort out the issues. Chad was able to track down the origins (and returns) of the funds. When discrepancies were found or it seemed that our partners had taken money out of the business account in error, they didn’t challenge us and agreed to reconcile the mistakes.
We continued on with Chad reviewing and correcting the financials as much as he could. Then the year 2020 was upon us. COVID-19 ransacked the world and crumbled the short-term rental business. The final chapter of our partnership began as we navigated real estate in a pandemic.
The common theme is we did not request enough information at the start of our partnership about how things would look once we started operations. We should have learned more about how partners operated their own short-term rentals with regards to:
- Bookkeeping – Chad wound up making a spreadsheet to more thoroughly account for costs, income and divisions of cost/profit in the partnership. We should have asked how they do their accounting on their properties and the level of detail to better understand their processes. Doing this may have provided a window into their diligence (or lack of it). At the same time, it could have helped them understand our expectations.
- Tenant Placement – we should have found out how they planned to manage the property. Hiring it out wasn’t a problem, but it’s a good question to ask when forming a real estate partnership. It’s also a good idea to ask any hired company for sample invoices so you can see how they bill. This will allow you to better comprehend and track expenses, especially when it’s time to file taxes. We may have found out sooner that the property manager was not very transparent and not hired him in the first place.
- Disbursing profits – Understand the nature of your rental. STRs tend to have high and low seasons so make sure you aren’t taking out profits too early otherwise you will have to deposit money back into company accounts. Long-term rentals provide steady income so the “low” season may be when a lease ends and a new tenant needs to be placed.
The more you know, the more prepared you can be. The more clear your expectations, the easier it is for everyone to understand what they need to do. When partnering, you should ask for examples where it makes sense. For us, we may have avoided some frustrations by talking through in more detail how expenses were being tracked. We also could have asked for ledger for the business bank account so that all transactions in the bank account would be noted. If a partner did accidentally take out money from the wrong account, it would be easier to track funds and remedy any errors. While we did change the property manager, more accountability should have been enforced to provide transparent documents as to how and what we were being charged for those services.
Lastly, sometimes you don’t know what you don’t know until you get into it. With this property under our belt, we got smarter from letting experience be our teacher and we took A LOT of notes.
What would you do differently if you were in our situation? Share your thoughts below or e-mail [email protected]