Why You Should Avoid Joint Ventures in Real Estate Deals

by | BiggerPockets.com

Today, I’m talking to you guys about joint ventures. Should you do one? Or should you not?

Ok, before I get started, I want to talk about something. A lot of you folks have been giving me a hard time saying, “Hey, check this guy out. He’s very black and white. He’s not flexible; he’s not open to opinions.” By all means, I’m very open to opinions. But sometimes the way I express things can come across in a very harsh or cutthroat way. I’m sorry, it’s just  my style. It’s the way I roll. Nothing personal. I’m just always excited to share my perceptions, opinions, and experiences with you guys. You can take it or leave it, and that’s just the way it is. Once again, I mean no harm.

About Joint Ventures

So, this is another one of those blog posts that is very black and white. Joint ventures: No; you should never, ever, ever do a joint venture. Let me tell you why. Never forget what I am about to tell you: You cannot have two cooks in a kitchen. Impossible. It’s just not going to work. The same goes in real estate. I just don’t believe in joint ventures. I’ve done them in the past, some of them were successful, some of them were not. The majority of them weren’t, and the way I particularly operate as an alpha-type character, I like to control everything. I want to call all of the shots. I just want my partner to shut up, do nothing, and let me do all the work. I’ll make them the money.

There is one way to successfully structure a joint venture. Someone can come to the party (or the table) with the capital. They’re going to give you the money, and then they’re going to get out of your business. You can’t expect anything else from them. You have to take that money and with your experience and knowledge, you have to use that money to make a great return on investment. Whatever the split is going to be is entirely up to you and your partner to negotiate. Sometimes, it’s a hard money loan, so it’s a different type of arrangement. Other times, it’s a partnership where it’s a 50/50 split. That is entirely up to you guys.

Related: 10 Vital Aspects of a Bulletproof Joint Venture Agreement

I truly believe one party should be passive. So give me the money and let me do my thing: Find the deal, negotiate it, buy it, close on it, renovate it, project manage it, sell it, and make sure I’m part of the entire closing transaction. Then when the funds are available, after the title company has dispersed them, divvy up those profits.

In my opinion, that’s the only way you can successfully structure a joint venture. I have seen it way too many times—joint ventures turning sour because, once again, you cannot have two cooks in the kitchen. Every cook has his or her own way of cooking, and that is the same in real estate. If one person wants to do something a certain way and the other doesn’t like that idea, it won’t work. You’re going to have issues there.

Time is money. If you spend too much time on miscellaneous things, you’re not going to get the job done.

Related: A Tale of Two Real Estate Joint Ventures: Success vs. Failure

The Bottom Line

So that is my opinion. I’m not sure if any of you are doing joint ventures out there. I suggest you don’t. I suggest you start slowly, doing things on your own. Then what’s going to happen is, over time, once you can prove your success, and once you start doing a lot of deals consistently, there will be a lot of people who like who you are. They will like what you’re doing. And they’ll be able to see the trend in the deal flow, so they will throw money at you. I don’t want to blow wind up my butt here, but I’ve got so many people throwing money at me every single day, it is mind boggling. My terms are very strict. Sure, I’ll take on the investment, but get the hell out of my way.

There you go. It’s black and white for me like every other blog post.

Hey, I’d love to hear your thoughts. Am I right? Am I wrong? Do you do joint ventures successfully? Can you have two cooks in the same kitchen? Comment below; I’d love to hear from you.

About Author

Engelo Rumora

Engelo Rumora, the Real Estate Dingo and your favorite Australian, quit school at the age of 14 and played professional soccer at the age of 18. From there, he began to invest in real estate. He now owns real estate all over the world and has bought, renovated, and sold over 500 properties. He is currently in the process of launching an ICO that will “Decentralize The Real Estate Industry.” He’s also known for giving houses away to people in need and his crazy videos on YouTube. His life’s mission is to be remembered as someone who gave it his all and gave it all away.

17 Comments

  1. willie morales

    Good article Engelo

    Took me several years to figure out That some of the people I wanted to either partner or JV with, just didn’t have the same goals as I .
    Lack of hustle, no vision, didn’t want to learn, etc was what I encountered, and believe me that just the beginning.

    I’m not saying I’ll never partner with anyone, but I will get to know them, like you said before, get to know them for 6-9 months and see if they can do the same.

    Thank Engelo, keep up the good work.

    • Engelo Rumora

      Thanks for your comment Willie,

      Over time you get to a stage where you don’t really need partners.

      Many folks starting out are strapped for cash and take on partners just for the money benefit.

