Joint Venture with nebulous exit strategy

[David Kimball]

I have been offered an opportunity to invest in a duplex in a good area in Jersey City with someone who knows what he's doing. He found the deal through a marketing effort, and has it locked up at a great price.

The thing is, he wants me to put up 100% of the purchase. And then we would split the profits 50-50.

Now, the exit strategy is not totally clear. If we flip it immediately, then the profit division is clear (in fact I would be getting a very good return on my money for not doing anything). If we hold it and share landlording responsibilities however, first of all how will we decide who does what to make it fair? And secondly wouldn't I be getting a bit short-changed by paying for the whole house and getting only half the cashflow?

[Jon Holdman]

Well, I would want to be very clear on the exit strategy up front. A 50/50 split between the do-er and the money guy is pretty standard. But that's for a fix and flip. I honestly think for buy-and-hold where the money guy is in for 100% of the cash, the cash flow is more like 90% to the money guy. That's because you own 100% of the equity and the do-er is just doing the PM job. PM's typically charge 10% of collected rents. So, I can argue that he should just collect the 10% and leave it at that.

If you're going to do this, you need to get very, very, very clear on a lot of details. If its a fix and flip (I would strongly recommend doing this), its in and out. Set a time limit. After the time limit, ownership reverts 100% to you, just like it would with a hard money loan. For that matter, doing it as a loan would be cleaner for you. If its buy an hold, who makes decisions? What if more money is needed? Does it truly cash flow (i.e., if he's taking a PM cut, you're looking at a 50% rule property.)

Is he making money anywhere else? He should not be, frankly. If he's being the general contractor, and taking a general contractor's fee and then getting 50% of the profit, he's double dipping. Any costs he or some company he controls come out of his 50% of the profit.