• How to Structure a Joint Venture Real Estate Deal

    From a425couple@21:1/5 to All on Fri Sep 7 15:14:41 2018
    XPost: alt.economics


    How to Structure a Joint Venture Real Estate Deal

    Real Estate Joint VentureOur first joint venture real estate deal was
    the very first property Dave and I bought together in 2001. We were
    dating at the time and pooled our resources to do the first two deals. I
    had excellent credit, $16,000 in savings and zero debt. Dave didn’t have
    any savings but he did have money in RRSP’s, which he cashed out to
    invest in our properties. We both had good jobs at that time, although I
    was leaving mine to do my MBA.

    We moved into one of the properties so we could put less money down and
    still qualify for good financing.

    After that, we were out of cash and I was now a student in Toronto so we
    had to find other ways to get deals done that didn’t require cash or
    bank financing.

    Despite the cash challenge, we still managed to add another four
    properties to our portfolio in 2002 and 2003. Two of those properties
    were our first external from us and we did a joint venture with a
    friend. Dave also made some money off an assignment deal – finding a
    great deal and assigning it to someone else for a fee (also called wholesaling).

    Since then we’ve largely relied on other people’s money to fund our deals.

    During 2010 – 2012 when we were aggressively growing our portfolio and averaging one new house almost every month, the majority of our
    purchases were joint ventures.

    The majority of these deals were structured so that we were the managing partners (finding the deals, negotiating them, hiring the teams and
    overseeing the renovations and overseeing management) and our money
    partners came to the table with financing capability and the initial
    investment capital required (e.g. down payment, closing costs, 2 month
    reserve fund).

    It was a fabulous way to grow our portfolio quickly and reduce some of
    our future costs because our partners will split any future costs (and
    profits) with us 50% / 50%, but partners also can be limiting and always
    bring additional stress to handle when there are issues (more on that in
    a minute).

    Options for Structuring Joint Venture Real Estate Deals
    Structure JVs There isn’t one right way to structure a JV. Over time
    you’ll discover the way that is the most fair for you and your partners
    given what each party is bringing to the table (Also see – Real Estate Investors Checklist for Working with JVs).

    We look to our partners to put in 100% of the initial investment capital (typically the down payment, closing costs, 2 months of a reserve fund
    and minor renovations) in exchange for 50% ownership in the property.
    When we sell the property, their initial investment is repaid first,
    then any capital we have invested, and then we split the proceeds 50% /
    50% as per the ownership.

    As long as we can reasonably suggest our partner is going to get 10-15%
    per year return on their capital and they don’t have to put in any
    effort, we believe it’s a fair exchange for them and for us. Those are
    our measurements, by the way, they don’t have to be yours.

    It’s about the return and the limited amount of involvement they have in
    the deal – not the share of the deal they own. These folks are busy – usually successful businesses or careers, families and hobbies they want
    to focus on. They want to be in real estate but they don’t have the time
    or inclination to become experts. That’s where we come in. We’ve spent thousands and thousands of hours becoming experts. While we may only put
    40 hours into getting a deal done for our partner, that doesn’t account
    for the $100,000 in education and 10,000+ hours we’ve put into learning
    what to do to minimize risks and maximize returns.

    Remember all you bring to the table in your own business – whether it’s your first deal, or fifteenth. If you don’t feel you bring enough to the table then you need to build on what you have – take more courses,
    improve the quality of your team, get to know your area more by touring
    more properties and walking around. One of the most critical things you
    can do is become an area expert.

    We prefer the traditional 50% / 50% structure, but that is far from the
    only option. You can create whatever structure you feel is fair given
    what you’re bringing to the table. For example, if you are new to the
    game, and are not bringing a ton of experience, perhaps a 30% / 70%
    structure is fair with you getting 30%. This is of course if your
    investor is putting in all the capital and qualifying for financing. If
    you both are splitting the capital contribution and qualifying for
    financing, then a 50% / 50% deal is more fair (again if your experience
    is limited).

