Joint Ventures In Real Estate
Updated: Jul 21, 2022
What is a JV in real estate and why would someone want to do it? A joint venture is quite simple, really. Two parties want the stellar returns that can be had in real estate, but can’t do it on their own. Each party brings something different to the table and they create a joint ownership model structured around the vision they have for themselves in that property. There are many ways to structure a joint venture depending on the deal, time and money investment and length of holding. Here are a few common ways to understand what is involved in real estate joint venture agreements.
Structure
At the heart of it, a JV can be broken down into 4 quadrants. As Russell Westcott (the JV Jedi) likes to say, the 4 Ms, money, mastery, mortgage and management.
Money
Who brings the money to the table? Who is supplying the upfront capital to cover the closing costs, the down payment and the renovation costs? Depending on the amounts required this may be multiple parties or just one. The key factor here is that the money is always first out at the end of the deal. The initial down payment is recouped to the money partners first and after that, the equity split comes into play.
Mastery
Who is the one that brought the deal together and can advise on the best way forward? Who is the master of the trade of real estate and can provide guidance on when to buy and when to sell? Who can bring different strategies together to bring the property up to its highest and best use?
Mortgage
Who is qualifying with the bank for the purchase? The person who is qualifying generally goes on title for the property and must sign the purchase agreement, the sale agreement and all the bank documents. They are using their credit and contacts at the bank to get the necessary financing in place.
Management
Who is managing the deal? Who is overseeing any of the renovations and construction that is happening? Who is finding tenants and dealing with maintenance calls throughout the term of the joint venture agreement?
The pie chart and description above is a very basic breakdown of the roles in a joint venture agreement. Typically the money partners just want a passive, hands off approach to real estate investment. In this case, the money and the mortgage would equal 50% of the deal and there would be an active partner that deals with all the headaches of finding a deal and managing it throughout the term.
Sometimes though, the deal is split 50/50 with both parties taking equal responsibility for all aspects of the deal. This is done when both parties want to be actively involved in the process. One person with the most experience will be taking the lead on finding a deal and managing tenants, but both will be equally involved with all aspects of the deal from financing to management. This works best with family and close friends.
Another circumstance is when one party already owns a good, cash-flowing asset and a money partner comes in after it has been stabilized. This is good for more cautious passive investors, as the property is already performing well and all the data is available for scrutiny. In this case, a good way to proceed is to estimate the market value of the deal the moment the new investor joins and pretend like it’s a new property that you are just buying. The money partner would put in a 20% down payment based on the appraised value of the property. Because the mortgage is already in place, no new financing is needed. Upon exit, the original partner takes the equity out that he had in the property when the new partner joined (calculated as the difference between the mortgage value and the appraised value when the money partner came in), the money partner takes out his investment that he initially put in and the remaining equity is split 60 to the original partner (active) and 40% to the passive investor.
Yet another way to structure a joint venture typically happens on larger multi family properties. The active partner might charge some fees in exchange for a smaller part of the pie at the end. Here, acquisition fees, disposition fees, and some management fees might come into play. The money partner might get 50% of the deal, the mortgage partner might get 15% of the deal, which leaves the active partner with around 35% at the end.
As you can see, there are many ways to structure a JV. One thing to remember is that an active joint venture partner isn’t just a partner on the upside, they are a partner on the downside as well. If there are risks, having an active partner actually mitigates some of those risks. For example, if a deal breaks even at the end, the active partner has put in all that work throughout the deal for free. If the deal loses money, the active partner is actually liable for a share of the loss. So not only did he work for free, he also has to pay a share of the losses on the deal. Obviously, if this happens, something went terribly wrong. Joint ventures are a great way for both partners to mitigate risks, achieve upside potential and create wealth for themselves in real estate.
Jonathan Beam is a real estate investor in the Niagara region who is passionate about helping you achieve financial freedom through real estate. He works with new and experienced investors to formulate a plan that fits your specific situation and provides market guidance and consultation on the best places and strategies to pursue within the Niagara Region. Book a free, half hour no obligation consultation to see how he can help you to achieve your goals. His travels are available at www.realestateandrepeat.com
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