Joint Venture with a stranger?

Question

Hi,

Looking for some advice. Is it a wise move to enter into a joint venture with someone I don't know?

Has anyone done this, and was it successful/unsuccessful?

Example:

Purchase buy and hold property. Partner provides a purely financial input, downpayment for conventional mortgage, rehab costs, closing, holding costs. I take care of the rest. 60% - 40% split in favour of partner.

John C. · Answer

Wow you are willing to give an equity partner 60% of the profit? Let's run the numbers:

Example:

Buy house for 200k

Fix house over 6 months for 70k

Total cost 270k

Sell house for 400k - 30k in seller contribuitons, holding costs, RE fees, etc

NET 100K

40k to you. 60k to equity partner.

OR

Borrow 270k at 10% + 2 points

Fix house over 6 months

270k+18.9k to lender (actually call it 22k because lender will probably have extra junk fees built in)

Total cost 292k

Sell house for 400k - 30k in seller contributions, holding costs, RE fees, etc

NET 78K

78k to you.

Then there's the PIA factor of having the equity partner stop by to "check on their investment" and present their ideas on how to do things, etc.

Of course the other side is you have to be able to make the monthly payments to the lender unless you negotiate that the interest be paid in arrears (when the house sells).

Since I've got a proven track record I've got guys proposing to partner up with me all day long. I'd consider it at 20% so it works out about the same but only on larger deals.

Having a credit partner for short term flips seems to be the way to go. Equity partners for longer term deals or much larger projects. Say you are buying a fixer upper apartment complex. Sure those numbers may work but I'd shoot for receiving a percentage of the net monthly rental income as well.

If you don't know them probably best to work with them as a credit partner. Everything clearly written out and closed with attorneys. Your rights and your "partner's" rights recorded in the public records via Warranty Deeds and Security Deeds.

K.I.S.S. (Keep It Simple Silly)

Of course there are other much wiser folks than me out there that put together syndicates and the like that may have other ideas. It's certainly possible.

Chris Chang · Answer

I had JV with people that I barely knew, but having said that I do a thorough check with them, as I am always the money partner. Spent some time to get to know your investor/money partner, set up some good expectation of what he expect from you (updates - for the property) and have all the agreement drafted by a lawyer (don't go with the one who charge you a flat fee, this is the one area you don't want to cheap out), and sign the paperwork.

We did exactly the above, and it's working well so far. The key is, if someone is willing to invest in you, why not? It's your first step into real estate, and work towards your goal. It won't be easy, as you will learn along the journey, but the end is definitely very promising! Good luck!

Jonathan Godes · Answer

@John C. - Money is not readily available to those who have no money for skin in the game that a HM lender will require. The OP was for a buy-and-hold, not a flip, so I don't think that answers his question. Money is also not readily available for someone with bad credit and no track record.

I have to say, the money guy has everything to lose. Stuart has nothing to lose other than time. The investor has their money and a mortgage from the bank on the line. How much do you know about foreclosure process in Alberta Canada? If the investor has to foreclose on a property thousands of miles away in another country in who knows what condition... yeah, I would say the private investor has a ton to lose.

Ash Badry · Answer

I agree with @Chris Chang, a JV partnership with a stranger can work if structured properly. You need to spend some time getting to know them and making sure that their goals and expectations match up with yours.

When we do any JV's we make it clear that our JV partners have no say in any decisions except those involving sale, refinance and yes or no when it comes to repairs or capital improvements over $2000. We are the real estate experts and therefore we decided how to run the property. The JV agreement is crucial, don't speed through it or cheap out and use one you found online.

Another thing to consider is how much investing experience you have. If you are new to the game then giving up some profit in order to gain experience is totally worth it for your first deal. There's nothing wrong with doing the first deal to learn and subsequent deals to earn. However, if you have the ability to do your first deal entirely on your own then that may be a better path as you won't be putting a JV partner's money and your reputation at risk.

If you have no experience at all I would highly advise you find a local investor doing what you want to do and either be the cash partner in one of their deals or volunteer to help with anything on their projects just so you can learn how the game is played.

Best of luck.

John C. · Answer

Actually no the private investor does not have much to lose except time. At 68% LTV (call it 70% to keep it simple, cover legal fees, etc) the investor's only potential cost is time if they had to come in and manage/liquidate the project if things went South. The investor has a CoC return of 15% and the first and only lien on the property.  Pretty secure position for a 15% return.

Money is readily available. Profitable, secure deals and the experience and contacts to execute them well - not so much. Many pieces to the puzzle.

Stuart Bartwicki · Answer

Superb advice gentlemen and much appreciated. Thanks for the number break down @John C.

Joint Venture with a stranger?

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