      Later on it becomes more of a “long term vision” type partnership just as you mentioned above.

      I have many equity partners in my ventures that I lean on for advice but at the end if the day, I call all of the shots.

      Much success

  2. Nick B.

    It probably depends on a project size and duration. If it’s a house flip, sure – one general partner is enough. But what if it is 200 units apartment? Is being a sole sponsor/GP such a good idea especially if this is your first deal as GP? Even if it is not the first one, having an experienced partner as a co-sponsor will help.

    There is also a continuity matter. What if a sole GP is hit by a bus? Who is going to finish the project if there is nobody else standing by? There is a reason planes usually have pilot and co-pilot. Same logic applies in business.

  3. Stephen S.

    There may well be only one cook in a kitchen but every great restaurant chef requires a sous chef. I read your article with interest but came away with the impression that your position blinds you to opportunity. Rejecting all divergence options is ultimately limiting.

  4. Barry H.

    I agree with the idea that having one person direct the project is beneficial and more efficient. As a hard money lender, my preference is to lend and then walk away until the end. However, I made (am making) a huge mistake by lending on a 50/50 JV-srtyle profit split whete I provide all the capital and the partner (Borrower) does the work.

    Borrower had a great resume but hired thief contractors and I am foreclosing on 2 of 5 and probably 4 of 5 of the homes when it is done. I had to inject myself halfway through the rehab process and the Borrower got very upset at my efforts to direct the progress, ignoring pretty much everything I suggested, ending in foreclosure and significant monetary losses to me.

    Just an example of picking the wrong partner I guess. Also, as a hard money lender, although the numbers may seem enticing, a person with no skin in the game is not likely to perform despite their resume or experience.

    • Engelo Rumora

      Thanks for your comment Barry and sorry to hear.

      It’s a tough one, as a hard money lender you rely on the other party to make you money.

      And as you mentioned, it’s about picking the right partner that will do just that

      I’ve had my fair share of sour partnerships and run things a different way now.

      I’ve found that “Business is easy and people make it difficult”

      Nowadays, I’m doing my best to limit exposure to new folks that want to become a part of any one of my ventures (I even limit sales to only a select few)

      It’s a long relationship building process before we jump in bed lol

      I have some awesome folks around me right now and am happy keeping it that way

      Thanks and much success

      • Sonia Spangenberg

        Engelo, as I am currently going through a partnership gone bad, I have figured out what my mistakes were. And though my former partner failed to perform as agreed, I am majorly at fault in several ways. #1. I ignored what I had read about using/screening professional consultants on forming out partnership. My partner didn’t want to spend the money on that. Did not want to own in an LLC for our SF. She conceded on our MF. I failed and deferred to her insistence. #2. We did not have a DETAILED partnership agreement. It was very general. We should of had specific duties outlined along with consequences for failure to fulfil. #3. We did not have SPECIFIC DETAILED outlines for how to dissolve and divide properties, assets, losses. I am paying the price now in legal fees.

        As to the issue of newbies with limited experience and resources, there may be a need to form alliances to accomplish their start-up. Problem is the newbie doesn’t know what they don’t know. This should be done very carefully and the long range view should be to be very picky on which deals they pursue, not fall prey to the desire to “get a deal” to get started. This will allow quicker progress to independence from the need for “partners”.

        A limited partnership differs from other partnerships in that the limited partners are allowed to have limited liability and the general partner has sole management if structured properly. This means that limited partners are only liable for the business’ debts up to a certain limit. This limit depends on the individual partner’s investment contribution. A limited partnership venture is run by one (preferred) or two partners known as general partner(s). Other contributors, known as limited or silent or limited partners, provide capital but aren’t allowed to make managerial decisions.
        JV is better than partnership but only if the above is outlined in detail. Equity only partners are hard to find when you don’t have investment experience. Hard money lenders are a great option because you get assistance with double checking your numbers and oversight on paying out contractors. Screening contractors needs to be a big educational goal too. See if your hard money lender has suggestions on contractors with good track records and be prepared to supervise the quality and progress yourself. Educate yourself on this.

        One or two failures on the above discussed is probably going to happen in one’s start up in investing, however it is not to be considered the end of the world. It is an educational event and will make one a better investor going forward. There is considerable wisdom in Engelo’s advice.

        One who has learned the hard way. But learned a lot!

