How to Structure a Joint Venture Real Estate Deal
Our 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
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.
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