triplex underwriting and JV questions

[Mike Carr]

I need some help overlooking the #'s before I present this to a potential JV partner. I have been marketing to small multi-family properties in my market (Delaware) and have wholesaled two so far. Id rather be buying these but I am having a hard time with banks and creative financing methods so I want to approach a few people in my market to JV. Any help is greatly appreciated.

My background: I have helped managed and maintain my parents' rental properties for over a decade. I started my business a few years ago after college by flipping and wholesaling properties. I just started to build my rental portfolio a year ago. I currently have three cash flowing properties. Short-term goal is to have 30 total units through multi-family properties in the next 2 years with a JV partner.

JV Structure: 60/40 split. Jv partner gets 60% and my company gets 40%.

My roll would be to find the property, perform due diligence (cover costs), manage the property manager, inspect when necessary, make repair/operating decisions, and provide monthly statements and updates. 

JV partners roll would be to provide funds for down payment, fund operating account (15% of gross rent), fund mortgage escrow account (if bank requires one), and cover closing costs.

We will open an LLC/LLP to purchase and manage the property through.

Property: Triplex with FMV of $145,000-$155,000 range. Gross rent is $26,400. I have not seen the inside of this one yet. But this is a typical deal we have been coming across.

     Purchase

Price                                $120,000 

Down payment            $30,000 (25%)

Closing costs                  $6,000 (5% estimated)

Mortgage escrow            $3,618 (6 months of payments)

Operating account          $3,960 (15% of gross rent) 

TOTAL initial investment $43,578

Expenses

Taxes             $957

Insurance       $800

Management  $2,640 (10%)

Utilities           $900 (sewer and common area)

12% misc       $3,168 (covers repairs, lawn, snow, etc)

TOTAL           $8,465

Mortgage

$90,000 balance at 5.25%. 20 year amortization. 5 year balloon. $7,236 ($603 per month). I am looking for 30 year fixed financing as well. 

60/40 split

$26,400(gross income) - $8,465(expenses) - $7,236(mortgage) = $10,699 Net (pretax)

60%= $6,419 which is a 15% cash on cash return from the initial investment.

40%= $4,279 for my company. 

Questions: Is this something you would present to a JV partner? How is the structure of the deal?...is there an easier ways to structure/operate this? Are there numbers I am not factoring in? How would you go about asking a potential JV partner? Thanks for any insight on this process.

[James Masotti]

The only call out I possible have is that your partner is getting a 15% return on their cash and you are getting significant higher return for that, essentially an infinite return on money invested. Now you can say that your time is worth money, and while that is true if the project goes belly up...you're out time and your investor is out a substantial amount of money. As an investor my question would be is this fair? 

Now if you were to do a 75/25 split...then your investor would have an 18% CoC return and you would still make $2675...for basically doing nothing, since you'll have a property manager in place.

There are a lot of investors out there who put in the $43k, set up a property manager on their own and then enjoy the full $10k in profit...Now I'm sure that this approach will work for someone out there, but you'll need to make it worth their financial risk. 

Flip the table and think through it from your JV partner's perspective. What questions would you ask and how would you react and respond given the same set of information and circumstances?