JV 50/50 split

16 Replies

Hello Everyone,

I just need some clarification on the JV 50/50 Split and wanted to see what experiences people have had using this financing structure.

The money partner pays the purchase price and rehab costs and the real estate investor pays the closing costs.  All profits are split 50/50.

Is this pretty standard?  Any feedback is appreciated.

Regards,

James Palin

Hey James - thanks for posting this. I'm looking for similar answers, as I have a money partner right now, but have been asked to "suggest a split". I'm trying to understand what is commonly done, how to manage/reduce risk on both sides, what is the best way to "own" the property - i.e. under my name, under an LLC that we both own, etc.

Hope you generate some responses on here.

I've seen some references to "waterfall" structures on the forum and am starting to try to dig into this to see if it makes sense, but don't have any good direction yet.

@James Palin

Hi James! 

Personally, I think that it all comes down to what kind of deal you have with your partner. Some of them will just provide the full amount of cash required, step out, and then cash-out 50% of the profit at the end of the project. Some of them will get involved in the ''day to day operations'' such as rehabbing a flip, for example. There really is no golden rule. 

Your 50/50 is quite standard. You see this kind of JV mostly for very begginner with no money as well as experienced investors looking for additionnal capital. But when it comes down to the terms of the JV, it really depends. Some investors will ask 25%, 50%, 75% according to their investments criterias or the trust-relation they have with the REI.

After all, even if you had 10% of a 20K $ profit, it's still better than 100% of 0 profit since there would probably have no investment at all without this JV (considering you don't have the money yourself). Remember that using other people's money is a great way to leverage your investment.

Also, you don't have to give away 50% of your whole company  (if you have one) to the other investor for a single deal. You can juste jump from deal to deal with different partners and JVs for each one of those deals. On some deal you can get only 40% then the other one you'll get 70% while still owning your company at 100%.

I hope this helped you!

Best regards,

Kevin

@Alex M.

Additionnal comment for Alex M. 

LLC will protect you from personal liability, lawsuit and you have some tax benefits. However, it is a bit more expensive to set up. As I said in my previous response to James, it depends of where you want to go with your partner.

Are you getting in business on a long term basis? Do you consider doing multiple deals together? If yes, consider setting up a LLC and become equity partner of the business.

Are you partner only for this particular deal? You might want to get a JV for the deal, but do not give up a % of your futur company for a single deal. It would a bit silly.

About the waterfall structure, it is quite a complicated one and unless you work with a qualified advisor such as a Lawyer regarding the structure/paperwork of those kind of partnership/loan, you might want to stay out of it. You have to have multiple loans to multiple people/business with different contracts and so on and so forth.

From what I see, it will be more of an equity partnership than a private loan. Waterfall is mostly for loans.

As for reducing risk of your money partner, try to get a bank loan secured before getting into the project. What I mean is :
Let's say you want to flip a 100K $ home.

Money partner brings in 125K $ (home + rehab) ALL-CASH.

You secure a loan (from the bank) of 80% so 80K$ without financing the project with.

IF the project goes south, here's what you can do to reduce your partner lost :

1: Sell the home ASAP and pay him back.

2: Bring in the 80K$ from the bank, and payback 80K$ to your investor. Therefore, his involvement is now much less and his potential losses are reduced. Unfortunately, on your side, you are stuck with a loan now. But hey, if you plan well and do your homework, project won't go south  :)

Best regards,

Kevin

@Kevin Bellavance - thanks for the feedback - especially on the waterfall structure, as I was not looking forward to digging into that. I'm looking at this as one of at least 6 with this particular individual, so it sounds like looking into an LLC may make sense.

The one thing though is that I am looking for buy and hold here and not flips.  @James Palin It is not clear if you are doing this as a flip or long-term hold. If this is a flip and my questions are off topic - please state so so as I don't want to hijack your post!

Hey Alex and Kevin,

Thanks for the feedback.  Yeah my current investment goals are fix and flip and not buy and hold.  

With any money partner relationship, anything is negotiable.  Lots of good ideas on here about splits.  

Kevin, I enjoyed the water fall structure you laid out just in case a potential deal goes south.

The feedback will help me do some thinking on deal structuring.  

Thanks,

James

I have done this a number of times on the funder side of the equation. 

