50/50 .. is this fair ?, What is an equitable split between RE expert and investor Options

[ThomasBeyer]

50/50 seems to be the REIN norm for single family homes .. but is this the right split ? Why not 70/30 ? or 25/75 ? Why not charge a fee upfront when all the work is done .. and a fee as you go along .. or more than 50% over a certain price target or investor ROI ?

Some of my investors have made 200%, or 300%+ ROIs .. so 50/50 in hindsight seems like expensive money .. but then they referred others .. so in hindsight that is the entry price to mutual success ..

first deal is always hardest, 2nd a bit easier, 3rd deal a bit easier .. 15th is easier ..

Hence, usually you have to do your own deals, with your own money, to prove a point or an expertise area !

Hence: sell too early .. to show a track record in deal 1 .. do a 2nd or 3rd deal .. show it again .. then you have the right to ask for other's people's money ..

so give away a little too much in the first deal, take a little more in 2nd deal, a little more in 3rd deal .. until the formula fits these criteria:

IT HAS TO BE WIN/WIN .. both for you and for the investor .. both you and the investor have to feel it is a fair deal and no one gets ripped ..

IT HAS TO BE REPEATABLE .. and as such, you have to make money too while you hold, work, get the mortgage, find the trades, upgrade .. and as such 50/50 works POORLY as you have usually almost no cash-flow while you hold and need add'l income to wait for the big equity pop at the end .. often years away .... why not charge a fee upfront (perhaps it is being credited against your future earning .. perhaps you call it a sales commission or an asset acquisition fee), a fee while you go along (perhaps charged against your future earning .. usually called an asset management fee) .. and then take 50 or 25 or 30% or 80% at the end .. depending on the outcome .. no one usually minds that you make lots of money .. as long as they make a decent ROI .. for the risk involved ..

IT HAS TO REWARD THE RISK ADEQUATELY .. and as such some deals need to show a higher ROI than others .. building brand new homes in brand new markets with no expertise is high risk .. you have to offer high ROIs .. subdividing land and waiting for approvals is high risk .. condo conversions is high risk .. buying pre-sale condos is high risk (especially if you couldn't close them yourself and they wouldn't cash-flow if you had to buy them ..) .. buying lower priced townhouses or duplexes or apartment buildings for rent with rental and equity upside in growth markets is fairly low risk .. perhaps less equity upside .. but high levareg and thus high cash-on-cash ROI .. but loss of capital potential is very low .. so you don't have to offer too high an ROI .. i.e. you can take 50% or more of the profits ..

IT HAS TO BE SELLABLE .. i.e. you have to have a proposition (properly packaged with appropriate legal and marketing material and website and salesmenship and team members that execute with you or on your behalf) that works for the investor .. he wants a track record and assurance that he doesn't lose any money .. i..e they want a return OF their money .. and then a return ON their money .. so the track record, you the person, the risk, the likely or potential reward and the packaging have to be aligned for it to be sellable ..

Happy JVing ..

[GarthChapman]

I would propose that the split percentage should be 'driven' by the 'return' for the money partner, along with a risk component to the calculation.

I would work backwards from the predicted 'Cash Flow plus' (cash flow + mortgage paydown), and consider appreciation as a bonus. The alternative would be to include the paydown and therefore measure from the total predicted ROI.

Many Investors do not take this into account, and thereby are offering vastly differing returns to their money partners. And I suggest that many Investors are giving away too much to their money partners.

Remember, as Thomas says, this should be win win, and that means you should ensure a fair return to you and to your money partner.

For example, I hear from investors who have refinanced the property and thereby reduced the return, and used some or all of the proceeds to pay out some of the money partner's cash invested, and yet they have not reduced their money partner's share of the return. In so doing the Investor's return has shrunk, and the money partner's, as a percentage of cash invested, has skyrocketed.

And that's my take on this complex area of JV investing...

[RedlineBrett]

Happy JVing ..

You too!

[Merriora]

Hello

I’ve recently been approached with the idea of being JV Partner, but have never looked into the details of one before.

Is it common for a JV deal to be structured as:

Money Partner: Provides money for 25% Down Payment on the purchase price and any closing fee’s.
Expert Partner: Provides the knowledge and makes all arrangements to purchase property. Provides a plan for the best return including timeframe.

Sale of Property
============

Money Partner: Receives the 25% Down Payment back as well as the closing fee’s.

