“Teresa, why would I ever want to partner in a Joint Venture real estate deal and give up 50% of my equity, mortgage pay down and cashflow, when I can invest on my own and make 100% of the profits?”
Before I answer this question, let me explain what real estate joint ventures (JV’s) are.
In a nutshell, there are usually two parties in a JV – the Money Partner and the Working Partner.
The Money Partner is responsible for providing the capital which includes the down payment, qualifying for the mortgage, all closing costs, two months of reserve funds, money to purchase furniture (if it’s a furnished rental), and money to do renovations (if it’s a fixing and flipping type of property).
The Working Partner on the other hand provides the sweat equity and is usually responsible for finding the deal, negotiating on the deal, furnishing the property, overseeing the renovations, finding tenants and all property management duties. The Working Partner has often invested thousands of dollars and hours in real estate investment training, and should have a good track record.
The property is usually held for a set number of years or until the value goes up a certain percentage, or when the partners mutually agree to sell the property.
During the holding period, the monthly cashflow (money left over after all expenses and mortgage payments) are split 50%/50%.
At disposition, the mortgage gets repaid and the Money Partner gets reimbursed their entire capital contribution (down payment, closing costs, furniture, renovations, reserve funds, etc.). After that, any profits (or losses) are split 50%/50% as per the ownership.
So back to the question, why would anyone want to do such a thing? Typically, the Money Partner is a busy individual usually with successful businesses or careers they want to focus on. They want to be in real estate but they don’t have the time or inclination to become experts.
That’s where the Working Partner comes in. They have spent thousands of hours to become experts. They know how to find the deal, have the expertise to maximize rental income (sometimes even double of what someone inexperienced can achieve on their own!), and they know what to do to minimize risks. They deal with all tenant relations and provide monthly or annual financial statements to the Money Partner.
Word of caution: Whether you are the Money Partner or the Working Partner, it’s always important to do your due diligence on your partner as real estate investing is a long-term game, because at the end of the day both partners share the same investment.
What does each party gain from a Real Estate JV partnership?
For the Working Partner, they are losing time, but gaining the capital to grow their real estate portfolio using other people’s money.
For the Money Partner, they are putting in the money and they sit on their behinds and make money in their sleep, so they gain time.
Each party brings something to the table that the other doesn’t have. In other words, a JV partnership is a win-win!