Understanding Joint Venture Deals
I have recently found myself in what I believe to be a great position and would like some advice. I am having a meeting in a week with an investor who made it know that he would like to invest his money with me. I have done one deal many years ago and understand that it doesnt make me an expert at all. I am a Realtor and have done some deals and have been reading and researching for a good year to prepare myself for this moment. I have contractor connections because I have also been in the construction industry in one way or the other, building relationships with these professionals over the years.
Would a joint venture be the best way to do the first deal to build trust with my private investor? I am preparing myself and would like to put a plan and system in place before meeting with him on Sunday.
Would someone here please provide me with some insight as to how you approach a joint venture or if you believe a joint venture would be the way to go?
I did create an s-corp almost a year ago for my real estate investing, and am wondering if making shares of the company available to this investor for an investment into the company?
Please forgive my ignorance in these matters. Although a lot of reading and watching videos can be quite helpful, when the real deal comes up, I want to be sure that I dont make any mistakes that could have been avoided.
This "private investor" has never invested in real estate before, but has the cash to do deals immediatley.
Thanks
@Michael Lopez Hi Michael, you have a great opportunity in front of you. Here is some basic advice. Treat it as a business, even if they are family or friends. You need a written agreement as to how everything flows. Who is the money investor and their responsibilities, who is the management investor etc. How are the cash distributions handled when a property is sold? Who covers any losses? What happens when one of you chooses to go sailing around the world and no longer wants to be in the venture? What kinds of insurance will you carry? Will you do the rehab yourself or hire contractors? In most jurisdictions, using an LLC is far superior to a Corp when it comes to real estate. Who are you going to use for legal? Who are you going to use for accounting/CPA. When are distributions to be made? Are there any spouses involved? What is their role. How do you pass each partner's portion on if there is a death? What zip codes are you going to cover? Will you do foreclosures, REOs, Buy & Hold, Subject To, Fix & Flips, Notes, Tax Liens? As an agent, do you get the agency fee? Is he interested in a JV or does he simple want to lend money at interest? That is a start. I wish you well and great success.
@Account Closed wow! That is great information! I will get answers for all of those questions. I appreciate that so much!
Congratulations on the opportunity to have a life-long investor. JV is usually a 50/50 profit split with both of you actively working the deal. If you are doing all the work consider interest only loan at 8-12% paid quarterly for a specific period of time. They can fund this from and IRA for tax free profits. Is your LLC still recognized by the state? Use your lawyer contacts for deal and contract structure. You want to do this right and hurt this relationship.
@Brady Durr thank you for the suggestions!
Quick question about JV deals: I always wonder how people form partnerships for the first time right before a deal occurs.
Like do most JVs actually form LLCs well before a deal, or do they just have a contract written up by an attorney once the property is found, and keep this in place until the entity filings come back?
@Rohan J. In my case, I have a Master Agreement that states what we are going into business to do and what our plans are for the purchase of real estate. It includes our "exit" strategy for the properties, ie: "Buy & Hold", "Fix & Flip", "Tenant Buyer", etc. I only do Single Family Houses so it would a bit different if your focus is Apartments, Commercial, Notes,, etc.) I might do one house with someone, I might do 20 houses with someone. The Master Agreement is the umbrella Agreement.
Then I have a second Agreement specific to each house.
All of this is in an LLC specific to that Master Agreement. I want everything to be known and in writing and signed before any money is spent. Once I approve their side of the Master Agreement (I don't always work with everyone that approaches me) and see proof of their ability to actually fund, we proceed. An LLC is then created.
People tell you all sorts of stories of what they want to do and how much they want to invest but, "you can't buy houses with promises". In the past, I've been stuck "on the hook" when people haven't performed. I've made a lot of money when investors forfeited and I had to self fund because they weren't able to actually get money when required, but that wasn't the plan and it creates problems so I take the whole deal. When that occurs, I tear up the Master Agreement with them and wish them well and to be on their way. So, for a long time now, I simply verify funds are actually in the LLC before making offers.
I don't even start looking for properties for that particular Master Agreement until "good funds" have been received by the bank and my accountant verifies.
It's a business. It needs to be run like a business.
@Rohan J. that is excellent advice. I will take heed! Thank you!
@Account Closed would you be willing to show me via PM what your master agreement looks like minus all the private info? I am meeting with the investor and my brother who will be in charge of the rehab work on Sunday to discuss the specific responsibilities. As I am understanding now, it would have been better to have this master agreement before we meet, but now I have to improvise. In any case, I will be meeting with my brokers attorney who put his JVs together and his accountant as well. I will say this, I have been reading and listening to podcasts for a while now, but nothing comes close to being in the middle of the action.
@Michael Lopez A lot of $$$ were spent to attorneys to have these drawn up and they are proprietary to my company so I will politely decline. However, each version was written for the states I do business in and the specific way I do business. It would be a disservice to you to use an Agreement not specifically designed to your state and your needs.
@Account Closed of course i was hoping there was sort of a generic version. my intentions were not to plagiarize, but more of what one looked like. I absolutely understand you though. thanks
@Account Closed I am meeting with the investor tonight to go over details of this project. I now understand that a Master Agreement would be the best way to proceed and I will be creating one moving forward, but will I be able to create the JV if I don't have a MA?
If I can create a JV, would the process then be:
Hash out all responsibilities tonight during our meeting.
Meet with attorney to create the JV.
Create an LLC specific to the JV agreement.
Open bank account to place all the funds in.
The property is purchased and placed in the LLC?
The project begins and when completed and sold, the profits are distributed and the JV ends.
***Please add any steps if I am missing something.
***I know this may sound like a quick version of what may actually happen, so please forgive the ignorance on my part.
If you would rather PM me please do so.
Did you ever get your master agreement written up @Michael Lopez? If so, would you have a basic version of what it looks like? I'm looking to explore this as an option in the future, possibly.
@justin young Thank you for asking. Since that supposed investor backed out because of the possibilities of being taxed on the money he was going to be investing, I put things on the back burner since I had some residential real estate deals that I was able to focus on and close. Now that being said, I did meet today with an older gentleman that is willing to invest $85,000. My mentor and I had a lengthy conversation with him concerning the risk involved, but the rewards are surpass the risk so as long as we mitigate it. A master agreement setup will be discussed.
Good luck @Michael Lopez with setting up your master agreement. If you wouldn't mind sharing the version you come up with, I'd love to take a look. But if not, thats totally fine.