What is the Right Split for a Real Estate Joint Venture?
Joint Venture Partners
Today I got a question coming in from one of my followers. They asked what’s the right split when you’re looking to someone to do a joint venture and they’re putting in all of the investment capital. My answer is that there is no right split. There are many ways to do a joint venture. It’s one of the reasons why we love raising money, not just joint ventures but private money, vendor take-backs, RRSP mortgages. The world of real estate is pretty phenomenal when you understand how to get the investment capital you need to do the deals you want to do. Specific to joint ventures, how we do it is we look to our partner to put in the initial investment capital, usually somewhere between 65 and $80,000 for the houses that we did in 2013. NOW it will be higher then that around $250,000 plus in 2020!
Then we have a reserve fund in place, which is usually two or three months of expenses. And we buy the property as we own it, they put in the initial investment capital. We own it 50 50 because my husband, Dave and I are doing all the work. We find it, we negotiate it. We’ve been working in the area for, well we’ve been buying in our main investment market for 12 years now. So we have area expertise in the team. We oversee it, we make sure it’s making as much money as possible every month for the life of our holdings. So that’s what we do in exchange for our 50% going forward if any money is required. So sometimes a tenant moves out and you think it’s time for an upgrade. Sometimes something goes wrong.
You might have to put a few thousand dollars in. When that happens, we split that 50 50 so 50% of whatever the expenses comes out of our pocket and 50% comes out of our partner’s pocket. When we sell, our partner gets their initial investment capital out first. Whatever’s left over, hopefully there’s lots leftover, either way it is split 50 – 50. Cash-flow that comes in is split 50 – 50, or goes to build up a further reserve fund depending on what’s going on in the property. So that’s how we do it. However, you can do it in all kinds of ways. We have joint ventures where our partner owns 25% and we own 75%. They didn’t put much money in, they just qualified for financing. We have partnerships where our partners own 60% and we own 40% or vice versa. Today we don’t deviate from our model, but in the past we weren’t as sophisticated.
We would work with whatever came our way and try to come up with a deal that everybody was happy with. So there isn’t a right way to structure it. And if you’re brand new, this is one of your first deals or your first joint venture deal and you’re trying to build a track record, you may want to give up more. You may want to put in some money, whereas in the future you might not want to or you may want to give up a higher percentage just to make it appealing to somebody to work with you when you don’t have an established track record. The only caveat I’ll put on that, or a word of caution is that you can pretty much expect they’re always gonna want that deal going forward. Even if you clearly communicate that this is a one time thing, I’m just doing it to build my track record.
It’s what you’re going to be happy with, what you’re comfortable with and what works for the resources you’re bringing to the table versus the resources that your partner is bringing to the table. It’s kind of a complicated subject, but hopefully that all makes sense and helps you a little bit. If not, we will be happy to get back to answer your questions.
Joint Venture Resources
Rev N You with Real Estate Watch on YouTube