Joint Venture - tips?

Real Estate Deal Analysis & Advice
6yFollow

Joint Venture - tips?

Christina Torres
Rental Property Investor · Chicago, IL · Member since 2017 · 17 posts · 2 votes

My husband and I are looking to buy a portfolio of properties. Given the sellers are my parents and they just want a monthly payment (they don't want us to get financing and pay them the full amount because then they will be taxed heavily) we are looking at 2 options- leaning towards the second.  

1) Seller financing - the downside to this is that at some point we will refinance because BRRRR..... and they will get the remaining money owed in one lump sum

2) Joint Venture- in this scenario my parents put up the properties and we put up the rehab costs and ongoing management. BUT how do we determine how much equity our contribution and work gets us? if the prop is currently worth 200k and we're going to spend 100k, I think it seems fair that we would have 33% equity and from there 50/50 on any increase in the value. Should we ask for additional equity for the management of the property and how could we determine the value of that? Also what professional would be best able to advise on the ins and outs of setting something like this up (and if you know of anyone in the Chicago area please send me their info!).

Anything else in regards to either of these we should be thinking of as pros or cons? TIA!

0Reply
19 views

2 Replies

Jump to latestLatest
  • Eric M.
    Flipper/Rehabber · Louisville, KY · Member since 2008 · 1k+ posts · 1k+ votes
    6y

    Well, a lot depends on the specific numbers and how much monthly payment your parents want but here is a creative solution.

    Very simplistic outline. You buy the prop for 100K with 100% seller financing and pay your mom and dad their monthly payment on the 100K.

    You invest 100K of your own in the rehab and the property is now worth 250K, just as example.

    You refi with a 200K mortgage and get your 100K and your parents get their 100K back.

    Then your parents use their 100K to become your private lender to go out and buy more property. You pay them the monthly payment they want. Hopefully their desired return is single digits.

    The only downside (other than the trickiness of doing business with family) is that since they want a regular monthly payment, you need to put that 100K to work right away. Can't sit around for long waiting for a new deal while you pay them interest.

    0Reply
  • Crystal SmithPro Member
    Moderator
    Real Estate Broker · Chicago, IL · Member since 2014 · 2k+ posts · 1k+ votes
    6y
    Originally posted by @Christina Torres:

    2) Joint Venture- in this scenario my parents put up the properties and we put up the rehab costs and ongoing management. BUT how do we determine how much equity our contribution and work gets us?

    The market, through a market analysis, determines how much equity you will have in the property. You can try and do it own your own or you can hire an appraiser and describe exactly how the $100K will be spent & he/she will provide you with a After Repair Appraisal. Or hire a broker and he/She will provide you with a Broker's Price Opinion. Both the appraiser and the broker can also provide you with the true AS-IS value.

    I'm not sure I'd worry about splits until you have market analysis data to support your proposal. 


    Anything else in regards to either of these we should be thinking of as pros or cons? TIA!

    Something else to consider- We once structured a deal with who owned the property inside of a Land Trust. We made an offer to update the property as part of a Joint Venture. Once the property was updated we sold the property and split the profits. To facilitate the Joint Venture the seller updated the Land Trust docs; i.e. The Trust still owned the property but we became part of the Trust. It was a complicated transaction but it facilitated privacy and protection for us and the seller. 

    I mention this alternate strategy because the seller's are your parents & there are other benefits of them holding the property inside a Land Trust if you are the beneficiaries.

    312-681-7487
    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free