Screening Joint Venture Partnersby
This week a woman other than my wife, Mom or sister told me she loved me.
I had just called our partner to let her know that everything is lining up nicely for our tenants to buy the home that my partner and I own. I told her that when they do that she will have earned about 18% on her investment in 13 months.
She exclaimed “Dave, I love you!” And when I asked her if she had any plans for the money she quickly said, “Let’s do it again.”
She’s obviously happy with the results and with the partnership. And that is because she chose her partners carefully. In her case, she focused on the people she was investing with not the deal. She didn’t do much due diligence on either of the deals she has done with us (and we doubt she’ll do much on the next one we’re doing together either), but she did do her due diligence on us. She told us right from the start that she was giving us her money because she trusted us, felt confident in our expertise and liked our rent to own program. And for her, a return was important, but it was just as important that she not have to do anything at all to earn that return. She wasn’t interested in throwing her money into a mutual fund and hoping for the best but she’s a busy business owner and triathlete and she doesn’t want to worry about her investments (nor about tenants and toilets!).
And, honestly, the most important thing you can do is find good, experienced and trustworthy people to invest with. I, personally, suggest that you check into every deal you’re investing in as well, but at the end of the day it’s the people you have to trust and believe in because they are the ones that will make the decisions that will either make or break the investment.
Where to Find Joint Venture Partners
These days the easiest way to find prospective joint venture partners is to do a search online. Most of the folks running an investment business like we do have a website or blog dedicated to explaining the types of deals they do and providing some sort of education and information. You could do a search for real estate investment opportunities and your area to find someone local.
But, personally, I think the best way to find someone to invest with is to drop into a couple of your local real estate investing club meetings and ask your friends and family if they know of anybody successfully investing in real estate.
Once you find a few different people meet with each of them. You’re investing as much in the person as you are in a specific deal so you want to make sure the person you’re investing your money with checks out.
What to Ask Your Prospective Partner (& yourself!)
- Does this investment fit my goals? In the case of our partner, the most important thing to her was to get a good return without having to do any work once the papers were signed. We offered that solution for her so it was a perfect fit. If you want to learn about real estate along the way you might want to find a partner that is willing and able to teach you as well as invest your money. If you really want to be hands on with your deals then you will be looking for somebody that will work with a hands on partner and perhaps give you a greater share of the deal in exchange for your efforts. You have to know what is most important for you – and then check whether this prospective partner and the deals they are doing will fit with your goals.
- What is your track record? Past performance doesn’t always indicate future success but how this question is answered can tell you a lot about someone. We’ve earned one of our partners over 700% return on his investment in six years. We also earned the same partner 110% on another investment in five years. When I am speaking with joint venture partners I rarely mention either of these examples because I don’t want to set expectations that high when much of that return was thanks to a rapidly increasing market. Sure – I did the research to know those areas were poised for growth but I had no idea they would sky rocket in value! Instead I will tell prospective joint venture partners that I have never earned a partner less than 15% per year. I will tell them that there are no guarantees in anything, let alone real estate but because of x, y and z I feel pretty comfortable suggesting a 15% – 20% return on most of the investments we do is very likely. Listen carefully to how someone answers this question. If they tell you about their best deals and don’t mention the worst, dig into the bad deals they’ve done to get a sense of how they have learned from their past experiences. And to get a sense of how honest and upfront they are. Look for a decision making process and an ability to take responsibility for the bad deals. That’s far more important than finding someone who made a 700% return on someone’s money one time.
- What is your credit like? Can I get a copy of your credit report? We’ve said this repeatedly at Rev N You – if you can’t manage your own finances then how can a partner trust you to manage theirs. So if you’re someone looking to turn your money over to someone else I think you have every right to understand how your prospective partner is managing their own money. We no longer qualify for bank financing but it has nothing to do with our credit scores. Both Julie and I have excellent credit scores and would proudly show any partner our credit report if they asked – but nobody ever has. But personally I would never trust someone else with my money if they can’t even manage their own. Nobody loves MY MONEY as much as I do so if somebody else isn’t loving their own money how can I feel comfortable they will give mine the attention and care it deserves?
- Do you have references? Ask to speak with one or two of the people they’ve partnered with before. If they’ve never partnered with anyone you could speak to present or past coworkers. I believe a good indication of how someone will handle themselves in their investments is how they handle themselves at work. If they were good decision makers and got along well with others at the office then there is a very good chance they will get along well and make good decisions on your deals.
What to Find Out About the Deal
The majority of our partners get high level details about the deal(s) we are investing their money in, but most of them never go out to see the property. As their partner, I am fine with that, but as your investing coach I highly recommend you ALWAYS go and check out the deal yourself. It’s not about second guessing the expertise and experience of the person you’re working with, it’s about covering your butt. Remember – nobody is going to love your money as much as you do – so make sure that what you’re investing in is exactly what you think it is.
Look at the property to identify work that might be required in the near future. Walk the neighbourhood to make sure it’s a good market to invest in (does it meet the Market Research Checklist items?). And ask any questions you might want to know about how the property will be filled with tenants (who is doing that, how do they screen tenants, what do they look for in tenants).
Finally – determine if there are alternate exit strategies for the property.
Right now we’re focused on rent to own deals but all of the deals we’re doing will be at least neutral cashflow even as a regular rental if it comes to that, and many of them can be sold at a break even point as well (because we bought them under market value and have done a bit of work to increase the value). So we have other ways out of the property if, for whatever reason, our original strategy for the place doesn’t work. Make sure there are options for your deals too.
Other Details to Consider
We’re creating an entire program on partnering for profits because there are so many items to consider when you’re doing joint ventures but in addition to everything above here are few things I think MUST be in place on every joint venture agreement:
A written joint venture agreement prepared by a reputable and real estate specializing lawyer,
An agreement as to how long (approximately) everyone commits to be in this deal – with the understanding that things do change and some sort of clause in the agreement explaining how an unplanned exit from the partnership is to be handled,
Clear expectations of roles and responsibilities for the partnership,
How often and what will be communicated – because everyone’s idea of good communication is different.
If you want to invest in real estate and want to get your money working for you while you learn, finding someone with experience to partner with might be the perfect solution. However, you have to make sure you’re getting what you need from the partnership. Joint venture partnerships work best when everyone brings something to the table. Whether you’re bringing money, expertise or some other important resource to the table, it’s important to understand what you want from the deal and what the other person is going to provide. And do your due diligence. Because nobody loves your money like you do!!
Published August 11th, 2010