Joint Venture & How to Buy More Apartments - Actual Experience

[Michael Ealy]

As I mentioned in a separate post, I have no problem with deal flow. I have established a reputation and track record as a successful apartment owner-operator and brokers know if I make an offer, it's as good as done. Because of this, I get deals before my before my competition does. 

But the problem is - I sometimes get too many deals.

For example, a few months ago, I learned about a 346 unit apartment portfolio and I know I would overwhelm my current property management staff if I take it on.

So what did I do? I looked for a good apartment operator who can take on the project while I remain part owner of the deal. I had them help raise part of the capital for it too. Of course I did my due diligence before I partner with them. And I liked what I saw.

For example, I found that they acquired a 34-unit building for $485,000 and in just 2 years improved it and sold it for $1,125,000. And that was not a fluke. They were "all in" on another bulding for $460K and sold it for $1.1M and on another - "all in" for $840K and sold for just under $1.6M.

Their model is similar to ours but they were "playing" with less units because they don't have access to great deals like I do.

What I like most about them is that their property management system is better than ours and they have more capacity to handle the additional units. They were able to produce the above results even with buildings in C areas of Cincinnati.

So after "dating" for a while, we finally "tied the knot" on the 346-unit apartment portfolio (comprising of 5 properties). 

We will manage the rehab as that is our expertise and they will manage the property as that is their expertise. We both have skin in the game and we both raised the capital from our separate set of investors.

Here's a picture of us having dinner after we closed on the building:

The above picture is what a $25M JV deal looks like (LOL). We hope to sell the building in 5 years or less for $38M to $45M. Total capital raise is $9M and financed the rest.

And this is the picture of one of the 5 buildings (as part of the 346-unit portfolio):

What Did I Learn and Why Am I Sharing this With You?

I see it all the time on BP. A lot of investors find themselves "stuck" and unable to make progress when they encounter an obstacle. Some complain they can't find deals. Or they're just not good with property management. Or they lack the capital.

If you want to buy more apartment buildings, the solution can be Joint Venture with one who has access to deals. Or, if you need capital, JV with one who is an expert at doing capital raises or one with crowdfunding experience. Or, if you don't have the capacity to handle more projects, find a JV partner who has the capacity you lack.

A wise real estate investor once told me: "Everything you lack, someone else has it. So use the power of Joint Ventures". Of course not all people are good JV partners. Fortunately, I made very few mistakes partnering with people. Why? I follow the principles below.

How to Choose the Right JV Partners

1. Do your due diligence on them. Make a mistake here and you're toast big time. You don't date once and get married. Same thing with choosing a JV partner. Take your time. Investigate. Don't take their word at face value.

2. Choose a JV partner which is stronger than you at some aspects and you're stronger than them at other aspects. Don't get as JV partner someone who is exactly like you. What's the point if you can do the same thing that they can?

3. However, don't choose a JV partner who is your exact opposite either. Choose a JV partner with the same beliefs, values and philosophy as you. You got to like them as much as they like you. If not, what's the point of making money with someone you dread or dislike?

4. Get a JV partner who will put "skin in the game". Otherwise, you're the only one with money to lose. Your interests have to align. If the project loses money, both you will lose money. Otherwise, they won't be as committed as you are.

5. Protect each other's interests with a good contract drafted by an attorney. Always put things in writing because people tend to forget the details after a while. Don't be cheap on having a good written document because you will pay thousands or tens of thousands down the road.

So there you have it. Whatever you lack, someone else has it.

So network here on BP. Network at your local REIA. Find the movers and shakers of your market and find a way to add value to them.

Anyone here have used Joint ventures to buy more properties or succeed in real estate investing? Go ahead and share your experience both good and bad and what have you learned?

[Fabiola F.]

Great inspiration @Michael Blank. I've found a proven developer (through networking and personal introductions) with decades of experience doing capital raises from both private and public funds (i.e government pension funds) and your post excites me, because the developer and I are discussing a JV with him doing the capital raises since I've found a few strong deals (100-150+ units). I also have another broker in NY whose clients are foreign investors and private equity managers, and we're collaborating on bringing some of his investors to the table to pitch one of my deals.

The upside in being in a male dominated industry and being fairly younger than most of the men who've built their career doing this is that I find that a lot of men are happy to see a woman at the table and are more open to sharing the wisdom. Sure people will say being attractive helps but most seasoned investors that I'm meeting believe in succession planning and bringing newer emerging developers into the fold. 

So please keep sharing!