Real Estate Investors Checklist for Working with JV Partners

“I made a list of the happiest periods in my life, and I realized that none of them involved money. I realized that building stuff and being creative and inventive made me happy.”

~ Tony Hsieh (CEO of Zappos.com)

MoneyMoney is a funny thing. It’s an object of much desire. It’s the number one marriage killer. And it doesn’t seem to matter how much money you have, you probably want more. At least you will want more unless you’ve come to realize that money is simply a tool not an end result.

I know – it’s a bit of a deep thought – especially for Wallstreet movie fans who are taught “Greed is Good!” but my point is simply that too many people believe money will make them happy instead of realizing that money can facilitate the time and space to do the things that make you happy but will not, by itself, fulfill you in anyway.

What’s this have to do with real estate investing?

Everyone has a different goal around money. And before you get out there and start talking to prospective JV partners, it’s a good idea for you to get a good understanding of what your thoughts around money are and why you’re investing in real estate (is it just for money or is for freedom or for comfort in retirement or some other purpose?).

I’ve met a lot of real estate investors in the past 24 months that are miserable. These are people who have bought 30 or more properties at a rapid pace. They achieved their cashflow goal or their goal to buy x number of properties by x date. They have, by the goals they set for themselves, achieved success. Yet, they are miserable. In speaking with some of them, I realized many failed to ask themselves a lot of these questions before they took the investing world by storm. And now they are cleaning up a mess or anxious to grow further because achieving their first goal still has them feeling empty.

It’s kind of the same thinking that was behind a comment made to me by a real estate author on a blog post I wrote. He said “if you did it the way I do it, you could be buying 4 or 5 houses a month instead of just the one per month you guys are doing.”

I disregarded the comment because more isn’t better.

More is just more.

And, in fact, more could just mean a lot more problems! A couple of guys I met at a conference earlier this year had some serious headaches because they had a different joint venture partner for each property, tenant troubles and quite a few properties that were worth 20% less than they had paid for them. More properties meant a lot more stress!

I share all this because it’s really important to think about what you’re doing and WHY.

If you’ve set a goal to buy 3 properties in the next year, make sure you understand WHY.

A clear and powerful WHY will help guide you when you make your decisions, will bring you confidence when you speak with joint venture partners and lenders, and it will enable you to align yourself with the folks with money (or with the deals) that fit perfectly with your REASONS for doing what you’re doing not just the numerical goals you’ve set for yourself.

If you have thought this through then you’ll find yourself working with the right people, creating the right deals and probably doing it with a smile on your face most of the time.

So – here’s the checklist. Here are the

7 Things to Ask Yourself Before You Work with a JV Partner on Any Deal

(and while we tend to take the viewpoint of a JV partner who is doing all the work looking for a JV partner who will bring the cash to the table – this checklist can apply no matter which side of the equation you are on.)

  1. Do you need a Joint Venture partner?If you chose to grow your portfolio slower, could you do it on your own? Sometimes when you do the math it might be better to do fewer deals but do them on your own.
  2. What value do you add to the partnership to exceed their expectation? What value do you need your partner to add to make the deal easy for you to do?
  3. What are your core values? For us, we only want to work with people who share our core values.
  4. What is your time horizon for the investment? You want to know this so you can align yourself with people who have the same or similar expectations.
  5. How actively involved do you want to be in this investment? How actively involved do you want your investor partner to be?
  6. Are you seeking anything beyond just a financial return from your investment? Is your investment partner? (sometimes our partners are looking to learn from us in addition to earning a return, sometimes we’re looking for some connections or a longer term relationship with that person).
  7. How comfortable are you with changing strategies mid-deal or using creative strategies to acquire real estate? Do you expect that same level of comfort from your investment partner? For instance, are you okay if you change from a Buy N Hold strategy to a Rent To Own strategy mid-deal? Will your JV Partner also be comfortable with the change?

After one failed partnership years ago and a snafu with a partner last year that nearly cost us two deals, we’ve really spent some time asking ourselves these questions. And after Dave meets with any new joint venture partner we review these questions for ourselves and with respect to the new prospective partner.

We know not every person with money to invest is a good fit for us.