The remainder of the return is then split 50/50 between the Money Partner and Expert Partner



Do most usually use the above as a starting point? Are arrangements usually further negotiated?

[RedlineBrett]

Hello

I've recently been approached with the idea of being JV Partner, but have never looked into the details of one before.

Is it common for a JV deal to be structured as:

Money Partner: Provides money for 25% Down Payment on the purchase price and any closing fee's.
Expert Partner: Provides the knowledge and makes all arrangements to purchase property. Provides a plan for the best return including timeframe.

Sale of Property
============

Money Partner: Receives the 25% Down Payment back as well as the closing fee's.

The remainder of the return is then split 50/50 between the Money Partner and Expert Partner



Do most usually use the above as a starting point? Are arrangements usually further negotiated?

Yep that's how we do it.

[GarthChapman]

Hello

I've recently been approached with the idea of being JV Partner, but have never looked into the details of one before.

Is it common for a JV deal to be structured as:

Money Partner: Provides money for 25% Down Payment on the purchase price and any closing fee's.
Expert Partner: Provides the knowledge and makes all arrangements to purchase property. Provides a plan for the best return including timeframe.

Sale of Property
============

Money Partner: Receives the 25% Down Payment back as well as the closing fee's.

The remainder of the return is then split 50/50 between the Money Partner and Expert Partner



Do most usually use the above as a starting point? Are arrangements usually further negotiated?

Hi Merriora,
See my comments earlier for my thoughts on how to value the percentage split between the Venturers. I don't think 50/50 is necessarily the fair split in every deal.

[ThomasBeyer]

... see my comments earlier for my thoughts on how to value the percentage split between the Venturers. I don't think 50/50 is necessarily the fair split in every deal.

Exactly .. work back from what is acceptable enough for the investor given the risk, experience profile, timeline, market, chance of loss, chance of huge upside, cash-flow ... and yes, with age and track record comes grey (or less or no) hair but the right to charge a little more .. and perhasp the wisdom what fee structure is win/win or win/WIN or win/win ?

This post has been edited by thomasbeyer2000: Dec 12 2007, 08:22 PM

[RedlineBrett]

You too!

Ugh, I had a much bigger post typed and for some reason only this part got posted. I'll try and paraphrase my last bit.



first deal is always hardest, 2nd a bit easier, 3rd deal a bit easier .. 15th is easier ..

Hence, usually you have to do your own deals, with your own money, to prove a point or an expertise area !

Hence: sell too early .. to show a track record in deal 1 .. do a 2nd or 3rd deal .. show it again .. then you have the right to ask for other's people's money ..

This is definitely something we've struggled with. Our investments require time in market to do their thing. Generally speaking We have found some difficulty in selling our business to people because we don't have a 5 or 6 year track record to fall back on. We are both 26 and have been at this for 2.5 years and are only just now starting to get looks from people that can afford fourplexes, duplexes and the like.

IT HAS TO BE REPEATABLE .. and as such, you have to make money too while you hold, work, get the mortgage, find the trades, upgrade .. and as such 50/50 works POORLY as you have usually almost no cash-flow while you hold and need add'l income to wait for the big equity pop at the end .. often years away .... why not charge a fee upfront (perhaps it is being credited against your future earning .. perhaps you call it a sales commission or an asset acquisition fee), a fee while you go along (perhaps charged against your future earning .. usually called an asset management fee) .. and then take 50 or 25 or 30% or 80% at the end .. depending on the outcome .. no one usually minds that you make lots of money .. as long as they make a decent ROI .. for the risk involved ..

We got around this by getting our licenses. We figured we would benefit from increased knowledge of the real estate and finance markets and could also save our partnerships some money at the back end from sale comissions. We also keep buyer comissions when we do deals with partners to inject some cash into our business. This has worked fairly well so far - our partnerships need an agent and need to get financed, we need some cash to keep the lights on so it's pretty close to win/win.

In the spring of '06 my partner and I pitched the venture alberta group (group of angel investors) with the thought of starting a homebuilding company specializing in nice duplexes and townhomes in inner city areas. We proposed a 50/50 split along with an upfront fee. They really liked our presentation and couldn't argue with the returns we were advertising but most of these investors had a 'real estate guy' already and also commented that they wanted to see us in business a little longer. Anyways it was a great learning experience.