Every funder (and I am finding every boots-on-the-ground flipper) has different "pain points" of what they want, or what they want to avoid. The 50/50 is a good starting point, but what really speaks to me as the money guy is all the other terms that YOU propose to protect me. That really speaks to your integrity and willingness to put you money where your mouth is. 

For example, what happens when the project goes over budget? Will you pay for overages related to contractor issues? What about finding mold or structural issues that couldn't have been forseen? Will you pay for any overages? Do you have the capital for that? 

What about if the house sits on the market for two months? A deal where the house sells for 20% less than you pitched me is the same to my pocketbook as if your contractor goes far over estimates. What is my compensation for having my money tied up for 3-4 months longer than you promised? 

Some funders will require a larger percentage of the deal, especially if it is their first time working with you. I am more about my annual ROI and what my downsides are and what you are willing to do to protect them.

I am doing some flips with a partner. We opened a new company under both of our names. He provides the cash and I do the work. After we sell, we split 50/50 the profits.

@Jonathan Godes

 I see your point as I am trying to see what styles of partnerships are commonly used. I know rehab costs can run higher and homes can sell less. (I have had it happen) I understand that money partners are going to want you to have some skin in the game, because if something goes wrong somebody has to cover the surprises.

I was out on my jog this evening and listening to one of the AskBP podcast. Another type of financing came up that got me thinking.

Essentially, you have two partners that want to go into together on a fix and flip property. They both sign their names onto the contract and on the loan. (hard money or conventional financing) They split the closing costs and rehab costs 50/50 and split all the profits down the middle 50/50. As we have heard the saying before 50% of something is better than 100% of nothing.

Anybody entered into this type of deal structuring?

James, 

You definitely want to establish what kind of relationship you have with the money partner. Will they participate as a lender or as an investor. A lender will want exactly what the terms of the loan are. If your estimated figures on your project are a given amount they better be right on otherwise you might get a commitment from a lender for lets say $50K when you really needed or will need $80K. 

What happens if you run out of money and your project is not finished?

I would make sure that maybe 150% of the money I will calculate I need is available from the same money partner and make that a part of the arrangement. 

It was mentioned that someone might want compensation for the number of days the house may sit on the market without selling. How in the world can you control that? You may do an excellent job of rehabbing a building, staging it or whatever but still it may take a while to get a buyer, that is out of your control but the person putting up the money may not see it that way and certainly if your money partner is a lender they will get paid according to the time you have their funds tied up. On the other hand if an investor is taking risks right along side of you for lets say it is 50% then it should be stated your split will be 50% of the net regardless. 50% of the net may not be what the money partner envisions or was convinced he or she would earn if that 50% ends up being less than lets say 12% on their money. 

When I think about these things I always consider what a person with money can earn in other ways if not for the partnership we are proposing. That I know of people who put up money can easily go with someone very very experienced and even well healed financially and earn 12% on their money so that is my starting point to compensate a money partner. I would agree to paying them 12% gross on their money plus a split of any remainder of net gains.

On the other hand you also want to make sure you are paying yourself. That I know of no one can go without eating, without buying gas to go to work on a project, without paying insurance on a vehicle they will use and they cannot work without tools.

All expenses and items needed have to be itemized and agreed to before you make a commitment to a project with any partner. What if in the middle of a project you suddenly need a compressor or a generator that you did not account for as an expense during your agreement formation?

What happens if you go over everything and determine the project will need lets say $50K but were not counting on the house needing a new foundation, mold remediation, or possible lead paint remediation or asbestos remediation. 

The money partner may be relying on you for full disclosure but what if you missed something?

How many of these projects have you done personally?

Are there situations that can arise in which you have no experience in?

What contingencies will you prepare to deal with such situations?

You and your partner will have to agree on how to proceed in the face of unknown contingencies. 

One of the things I have noticed with people making these kinds of arrangements is that the one proposing to do all the work fails to pay themselves enough to keep up with their living expenses. You should add an amount to cover this as a part of the project cost unless you will count it as a part of your investment in the project but just think what if you take long to finish the project, encounter costs overruns on unexpected expense items and you are forced to go longer without any kind of money to take care of living expenses?

Someone will put up money and you will put up work but can you go without food or water, travel without gas, work without tools?

Really there is allot to think about. 

NO ONE GETS PAID IF THE HOUSE WILL NOT SELL. 