We’ve learned over the years that it’s more work to try and put a deal together with someone that isn’t in alignment with what we’re doing and why we’re doing it than it is to just keep looking for someone that is a good fit. And the beautiful thing we’ve discovered is that when you find someone that is in perfect alignment with what you are looking for and with what you can offer you’ll have a long term partner. We just closed on deal number three in 12 months with one such partner. What she’s looking for works perfectly with what we have to offer. And she has basically committed to doing at least a deal a year with us for the foreseeable future as a result.

Published October 11th, 2010


Screening Joint Venture Partners

Joint Venture Partners

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

Joint Venture Partners Screening Process

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

First image credit: ©Viorel Sima |Dreamstime.com

Real Estate Partners – The Profits and Pitfalls

real estate partnersMarriage and real estate partnerships aren’t that different. There’s a courting period, there are things that each person has to bring to the table to make it work, and there are as many problems as there are possibilities for success.

In real estate investing, just as in a marriage, there are many ways that a partnership can fail. If you rush into a relationship without dating or doing your due diligence you may find that you’re not as compatible as you once thought. You may find that you and your partner end up having different objectives for the relationship. One of you may oversell what you’re bringing to the relationship. Or, maybe things change, and one of you just decides it’s time to move on.

There’s plenty of ways a partnership and a marriage can go wrong. It can get messy and it definitely can be stressful and emotional. And it can happen when you least expect it. And it can feel like there was no warning.

We’re no strangers to turmoil in our real estate partnerships. While the majority of deals we’ve done have been with partners, and they’ve gone very well, there are always new lessons to be learned.

So, if there’s potential for so much turmoil with partners why bother? Why not do all of your deals solo?

Well, just like the right partner in your life can make you happier, more fulfilled and even more successful, the right partner in your real estate deals can allow you to do bigger and better deals with reduced risk.

In fact, the right partner can bring any one or more of these positive things to a joint venture:

  • Skills and Expertise:For example, if we decided to get into flipping properties we’d be interested in partnering with someone that has experiencing working in the trades or working as a contractor. Someone that has never invested in real estate before may wish to work with someone with experience on their first deal.
  • Money:Most of our deals involve us bringing our expertise and experience to the deal and doing all the work in exchange for a partner putting up most of the initial capital required.
  • Financing Options:On a recent deal we were unable to secure the kind of financing we wanted so we brought in a partner who could. Sometimes the best way to look good to a bank is to bring in people that fit into their tiny little box of lending requirements.
  • Risk reduction:Having additional parties involved in a deal allow everyone to carry a lesser share of the risk on a deal. It reduces each persons exposure and downside should something go wrong.
  • Network:In the past we partnered with someone that had a gigantic network of high net worth individuals. This guy knows someone in just about any field and could get them on the phone pretty quickly.

Julie’s parents aren’t willing to take on partners, and they acknowledge that this has slowed down their wealth creation. They made the choice consciously but they’ve missed out on great deals because they weren’t willing to work with a partner on the deal.

On the other hand, we’ve expanded our wealth rapidly thanks to great partnerships but we’ve also experienced a lot more stress, surprises and drama than we would have without partners.

People like to make partnerships more complicated than they need to be. If you keep things simple it will be easier for everyone. There are also a few other things you can do to minimize  the potential pitfalls of partnerships:

1. Before you get involved communicate a lot… and just when you think you’ve communicated too much … communicate some more! And a big part of communicating is listening. Listen carefully to your prospective partner. Ask questions. Understand their objectives and their needs. Make sure you’re going to be able to meet their needs. Focus on what you’re bringing to the table. Make sure it’s at least equal to what they are bringing to the table … preferably greater than what they are bringing to the table so they feel confident that they are getting a great deal.

2. Always be accountable.Recently we almost lost two really great rental property deals because our partner had less money to contribute than we had expected. We felt we had two choices … be bitter and lose the deals or be productive and save them. It literally took 100+ hours and it pretty much consumed our summer vacation but we saved the deals. And we are fixing the leaks in our process and learning from what went wrong.

We aren’t victims of anyone’s actions. And when you don’t accept the victim role you can keep control of the situation. And that is what we did. We accepted the fact that we had not done a good job of communicating, realized that we contributed to the disaster, and took the yucky tasting medicine.

If you are always accountable for what goes wrong in a partnership, you will be able to handle just about any of the pitfalls.

3. Have a clear and fair joint venture agreement created by a lawyer: And of course, follow up that accountability with a solid and fair joint venture agreement that lays everything out clearly for all parties involved. There’s nothing wrong with covering your butt!

Published on September 18, 2009

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