Today's blog is a guest post from Thomas Beyer, president of Prestigious Properties and successful real estate investor who has amassed a multi-million dollar portfolio inside a decade's time. Take a read and check out what Thomas has to say about 50/50 joint venture deals.
When you first begin to consider the notion of a joint venture with a money partner, some questions you might ask yourself are these: How much am I worth? How much ownership should I have, and how much ownership should my money partner have? There is a fine line between self-confidence, arrogance and self-deception. Be aware of this line. Confidence is important to negotiate a good deal for yourself – but please be realistic.
50/50 seems to be the norm for a joint venture (JV) on a single-family home, but is this the correct split? Why not 70/30 or 25/75? Why not charge a fee up front when all the work is done? Why not charge a fee as you go along? Why not own more than 50% over a certain price target or investor ROI?
Some of my investors have made over 300% ROI. In cases such as those, 50/50 seems like expensive money. But those investors referred others, so in hindsight that was the entry price to mutual success.
The first deal is always the toughest, the second is a bit easier, and the third deal is a bit easier. The 15th is easier still …
Usually you have to do your own deals with your own money to prove a point or to prove that you have expertise in a certain area. That’s why it might be a good idea to sell too early on your first joint venture. It helps you show a track record. With the success of the first deal, you can do a second and a third deal. Then you can show off your track record some more. Then you have the right to ask for other people’s money. People with money today, in a volatile stock market or with low bond rates, are always looking to invest their money wisely. Don’t be afraid to tell your story. Treat every “no” as a “not yet.” The JV money trail always looks like this: no, no, no, no, no, no, no, YES.
Like a stone cutter at work, it takes many hits (on the same stone) for the stone to crack. Seven times is a proven sales rule-of-thumb. It takes seven times of asking, on average, to get a deal. Ask again and again.
It may be hard for your ego, but it might not be a bad idea to give away a little too much on the first deal, take a little more in your second deal, a little more in third deal, until the formula fits these criteria:
1) It has to be win/win. This means that both you and the investor win. If one of you wins and the other loses, then the whole deal is a failure. Both you and the investor have to feel it is a fair deal and no one gets ripped off.
2) It has to be repeatable. This means you have to make money while you hold the property, or shortly after you purchase it. If you fix-and-flip properly, you can create cash to further your life, or if it’s your goal, perhaps you can become a full-time real estate professional, living off the cash your fix-and-flips produce.
This is rare. A more common plan is to build your portfolio slowly, holding some properties and selling others. The ones you hold have to pay you, too. There will be work to do, that is for sure. For example, you’ll be getting the mortgage, finding the trades, doing the upgrades.
It is a lot of work, and to produce an income for you, 50/50 often works poorly, especially when the cash flow is low. It can often be this way while you hold. You’ll need additional income to wait for the big equity pop at the end, which is often years away. So why not charge a fee upfront (perhaps it is being credited against your future earnings or perhaps you call it a sales commission or an asset acquisition fee)? Or perhaps you charge a fee while you go along through the holding process (perhaps it’s charged against your future earnings — usually it’s called an asset management fee). You can negotiate whatever deal is a win/win because no one minds that you make lots of money as long as they make a decent ROI for the risk involved.
3) It has to adequately reward the risk. This means that some deals need to show a higher ROI than others. Building brand-new homes in brand-new markets with no expertise, subdividing land, condo conversions, and flipping presale condos (especially if they wouldn’t cash-flow if you had to hold it) are all high risk, and you might have to offer a higher ROI if you do any of those. Whether you like it or not, fixing-and-flipping has a similar reputation as anything in the list above. It’s more risky than a standard buy-and-hold, especially when you don’t have expertise.
Buying lower-priced townhouses or small multi-family buildings or apartment buildings with rental and equity upside in growth markets is fairly low risk. That’s why I like to occasionally fix-and-flip small multi-family buildings. If I can’t sell them, I can always refinance them and keep them (forever) out with good cash flow.
On a standard buy-and-hold, there is perhaps less equity upside, but you can use a lot of the bank’s money and thus create a high cash-on-cash ROI. The potential to lose capital is very low, so you don't have to offer too high of an ROI. In other words, you can take 50% or more of the profits. If your property will be a strong rental, you’re minimizing risk for your partners, so you have the right to ask for more of the deal. Always have multiple exit strategies. If you try to fix-and-flip a house that must sell at a certain price and something happens to the market, you might be in for trouble. Always have an option B, so you can escape without loss of capital. Once you mitigate that risk for your partner, then you can ask for more of the deal.
4) It has to be sellable. A great property or a great deal, or even a great asset manager, isn’t any good if you can’t present it to your investor in such a way that they’ll understand it and buy into it. You have to have a properly packaged proposition with appropriate legal and marketing material (perhaps a website). You have to have some degree of salesmanship and team members that execute with you or on your behalf. The investor wants a track record and assurance that they won’t lose any money. They want a return OF their money and then a return ON their money.
So, the track record, you the person, the risk, the likely or potential reward and the packaging have to be aligned for the deal to be to be sellable. Talk about yourself and the specific deal – as an investor always looks at both. Also, include numbers and pictures or graphs. Some investors are very analytical and like lots of numbers. Some like pictures of the (soon to be) renovated house, and a particular number like 12% (if that’s your target return.) You’ll probably never know which one your investor is. That’s why you always use plenty of both.
With a tremendous wealth of experience and a specialty in common sense, Thomas Beyer offers real-world wisdom that quickly cuts through the real estate myths and sugar coating prevalent in so much of the popular media.
Thomas Beyer founded Prestigious Properties in 2000 specializing in multi-family apartment buildings. He currently manages over 85 million dollars of profitable, cash flow positive real estate assets, primarily apartment buildings with a total of over 1,150 suites in AB, BC, SK and TX.