How do you split jv profits?

Question

I am looking to get into some JV deals and wanted to know how most people split their profits?  I will likely fill the role of a private lender and provide the $$$ because I am overseas.  The other person will do the hands on work.

Mark Lawson · Answer

This may be a little to complex for just residential flips but I deal in RV and mobile home parks and when I take on investors I pay a preferred rate of return and then a 70/30 split between the limited partners (investors) and general partner (the one doing the work). With the preferred rate which ranges from 8%-20% depending on the amount of investment the general partner does not take any profit until the preferred return is paid to investors. Once they are paid the rest of the profit is split between the LP and GP.

Rob Caldwell · Answer

I think that there is a difference between JV and "private money".

The normal course generally starts with Hard Money at rates of 12+ % in addition to points, as much as 5.

After a few deals and some positive/profitable experiences, the next level is a Commercial Loan from a local or regional Bank.  These loans generally offer terms from 8 to 12%.

From there is Private Money offered by an individual.  In my experience, the people I work with  have funds to lend because they are out of the Stock Market, etc. and what to invest in Real Estate but don't want (or can't) to get involved in the physical process.

There are very different roles between the Private Money lender and the Investor.  The Investor has generally spent a great deal of time advertising and locating the deal.  It can cost thousands of dollars in advertising and leg work just to find one house to buy.  Many times the investor has made offers on MLS that were rejected.  Made multiple offers to banks to buy multiple houses, but was rejected.  Sat in many many homes with many many sellers until the investor FINALLY strikes a deal.  Now comes the Private Money lender.

The terms most fair in this situation are usually less than Hard Money and a Commercial Loan.  6 to 9% with a point or two.  The ideal situation would be for the investor to borrow from the Private Money lender three or more times a year consecutively.  The ROI on the original or principle amount offered by the Private Money lender would be fantastic!  Much more than any markets could offer and secured by real property in a first position.

In my opinion, I am not sure that Joint Venture is an appropriate mechanism for the type of business we operate in as Real Estate Investors.  If funds were needed to open a convenience store, for example, then JV would be something to would consider.  But the Real Estate Investor truly operates from a transactional and recurring entry and exit position in the course of months.  JV would be much longer and at a lower percentage.

As a real estate coach and business consultant to the house buying businesses I work with, I strongly advise my folks to avoid any JV arrangements and work towards building a lending relationship that is personal and ongoing.  I advise to find a lender that lends on terms, not a percentage of profits.  And to exercise solid business practices and decisions that do not exploit the bottom line.

Private Money Lender relationships should be based on favorable terms that are not extraordinary and excessive, but rather fair and reasonable for all parties.  Not profit splits.  Start with Hard Money, then work into long term Private Money relationships that are going to be recurring and ongoing for years to come.

Jerry W. · Answer

There are a couple of ways to do this.  One is figure out the profit you would have made from your construction until it equals the cost of the 25% down payment, another is to simply pay the money guy back the 25% down from all profits then split after that, or even just split all profits from day one evenly.  There is no magic "fair" split.  What is fair is what both of you agree on at the time.  Make sure that there is 100% transparency on everything.  Call and ask about major decisions even if it seems petty, the other partner will really appreciate it even if he has no opinion to share.  It is really important that you cover every contingency you can think of in how you split profits and losses.  It is the unexpected or unplanned for events that are likely to cause problems.

Jerry W. · Answer

@Adam Bindar, that is still too vague for me to give input.  Is the other party bringing in 25% in cash and you arrange the loan for the 75% and you both sign?  Is he bringing in 10?  Are you having your crew do $10,000 at cost?  Or $500,000 at cost?  Are the costs for materials being paid by the loan?  Fronted by you?  Fronted by the other party?  How much do you expect the increase in value to be?  $100,000, $500,000?

Adam Bindar · Answer

Thanks for responding. The other party would bring the down payment of 25% cash and I would arrange the loan for the rest of the purchase price (the other 75%). We would both sign and be 50/50 partners. I would supply all labor at cost- I wouldn't mark up my crew's labor- the partnership would pay my crew their actual labor costs. Materials would be paid for with proceeds from rental income. I would manage the property for free in exchange for having a 50% equity stake in the property.

I expect the equity of the property to increase by 750,000 over the next 2yrs.

Bryan C. · Answer

@Jerry W. , thanks for your take on things.

Jerry W. · Answer

@Bryan Case, I am going to disagree with Curt on this.  The JV partner has no risk of loss in the deal.  A 50/50 split is more than fair.  If you are doing a flip it is much more work intensive.  If you are doing a buy and hold I would never do a 50/50 split if I provided all the money for a cash buy.  It depends on what you are doing and the risk involved.  Buying a rental and getting it rented is not worth half of the profits.  You can get a realtor to buy and a property manager for 10% so why pay 50%?  There are folks who give half of the profit in doing flips to the money man.  there are some who pay hard money from 12 to 18%.  A lot depends on your track record and how good the deal looks.

Walter Ichikawa-Doyle · Answer

Most JV's I've seen, 50-50 has been the norm. Some money partners want more because the RE partner has no skin in the game, but if you trust your JV partner, giving them a "fair" share will ensure you're getting quality management. IMHO.

Crystal Smith · Answer

As the lender you make the rules.  Those rules may include an origination fee followed by receiving monthly interest only payments; or an equity split of the profits w/ your preferred ROI;  or a combination of both.  Everything is negotiable.  Your money, your rules.  Wait.... Some of the States have rules regarding Private Lending.  Some of the rules make it more difficult, but not impossible.  Pulse the BP network once you decide which states you want to work.