  5. One thing I have learned is to Never Say Never

    I fully agree that there should be only one person steering the ship, and that it should be me. If they don’t trust me, my strategy, my competency, etc. then we should not be partners. Most of my JV partners are/have been out of town, passive investors, and that has always worked out great! Rehab projects can look pretty scary when you are in the middle of them.They really don’t need to worry themselves with those little details

    I would be nowhere near where I am financially without having done JV deals. They gave me a chance to own half of hundreds of properties instead of all of just a few. So I don’t think there is anything wrong with doing JV deals, as long as you structure them properly.

  6. Ryan Wittig

    The title of this article might be better as “Why Engelo Rumora should never do a Joint Venture”. It sounds to me like you have the luxury saying you don’t need partners based on your track record and a strong capital position. Investing in the Boston area (most properties we look at are at or over $1 Million) with a full time job, I could do one or MAYBE two deals a year on my own and would be significantly limited by my time and capital. Having partners I TRUST allows me to do bigger and better deals than I could do on my own.

    In my opinion and experience, partnerships do have their place in time. I’ve done partnerships on development deals which worked out very profitably. Were there learning experiences about structuring operating agreements and splitting up equity based on capital and time devoted to the project? YES. Live, learn and improve. Having clear & written roles and responsibilities is important. Having clear exit clauses for longer term engagements is also important.

    I’m currently working on a partnership deal for office property which is targeting property between $2.5-4 Million. Two of the partners (myself included) will be the operational/general partners, and the others will be limited partners. As long as everything goes smoothly (God willing), I imagine the limited partners will be happy to collect their money and go about their business. Should there be challenges, I would welcome the input of other partners as they are all people I have chosen to do business with and believe they have earned the right to assert their position if we aren’t executing as planned.

    I’m a believer that real estate is a team sport and when you are operating at a higher level than basic flips or small rental properties it is beneficial to have people who would go into a “fox hole” with you.

  7. Brad B.

    Good article Engelo. I agree with the concept but I think there are ways to make joint ventures work if structured correctly.

    We do JVs which are structured so that you only get into the equity of the deal if you actually bring the deal. By doing that, a JV partner is bringing real value since we get into a deal we otherwise would not have found. So, we’ll gladly give them some equity.

    The problem with most JVs is that usually one or both partners would be better off on thier own. For example, that’s why the whole (brother-in-law as the accountant, uncle as the money guy, and me as the contractor, and then split profit 3 ways) game plan doesn’t work because what you should do is fire everyone and hire out all the needed services rather then give away equity. The reason that structure doesn’t work is because real value isn’t being added.

    So we have a guiding principle with our JV partners called “must add value.” This goes for us as well. It’s harder to determine then it sounds but for us, a JV partner only adds value if they bring us a deal we otherwise would not have found. For the JV partner, we only add value if we are executing the deal that they otherwise could not have done on thier own, and in this arrangement, we take all the downside risk and make all final decisions.

    • Engelo Rumora

      Thanks Brad,

      Why do you give equity in a deal to someone?

      We usually just pay them a “buyers fee” or they already make their margin by wholesaling to us.

      I’ve found that most folks wanting to do JV’s are either 1) Not knowledgeable enough to do it on their own or 2) Don’t have money to do it on their own

      None of the 2 examples above are good in my opinion.

      There are exceptions off course but the above is just based of my experience

      Not claiming to be right or wrong here and just sharing my perceptions

      Thanks again and have a great day

      • Brad B.

        Engelo, I agree most people wanting to partner don’t have good enough reasons for us to partner with them. We don’t partner with wholesalers, buyers agents, or bird dogs if we’re already paying them a fee.

        The part I left out about our partnerships is that they usually start with partnering on the marketing campaign. For example, I have some partners that are interested in direct mail marketing but don’t have the systems and processes to manage calls, follow up, etc. So they are responsible for paying for the marketing campaign and we manage their leads. If we get a deal, we partner. We only do this with people we know really well and who trust our systems and processes. The advantage for us is we get exposed to off market deals through free marketing. 50% of our marketing right now is funded by partners.

        I have also partnered with a local wholesaler on several deals and given him equity rather then a wholesale fee. I believe this incentivizes him to bring us the deal rather then shopping around for the best price from other investors. He’ll usually bring the deal before it’s even under contract yet so I then get the chance to negotiate an even better price with the seller. In my market, investors are fighting over “80% rule” deals which is way to high for me. So if I can convince a wholesaler to bring me his lead which is at 65% and not yet under contract, then let me negotiate down as much as we can, and partner on it, we both win because I get into a great deal and he gets the upside potential that he otherwise would have missed by wholesaling.

        Thanks for your perspective.

        Brad

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