You may be calculating the house will be valuated and appraised for $440K  and then when a bank appraises it to determine financing for a buyer they come back with an appraisal of only $325K, what will you do then?

This business of someone putting in all the money and another doing all the work may be be so simple or cut and dry as we imagine it can and will be. 

There are substantially more risks then many people account for.

I've been looking for an investor a similar scenario. Here's the arrangement I came up with...

Investor funds the flip and rehab. I find the deal and rehab it and get it sold. Basically the investor only has to put up the money. I'll do the rest.

The house goes into both of our names with the clause that if I don't have the house rehabbed and sold in 6 months, my name comes off the deed (see below).

I draw a check for labor weekly, but the total paid to me during the rehab gets deducted from my half of the profits (see below). I have a family to support and can't go a month without getting a check. I'm a single dad with custody of 2 kids, they have to eat! If I'm not getting paid on this house, I'd have to be taking on other projects and speed and quality of the flip would suffer.

It looks like this (using round numbers of course)...

Acquisition: $100,000

Rehab (including my salary, let's say $6000): $50,000

Sale: $225,000

Investor gets $150,000 back (all out of pocket expenses). To continue using simplified round numbers, lets say $25,000 in holding costs (Realtor commissions, taxes, etc.) which leaves $50,000 profit. Investor gets $31,000 and I get $19,000. (My $25,000 of a 50/50 split, less the $6,000 I already got paid.) Investor actually makes a few thousand more then I do on the deal.

If I can't get it sold in the alloted time, yes, I still get paid for the work I did on the house (my kids still got to eat), but the investor still gets the finished product. By removing my name from the deed, the sale price can be immediately dropped by $19,000 and the investor won't lose a dime on the sale, they'll still make $31,000 profit!

So with all that being said, if there are any investors that would want to get in on it, I'm listening! :)

Originally posted by @James Palin :

Hey Alex and Kevin,

Thanks for the feedback.  Yeah my current investment goals are fix and flip and not buy and hold.  

With any money partner relationship, anything is negotiable.  Lots of good ideas on here about splits.  

Kevin, I enjoyed the water fall structure you laid out just in case a potential deal goes south.

The feedback will help me do some thinking on deal structuring.  

Thanks,

James

 Hi James

How is your market? Would like to find a rehab partner there if the deals are good enough.

Originally posted by @Javier Marchena :

I am doing some flips with a partner. We opened a new company under both of our names. He provides the cash and I do the work. After we sell, we split 50/50 the profits.

 Hi Javier

How many deals at a time are you doing? Are you still finding good deals there?

Hi @Angela Holstien ,

The market in DFW is really hot right now. There is not a lot of inventory right now.

Right now being a realtor, I do come into some occasional properties that are priced below market and do need some work. PM me with what kind of JV terms you proposing.

Originally posted by @James Palin :

Hi @Angela Holstien,

The market in DFW is really hot right now. There is not a lot of inventory right now.

Right now being a realtor, I do come into some occasional properties that are priced below market and do need some work. PM me with what kind of JV terms you proposing.

 We'll go as high as 50/50 for experienced rehabbers. Hard to say without knowing how many deals you've done in the past. But after doing my research I realized that there aren't many (I couldnt find anybody) that actually fund the entire purchase and rehab costs without requiring any skin in the game from the rehabber. So its important to make sure the rehabber is good. If your interested email me your contact info and well's up a time to talk next week. 

@Angela Holstien pretty common for JV partners to fund 100% if your doing a true JV and not a modified HML type program. I have personally done over 350 JV deals as the money in the last 3 years.. so here is one !!!

money is not the issue finding the right folks on the ground is the issue..

@James Palin agree with you Dallas is pretty tough right now. main issue is getting the appraisers to give you a realistic ARV once you sell retail.. that's what our issue has been getting lowballed on appraisals going out the back end.. you have a market that is moving fast and apprasiers are not following along as well as they do for instance here on the West coast were an arms length transaction will usually support the new purchase price.

Originally posted by @Angela Holstien :
Originally posted by @Javier Marchena:

I am doing some flips with a partner. We opened a new company under both of our names. He provides the cash and I do the work. After we sell, we split 50/50 the profits.

 Hi Javier

How many deals at a time are you doing? Are you still finding good deals there?

 Not a lot of good deals in the 100Ks or lower. We increased the price to see if we get better deals. 

I work on 2 or 3 flips at a time max.

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