Creative JV; one side wants cash flow, the other equity

6 Replies

A colleague of mine has a small portfolio of rentals on the lower end, where his goal is to accumulate some more and finance them with a 15 yr mortgage so that by the time he retires he'll have them all free and clear to generate a decent cash flow. Me on the other end, am interested in equity and buying in an area that projects appreciation for the next few years. 

I was thinking that we can combine the two goals in a way that we can split the DP to buy an undervalued property on a higher end neighborhood, fix it up, cash out refi to a longer term loan, hold it, and once it gains a certain equity amount refi again but this time I'll be handing over my shares and he'll keep on holding it. This way he could enjoy a higher income from rent, better pool of renters and lower turnover with a low DP, and I could have appreciation play.

Any thoughts? Maybe someone attempted to do it? 

@Assaf Furman

First up is have lunch with your partner and write down everything that you're willing to do everything he's willing to do 

Then go see your partnership and draft a joint venture partnership agreement and a new LLC operating agreement

I would have someone to be an arbitrator of the company so that disputes can be referee'd

Get your prenuptial agreement amongst 2 business partners

@Douglas Dowell

Is a great corporate attorney

@Assaf Furman  very common strategy in the 80's syndications were set up with A class B Class and C class..  A class would take no cash flow just equity and some deprecation.  B would take a mix of both  and C would take no equity but cash flow and deprecation. 

You can that was pre LLC days now with an LLC you can have all sorts of unequal distributions.

Also in the 80's when I lived in Palo Alto is was very common to have home owners partner with equity investors.. IE prices shot up from early 80s values to 500k or more in PA  so in those days people needed 20% down... touch to save up a 100k  and the market was moving north... So you had two investors

1. cash investor

2. the home owner 

home owner would get a owner occ loan and move into the home.. the cash investor put the down payment down.. Now not sure that would fly in todays lending world but maybe with some seasoning it would.. but they would set these up on 5 year terms.. with the home owner getting all the bene's of ownership and paying all payments tax's insurance. 

then at 5 years home is either refied or sold .. .with each splitting appreciation 50/50. now of course this worked in the bay area until the crash of 89 to 90 and many of these deals got extended out.. but when prices doubled again by 98 99 investor were able to cash out  folks got to live in PA with nothing down and have their kids go to some of the best public schools in the US... 

so just some thoughts  as I go down memory lane none of this may be feasible but maybe get you thinking

Thanks for your input @Brian Gibbons and @Jay Hinrichs . Getting an arbitrator is a great idea! 

The main thing I wanted to know is that there's precedence to what suggested above and a proper way to structure this. Have either of you been or know such a partnership in recent years?

These are core differences you both have @Assaf Furman .  Will probably take some educating on both ends to better see each other's views.   Wanting buy and holds in common is a start, but you are almost as far apart in your asset types as two partners with different niches entirely!

If I were you, I would show some actual returns from C class and their inherent headaches & unexpected costs from tenant damage and vandalism, etc vs projected returns.  They do look great on paper. Many stories from experienced investors on here.  Search 'pigs'. Lol. I'm sure you get the idea. 

If all this is just to split the DP, I would go solo.  Then again, I always go solo.  What kind of DPs are you talking about?  The headaches of a partnership whose core values are so different would concern me greatly.  Cheers!

Thanks for the mention @Brian Gibbons .  The following is intended as information and not legal advice.  Seek Local Counsel.

The beauty of the LLC is that is the number of creative ways you can use it are almost unlimited.

The trick is to meet 1) business and 2) tax objectives at the same time.   

The recurring issue is can I or should I?

The answer to the can I question seems to me is limited to only what you can negotiate.

The answer to should I should IMHO be subject to your after tax ROI targets relative to the next best alternative with an element of risk factored in.

Originally posted by @Douglas Dowell :

Thanks for the mention @Brian Gibbons .  The following is intended as information and not legal advice.  Seek Local Counsel.

The beauty of the LLC is that is the number of creative ways you can use it are almost unlimited.

The trick is to meet 1) business and 2) tax objectives at the same time.   

The recurring issue is can I or should I?

The answer to the can I question seems to me is limited to only what you can negotiate.

The answer to should I should IMHO be subject to your after tax ROI targets relative to the next best alternative with an element of risk factored in.

 Thanks for chiming in Douglas. I'm not looking for legal advice, let alone here in the forums, but can you tell if you've counselled to a partnership similar to this? 

Join the Largest Real Estate Investing Community

Basic membership is free, forever.