Partner Up With Experts Through Strategic Joint Venture Partnerships:
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“Buying real estate is not only the best way, the quickest way, the safest way, but the only way to become wealthy.”
– Marshall Field
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Yes, that’s true. Real estate investment is the best and the safest investment you can make. Your investment will be secured by real estate as real estate cannot be lost or stolen, nor can it be carried away. However, mistakes in real estate are very expensive. Buying a wrong property, lack of proper mathematical analysis, choosing a wrong market for a specific investment strategy, choosing a wrong exit strategy, working with wrong people and the list goes on and on.
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So, have you been thinking about investing in real estate, but you do not have the knowledge and experience to do it correctly?
Well, there is a really good news for you! Real estate investment could be easily done with absolutely no knowledge and experience, and this could be achieved by Join Venture Partnership.
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Joint Venture Partnership, in real estate context, mainly refers to a situation in which a money investor partners up with a real estate investor/expert, sharing all profits and risks to create a win-win scenario. Although this type of relationship is commonly called a Joint Venture, in many cases it is not technically such. Many times it could be a shareholder relationship, where the investor and the cash provider own shares of a corporation which they use to invest. In other cases, the money investor just wants a simple, annual percentage return on their investment – this would be a lender relationship.
A true joint venture occurs when two or more parties get together, pool their money, knowledge, and leverage to build a portfolio. No shares are owned, it is just two or more parties deciding that the best course of action for both is to work together. They agree to terms on money, dividing of duties, and setting of goals. From that comes a Joint Venture Agreement (or as some people call it a Business Prenup agreement). This agreement must be detailed and must be completed before any money passes hands because once real money enters the equation, new emotions enter, making the written agreement much more volatile to create. When an agreement such as this is created, it becomes the basis of the relationship moving forward and deals with all potentialities (taxes, income, expenses, death, divorce, duties and disputes).
The majority of the Joint Venture deals are structured where one partner finds and negotiates the real estate deal to the absolute best of their ability by leveraging their real estate knowledge, experience, and network, while the other partner or partners puts up all or part of the cash in return for participating in the ultimate profits or losses in the deal. They are full partners, each with their own risks in the deal. One is contributing their vast expertise, experience and contacts to maximize the profits in the deal by choosing the property wisely, arranging a good price, and then managing the day-to-day operations of the property. The other is often a silent partner providing just the initial investment capital. Risks are shared, as are the rewards, mostly on a 50% each party basis (after the money partner is paid back their capital first.)
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As a very simplified example (that does not take taxes into the equation):
PURCHASE & OPERATION:
Property is valued at $350,000 when purchased, but real estate expert partner negotiates the deal and buys it at $300,000.
The money partner puts up $65,000 (for down payment and closing costs),
A mortgage is arranged for the remaining $240,000.
Property is overseen by the real estate expert partner
Money partner receives monthly or quarterly updates
SALE & PROFIT SPLIT
A few years later, the property is sold for $420,000. Here’s what happens:
Bank gets paid back the remaining mortgage of $210,000
Money partner is paid back their initial $65,000
Closing costs are paid (lawyer, realtor commissions) $5,000
Leaving $140,000 pre-tax profit which is divided equally between the two partners
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This simplified math scenario above is very typical where the money partner, with very little effort, receives a strong return on their initial investment. The real estate investor puts in all of the effort of maximizing the profit for the partnership, spending countless hours so the money partner does not need to.
There is one component that is missing from this equation and that is the positive cash flow that is created from the property. This cash flow, in most cases, is split 50/50 on an annual basis, not monthly or quarterly due to the fluctuating and seasonal operating expense waves.