Let’s say you have a full time career but want to invest in Real Estate. You don’t have the time for due diligence and seek smart investment opportunities.
You probably don’t want to deal with tenants or other rental property maintenance, so you’re looking to find out about a real estate joint venture.
The Real Estate Joint Venture Defined
A real estate joint venture or JV is when two or more parties come together for a real estate transaction.
In most cases there is a ‘money partner’ (MP) who is financing the real estate investment. They put up the initial capital to buy the property and a ‘real estate expert partner’ will take care of finding and maintaining the real estate investment from start to finish.
In this typical structure (but not limited to) both parties own half of the investment return and asset.
The real estate expert does all the work for the term (which is usually three to five years) while the money partner enjoys their freedom – WITH the security of a true hands-free investment.
When the term is over, the asset is sold and the jv money partner receives all of their initial capital first.
The left over profit is split between the parties as defined in the real estate joint venture agreement.
The Real Estate Expert is ONLY paid based on the performance of the property; so if the money partner does not make money, the real estate expert does not make money.
Great Idea If You’re a Private Money Lender
So as a private money investor wanting a secure a real estate investment without ANY of the work involved, a real estate joint venture is a very attractive option.
Think of it this way:Â you invest 20-25% of the asset value and own at least 50% of it while you continue with your career, maintain your income and benefit from the tax savings the investment generates such as depreciation or loan interest deductions.
Find a successful Real Estate expert and ask to see their portfolio. Once you are convinced they know how to generate above average returns, they have a system in place, then jump on the gravy train with them!
Hi Joey, I hope thing are going well with you over all!
If it's not too much to ask, I would like your expertise on the subject. In terms of a JV scenario where the expert partner manages (do the PM work) the investment prop. Do you charge a fee? Is it fair to charge a fee? Or would it be part of my share as the expert partner to do the work?
Jason
Hey Jason!! Never too much to ask – There are two different schools of thought but my answer would be to charge the standard fee. The reason is because as the expert I would imagine you hiring a third party PM company in the long run anyway. Once the property / JV partner is used to paying this fee, it will not come as an added expense. The second reason is that you have to value your time like anyone else. What you ARE giving to the joint venture is ALL your ***et management time, like paying the bills, coordinating tenants move in, move out, inspections, handy people, emergency issues, bookkeeping, advertising etc…you are also adding your expertise of the market, where to buy and why. You are also not paid for any of this work until the investment comes out on top only after they get their money back. So one could argue the $100 / m you make in PM is being paid, but what happens when you hire someone to do it? Does that make sense?
The last point you ask about is totally up to you and it's nor wrong or right. If this is something you can ADD to value package a JV and it's worth it to YOU and THEM, do it.
Here what do you thinks of this case study? Is this fair for all parties involved?
Investor A:
– Current owner of investment prop
– Wants to hands off operation to investor B (me)
– Want 60% OVER AND ABOVE current equity
– Will remain on title
Investor B:
– Puts in $30K
– For 40% OVER AND ABOVE current equity
– Do 100% of the operation
– Takes 100% cashflow for the entire JV term
– Will be on title and be added to the mortgage.
The property:
– Appraised 6 months ago for $330,000
– Investor willing to price it for the deal at $315,000
– Remaining mort. blance about $235,500
– Use the same mortgage (3.8% closed 4 years left)
– All suites are fully rented at $2200
– Cashflow of $600+ (after dept service, reserve fund, R&M, tax, insurance, utilities)
Thank you in advance!
Hi Jason,
Remember, each opinion is that of the author and if a deal seems right for YOU, then that is all that matters. That said, on the surface looking at this, I would consider that you are putting in 30K for 40% of the deal and 100% of the work. That pops out at me. Simply, the current owner deserves to have his equity built over the time he had the property. You can come in on the deal at today's value and take your cut. That could be 40, 50, 55 whatever it is without putting money in. You are essentially doing a reverse JV as you are taking over the work while he leaves all his capital in. I'm not sure if you can be added to the mortgage without re-applying for the mortgage again, so the best is to leave him on title and you register the JV agreement against the property. The one thing I'm not clear on is does he get 60% of the cash flow OWED to him once you sell? If not, he is basically asking for the cash flow upfront with your 30K and he keeps his equity plus gets 60% appreciation. That's a sweet deal for him, how do you feel about it?
Hi, Joe, i knew you through REIN, which brought me to your website. Thank you for all the wonderful articles. I have a question regarding structuring a JV deal. A friend of mine has shown the interest in working with me to invest in the rental properties. I introduced the standard REIN structure, she puts the money down, we both qualify for mortgage, then split the profit. She felt a bit too much about the 50% ownership goes to the manager. I asked her to fill out the questionaire sheet, from which, I learned that she wants to get involved into the management process, such as purchasing, financing and sale and wants to get approved with all the expenses. She did express that she does not like the detailed operation though. My thought is she is more looking for a coach instead of a partner, she wants to learn the business. However, I am not in the coaching business. I want to make this work for both of us, is there any other way to make it work? She does say that she will refer other investors to me if the first deal work, what is your thought about this?
Hey Angela!!!
I'm glad you like the articles!! This was an old one LOL 🙂
The issue is, there really IS NO standard. From all my experience I can tell you it's much more important to find out what your partner wants BEFORE you introduce any type of structure. It's fine to "suggest" the 'standard' way of doing things, but as you have mentioned, she is not wanting a typical structure because she wants to be more involved. However, purchasing and financing and sale are really "easy"…it's the MANAGEMENT of the assett, the daily operations that take the time and effort. From what I understand, she DOESN'T want to do that and that's why YOU are of major value to her. Let's be real…ANYONE can go a 'shop' for a property because it's fun, exciting…they may also deal with 'financing' (although I'm unsure of what she really means) but then when it's all said and done, they want to walk away from all the issues of tenants, maintenance etc. At the SAME time, she wants to control all the expenses. While that is a smart business move on her part, there has to be SOME level of trust for you. What I do is declare how much I'm allowed to spend without approval. I don't abuse that and always report to my JVs … however, if a relationship starts with very little to no trust, I'm not sure it's the way to go.
That said, if she want's to 'shadow' you, like a coach…then SHE must be involved with the daily operations also. If it seems I'm harsh, it's because I beleive you bring massive value to the business. When someone tells me they'll 'give me more' business if the deal works, that's great, but I don't build my business on speculation … truthfully, if you're doing what you say you're going to do…EVERYONE will refer business to you.
My suggestion is to sit down with her and ask her "what does a fair deal look like to you?" That means asking her what she expects to contribute…what does being invloved in the purchase, financing mean? Then, if you feel it's unfair because you're going to list EVERYTHING you're doing at the beginning, for five years and during the sale…then you have a choice to make.
In the end, a fair deal is one that BOTH people are happy with … and what I teach to all my clients is NEVER chase the money, decide the type of partner you want FIRST, then attract them into your life. In fact, it's even EASIER to decide who you DON'T want to work with because that will eliminate most of the people (even if they're your close friends) and zoom in on the ones that fit your ideal partner.
I hope that helps you a bit, if there's anything else, please let me know.