When you are at certain level on your real estate investment journey, you may find out that banks won’t lend you more money because you are maxed out. You just have too many investment properties.
Joint venture is the secret of using other people’s money to buy real estate.
If you ask veteran real estate investor their biggest challenge when it comes to generating lasting wealth with real estate, and 9 times out of 10 you’ll get the same answer: access to capital.
Why Would You Consider A Joint Venture?
The most common reason people consider a Joint Venture relationship is to overcome either:
lack of capital or lack of experience.
Let’s look at lack of capital first…
During your investment career you’ll likely come across a point in time where you’ll know of a great opportunity to invest but you won’t have access to the capital to acquire the asset. Either because your capital is tied up in the form of equity in some of your properties and you can’t access it easily. Or, because you’ve simply run out of cash buying properties.
One creative way to get around this little problem is to Joint Venture with someone who does have the capital to invest.
A very common scenario in smaller residential real estate investments, let’s says 5 units and less, is this:
Partner A: Puts up the capital for the down payment of the investment.
Partner B: Puts in the work required to manage or fix-up and sell the investment.
Partner A and Partner B split the proceeds of cash flow and equity build-up 50/50.
Notice that in this scenario each partner has something to offer the other.
Partner A has the cash. And partner B has the skills and experience to manage or fix-up and sell the property. It’s an exchange of value.
Often beginner investors want to form Joint Ventures because they have zero cash and zero experience. In that scenario you offer very little to a potential Joint Venture partner. It’s the classic catch 22. If you find yourself in such a position you’ll need to either save up some cash for your own down payment even if that means it takes longer for you to start investing.
Let’s look at the next reason to Joint Venture…lack of experience…
Another reason many investors with sufficient cash to invest alone choose to investing with Joint Ventures is their lack of experience.
For example, if you’ve never purchases and managed a 20-Unit Apartment Building, you may not want to jump in all alone. That size of building likely has a fair amount of landscaping to deal with. Parking to keep organized. Common areas, like stairwells and hallways, to keep clean. Garbage to take out.Vacancies to deal with. Evictions to handle, the list goes on.
And it’s not large enough to warrant or even afford a full time property manager. If you can find someone with a proven track record that can keep vacancies low and cash flow high it may be a fair exchange of value to give up some portion of the cash flow and equity build-up to gain their expertise and have them manage the day-to-day activities of the investment.
What about Buy-Fix-Sell?
If you’re purchasing a property to “fix it up and sell it for a profit” then perhaps you’re looking for someone to partner with that is a contractor. You put up the money and he/she does all the work. You split the profits at an agreed upon rate.
Of Course, There Is One More Form Of Joint Venture…
There are situation where two partners put up the same amount of capital and share in the duties of the investment. Many beginners choosing this path. Often with two, three, even ten or more partners.
Just remember that with the more partners you have the more complex decision making can get. Ultimately, the combinations of partners, ownership percentages and responsibility division are endless. You can get as creative as you’d like.
Using Joint Venture Agreements is also the key to keep good JV relationship.
Before entering into any type of Joint Venture agreement you should have your lawyer review the agreement, also get expert advice on the investment. Get to know your JV partner.How financially strong is the Joint Venture relationship? Does the partnership have enough money available to fund delays, cost overages, unforeseen events, and changes in interest rates, changes in the market? Plan for the worst case and budget accordingly. Have these conversations up front and put them in writing!
When you look for joint venture partners, most likely you will start with family member or friends, then your coworkers. Because they already know you and trust you. Once you have more successful case, other people will follow you as successful people attracts money partners.
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