    There are endless options for how you can structure a Joint Venture Real
    Estate Deal but here are a few others we’ve done:
    • 30% / 30% / 40% – if there are two cash partners and one managing
    partner or maybe one person is going to be a tradesperson offering their
    skills to renovate in exchange for a share of the property (essentially
    they are putting in sweat equity while someone else funds it and someone
    else is the managing partner). It’s always critical to lay out roles and responsibilities in your agreement but it’s even more important in an arrangement like this.
    • 60% / 40% – we’ve done this two ways. Once, when we have had to put in some money and do all the work – we took 60% of the deal. Two, when we
    felt that someone was bringing more to the table than our usual
    arrangements we would offer them more equity. Perhaps they are funding a
    large renovation and leaving that cash in there and we need to increase
    their equity to ensure they get a great return, or maybe they are
    offering some skill in addition to the cash or if we were new, it could
    be how we get the deal done if we aren’t putting any cash into the deal.
    • 75% / 25% – We’ve done this when we put the down payment in but couldn’t quality for financing. We gave someone 25% in exchange for
    their name on title and finance-ability. It would not be our first
    choice in an arrangement but we were in a pinch and had already lifted conditions. We needed to close on the deal and this got it done.
    • 50% / 50% – Someone already owns the property and is unable to sell.
    They don’t want to hire a property manager for whatever reason. You can
    step in and offer to oversee everything in exchange for 50% ownership in
    the property. Their ‘initial capital contribution’ can simply be the
    equity they have in the property as of that date (get a property
    appraisal to determine this value relative to the mortgage owing). We
    did this when someone we met at a club meeting wanted to turn their
    property into a rent to own to sell it but didn’t know how. They also
    wanted to go away traveling and didn’t want any hassles.

    Simple Structure Is Best
    The most complicated structure we did almost completely bit us in the
    butt because one of the partners got divorced (the 30, 30, 40 split).

    We brought two partners into one deal. We all brought money to the table
    but in different amounts. One couple put less in as they went on title
    and qualified for financing. Between us and our other partner we covered
    the remainder of cash. We split the deal with them 30% 30% and we got 40%.

    A few years later the couple got divorced. Thankfully they were able to
    settle things amicably and were able to agree to keep the property. Had
    their divorce gone the ugly way of many, the property would have gone on
    the chopping block and we would have been put in the awkward position of
    either selling it prematurely to get them out, or having to buy them
    out, switch title and find our own financing. Not always an easy thing
    at the best of times, but we would have had the added pressure of making
    it fair given our other partner as well…

    Thankfully it didn’t come to that and we all still own this property
    together but it was a good reminder that it’s best to keep your smaller
    deals one partner to one property. Every partner brings their own set of complications so why make it harder on yourself than you need to by
    mixing and matching?

    Word of Warning: JV’s are Limiting and add stress – Use with Caution
    One of our rent to own properties failed. The tenant buyers chose not to
    buy the property from us, as per their option, and rather than selling
    it in a slower market, we chose to convert it to a regular buy and hold
    rental property.

    The property barely cash flows as a regular rental, but it’s a perfect property to add a legal suite to. It would potentially be one of the
    easiest places we’ve tackled to add a legal suite to because of the
    location of plumbing, electrical and the heating source. We approached
    our partners with the proposal to add a suite. We were going to split
    the cost of renovation with them, as per our 50% / 50% ownership with
    them because we have already owned it for several years. We would charge
    a small general contractor fee just to cover some of our costs of
    overseeing the work, but otherwise we were agreeing to take on a ton of
    work and time to improve the overall performance of the property. This
    move would have turned a neutral cash flowing property into one that is
    giving us at least $600 a month. Despite all the effort required to do
    this, it made perfect sense to us. If we owned this property on our own
    that is what we would do.

    Our partners said no. Not because they didn’t like the idea, it was
    because they didn’t want to invest anymore cash into the deal.

    They want to wait until the market is good enough to sell and then they
    want out. Getting them out now to make the change ourselves is more
    complicated and cost ridden than it is worth to us. It’s frustrating as
    we would much prefer it to be a solid holding property with strong
    cashflow, but it’s one of the limitations and issues with partners.

    Joint venture real estate deals are a great way to grow your portfolio
    when you’re short of cash resources for down payments, struggle to
    qualify for financing, or want to work with other people who bring
    something to the table that you don’t have. They are long term business relationships, however, and need to be carefully considered to make sure
    it’s a fit and that the structure you select makes sense given what you
    are all bringing to the table. Hope this gives you a few new ideas.

    Other Articles on Joint Ventures & Using Other People’s Money:

    How to Write a Comprehensive Real Estate Investment Deal Summary
    (Business Plan for Real Estate Investors)

    5 Things Every Real Estate Investor Should Know about Money & Credit

    How to Use RRSP’s to Fund Your Real Estate Deals

    5 Tips to Create Credibility as a Real Estate Investor

    When to Sell a Real Estate Investment

    Julie Broad

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