IT HAS TO REWARD THE RISK ADEQUATELY .. and as such some deals need to show a higher ROI than others .. building brand new homes in brand new markets with no expertise is high risk .. you have to offer high ROIs .. subdividing land and waiting for approvals is high risk .. condo conversions is high risk .. buying pre-sale condos is high risk (especially if you couldn't close them yourself and they wouldn't cash-flow if you had to buy them ..) .. buying lower priced townhouses or duplexes or apartment buildings for rent with rental and equity upside in growth markets is fairly low risk .. perhaps less equity upside .. but high levareg and thus high cash-on-cash ROI .. but loss of capital potential is very low .. so you don't have to offer too high an ROI .. i.e. you can take 50% or more of the profits ..

What would be great would be if we had a special REIN report where investors disclosed how they are doing with negotiating their JV deals. We could keep everything anonymous. I think a great many people would benefit from knowing just what kinds of deals people are getting out there and what the true ROIs investors are seeing for their buck.

IT HAS TO BE SELLABLE .. i.e. you have to have a proposition (properly packaged with appropriate legal and marketing material and website and salesmenship and team members that execute with you or on your behalf) that works for the investor .. he wants a track record and assurance that he doesn't lose any money .. i..e they want a return OF their money .. and then a return ON their money .. so the track record, you the person, the risk, the likely or potential reward and the packaging have to be aligned for it to be sellable ..

I think it's important to note that this takes a bit of time and effort to achieve. You can't flip the switch after a REIN meeting and instantly become the total package (or at least we couldn't). Taking a bit smaller bites and putting things together at a slower pace can be a lot easier on stress levels and I would contend you'll have a more stable and organized business as a result.

Happy JVing ..

You too!

This post has been edited by RedlineBrett: Dec 13 2007, 08:49 AM

[markl]

I for one like the 50/50 JV maybe because I am only on my 7th JV and it is what I have been taught. But I am a fan of getting an upfront fee for my time and I put this in every deal.

Regards,

[ThomasBeyer]

I for one like the 50/50 JV maybe because I am only on my 7th JV and it is what I have been taught. But I am a fan of getting an upfront fee for my time and I put this in every deal.

Regards,

ask for it .. or put it in your JV contract .. time is money, espcially upfront .. s most work is front-end loaded .. and with a 50/50 deal most return is rear-end .. sometimes years away .. try to get some $s upfront, some while you hold and some at the end .. whatever is win/win and sellable !

Most real estate syndicators on a large scale (Shire, Walton, Platinum Equities, Signature, LibertyGate, Concrete Equities, League, Strategic West, .. to name but a few ..) take a 10% sales commission upfront and MANY even uplift the value going in .. some even w/o disclosing it .. and the deal even then may make sense for the passive co-investor (although some don't) ! We take 6% commisison and no uplift going in .. but we also take a 1% asset acquisition fee !

[JoeRagona]

.. but we also take a 1% asset acquisition fee !

Is this acquisition fee based on the property value or the amount of invesment the money partner puts in ?

[ThomasBeyer]

Is this acquisition fee based on the property value or the amount of invesment the money partner puts in ?

it is based on the purchase price of the ASSET .. so for a building worth $2.0M we'd take $20,000 ..



a VERY common model, not employed by us, but by MANY other syndicators is to buy at price X and syndicate at price X+ 20% or +5% or even as high as +100% (in land syndication deals especially !!)

[Jana]

a fee while you go along (perhaps charged against your future earning .. usually called an asset management fee)

If you charge an "asset management fee" what would a normal percentage be and where would the funds come from? Also how often would this fee be levied?

Thanks for the great info.

[ThomasBeyer]

a fee while you go along (perhaps charged against your future earning .. usually called an asset management fee)

If you charge an "asset management fee" what would a normal percentage be and where would the funds come from? Also how often would this fee be levied?

Thanks for the great info.

usually we charge 0.5% of the asset value PER YEAR, paid quarterly.

So, on an asset with 20 units @ $100,000/unit or $2.0M we would charge $10,000/year or $2500/quarter. This comes out of the building cash flow !

[albainstar]

to me it seems like the expert investor is being over valued
experince is valuble but to me capital is more valuble.

i have looked at jv's but ask myself why am i putting all the capital in and getting only 1/2 the profit?
it seems a little like really expensive property management....

i as an investor am putting up all the hard earned cash and they rent it out and put time into it - but i dont see this as equitable
i would see 75/25 more fair

maybe i am missing something