If you were approached to be involved in a JV, what criteria would you look for before moving forward with a deal.
Hey Cody, that's a super vague Q. Generally the JV will be tailored to the parties involved in the agreement.
For example for me, maybe my criteria is an agreement where the partner funds the DP & finances the property. Where as for someone else maybe the most important criteria is that they do not have to manage the project, property search & tenants.
The only deal breaker should be whether or not the deal makes sense for both parties.
As a hypothetical case, what would be your thoughts on a existing 8-plex JV? Let's say one party is looking to provide 30% of downpayment and PM the tenants for the term of the agreement well the other investor would provide the remaining 70%.
Hey @Cody Weiss , how we typically structure our JVs in Windsor Ontario is that one party puts up the capital and financing, and we do all of the work finding the deal, normalizing the property, managing the asset. We split all net profits with the the investor 50/50.
If you are splitting the downpayment, the other factor you will need to consider is what else each party brings to the table. Does one of you have expertise while the other has no knowledge or experience in real estate? If so that is worth something.
If the two of you have a similar level of experience and knowledge and you are working together to find & close the deal then that portion of the value is equally split.
We typically look at property management as a service that is paid as an expense of the property, not as a task that one would receive equity to do. The reason being - consider if you were to get more properties and you decided that it made sense to hire out the property management to a management company. Now you will be paying the management company a monthly fee to do that, and one partner will still have extra equity that was supposed to compensate him for property management. In our experience it is best to leave property management as a service fee and not equity. If one partner is taking care of the property management then it may make sense to pay them a management fee (maybe 8%, or whatever you decide on) from the income of the building rather than giving equity for this.
You can think of it this way:
Experience, expertise, deal, and asset management = 50% value
Money & financing (otherwise passive) = 50% value
If you provide equal value in terms of experience, deal, asset management, etc, then you can split that (25% equity each).
If you are bringing 30/70% of the money & financing then that is a split of 15% and 35%
So this would look like an overall 40%/60% split, and property management would be paid to whoever is doing it as a management fee out of the gross income of the property.
Looking at the value split this way, you can rebalance it however it makes sense based on what you each are bringing to the table.
Hopefully this way of looking at the framework is helpful for you! Ultimately the most important thing is that you come to an agreement that makes sense for both of you, and make sure you put it in writing including what specific roles each party is accountable for.
@Cassidy Logsdon ! The involved partners are looking at multiple properties, so accounting for PM for a paid expense makes perfect sense.