Structuring a JV deal - James Wise podcast

4 Replies

Hey BP members, Happy Monday!

I'd love you input on deal structure. After listening to the latest podcast with James Wise it makes sense to add JV as part of my arsenal, since I do have friends & family that have funds and have said they want to get into real estate.

My questions is: if as an investor I'm bringing: knowledge, research, connections, finding deals and orchestrating a team (rehabber, R.E. agent, bird dog, property management, etc.) -- and the JV partner is bringing money and/or credit, what should the split be? 70%: me/ 30%: partner, 60/40, 50/50? And why?

I'm hoping to get examples of actual deals you've structured or been a part of.

Thanks

Arnauld

I've never done it before but for a starting point figure out what the investor's minimum rate of return (how it compares to a bank, CD, or stocks). Say its 5-10% annual rate of return, backwards engineer the equity split or preferred rate of return.

Originally posted by @Arnauld Nakaha :

Hey BP members, Happy Monday!

I'd love you input on deal structure. After listening to the latest podcast with James Wise it makes sense to add JV as part of my arsenal, since I do have friends & family that have funds and have said they want to get into real estate.

My questions is: if as an investor I'm bringing: knowledge, research, connections, finding deals and orchestrating a team (rehabber, R.E. agent, bird dog, property management, etc.) -- and the JV partner is bringing money and/or credit, what should the split be? 70%: me/ 30%: partner, 60/40, 50/50? And why?

I'm hoping to get examples of actual deals you've structured or been a part of.

Thanks

Arnauld

Arnauld, with experience and a successful track record you can better negotiate the terms of your JV. Investors find it uneasy knowing the operating partner (gp) will have little skin in the game and are less likely to invest. I would recommend structuring the initial equity split based on what you feel comfortable investing in the deal and what your investors are comfortable with. Typically, until you reach a certain hurdle, you will not be collecting any sort of equity promote. Try getting at least 10% in the deal. With no track record, I would imagine you're going to need more. Deal size also matters. Your biggest investors will have the negotiating power, however you can try something like this:

Pari-passu: 0-8%, 90lp /10gp 

First promote: 8-16%, 75lp /25gp 

Second promote: 16%+, 60lp /40gp 

Hope this helps.

@Arnauld Nakaha

The most important thing to understand about doing a JV is that EVERYONE needs to ad value.

Here are blogs that go over the number on JV's my company has done.

11 Unit apartment building $271,000

21 Unit apartment building $635,000

You appear to be looking for capital while you are the guy putting in the work as you have stated you have contacts such as real estate agents, rehabbers and property managers. Having contacts with these guys is great but your not actually providing those services only being the connection to them so I would assume your going to need to take a smaller equity position then we normally do or put up a larger amount of capital then we do to get the same equity split. 

The more deals you do the higher your demand will be. Just getting started your going have the least amount of meat on the bone leftover for yourself. As you progress in your career, gain more skills, experience and reputation that amount should grow.

For instance, we no longer put up the same amount of capital for a 66/33 equity split like  the deal we did with the 21 Unit apartment building $635,000 deal.

We are now putting up a smaller number for that equity split because we have a higher supply of investors than inventory of buildings. Do things right and you should run into the same situation.