JV vs property management

[Aaron Prychidny]

Hello all. Curious thoughts on joint venture structure and why the money partner would ever give up equity instead of just using a good property management company.

I've run numbers on proposals for a 50/50 JV where the money partner puts up the down payment and initial improvement costs as well as takes title on the mortgage. The other partner handles all property and tenant matters. They then split operating profits 50/50. On sale, the money partner gets their initial investment back and remaining capital gain is split 50/50.

I value property management very much but in a 50/50 the money partner seems to give up a lot of equity for management and has all the downside risk as their capital is tied up and they are tethered to the mortgage.

Am I missing anything here in my thought process?



Sent from my SM-G925W8 using myREINspace mobile app

 

[Thomas Beyer]

Yes you are missing the point of asset scouting and subsequent acquisition. A very time consuming process, and you are missing that even the PM needs management.

But, a 50/50 deal is not appropriate if the money partner also qualifies for the mortgage. In my world, roughly, the expert deserves about 30% ( perhaps 10-15% for asset acquisition and 15-20% for ongoing management, as even the PM has to be managed and sometimes fired/changed), 20% for mortgage qualification and 50% for the money partner.

Related JV posts for win/win:

50/50 JV - How is this fair ? http://myreinspace.com/threads/50-50-is-this-fair.1983/

Red, green and blue money - what are the three crucial elements of real estate and JVs: http://myreinspace.com/threads/blue...expert-deserves-to-make-some-money-too.29091/

 

[Alvaro Sanchez]

Usually Money partners do nothing (complete hands-off).... the expert does everything!. I do JV deals and both money partner and expert qualify for mortgage for a 50/50 split which is normal for small plexes.

I have come across with some money investors who want more than their share (my offering) and in those cases, I pass. The way, I see it is that there is more money out there than experts.

 

[Willyboy]

Hello all. Curious thoughts on joint venture structure and why the money partner would ever give up equity instead of just using a good property management company.

I've run numbers on proposals for a 50/50 JV where the money partner puts up the down payment and initial improvement costs as well as takes title on the mortgage. The other partner handles all property and tenant matters. They then split operating profits 50/50. On sale, the money partner gets their initial investment back and remaining capital gain is split 50/50.

I value property management very much but in a 50/50 the money partner seems to give up a lot of equity for management and has all the downside risk as their capital is tied up and they are tethered to the mortgage.

Am I missing anything here in my thought process?



Sent from my SM-G925W8 using myREINspace mobile app

You're 100% right. It doesn't make any sense to me specially when it is 50/50. On top of that it ties you up in so many ways.

All you need is a good property manager. They charge about 10%.

I agree that down the road you could have hard times dealing with property managers and need to change them or keep them but with extra costs due to bad management where it could increase your property management cost from 10% to maybe more or less 20% over the long term but it is still way below 50% and the best part of it is you're never tied up.

I really don't understand this hype about 50/50 JV where the managing partner is doing nothing relatively and bearing zero risk and could mess up with management as well while the money and mortgage partner is contributing everything but management which you can hire someone to do it.

I would maybe do a JV if it was like say 20/80 or 25/75 but 50/50!? Really!? Come on I am not going to give you my hard earned big money for free.

I don't think you're missing anything. The only thing you would need is a good realtor to find you a good asset and as far as I know realtors are paid by sellers not buyers.

Finally and just so no one gets me wrong I'd like to clarify that I am only talking about this 50/50 home purchase JV but not all other forms of JV or partnerships. There certainly are other ways where JV makes sense.

 

[Thomas Beyer]

You're 100% right. It doesn't make any sense to me specially when it is 50/50. On top of that it ties you up in so many ways.

All you need is a good property manager. They charge about 10%.

I agree that down the road you could have hard times dealing with property managers and need to change them or keep them but with extra costs due to bad management where it could increase your property management cost from 10% to maybe more or less 20% over the long term but it is still way below 50% and the best part of it is you're never tied up.

I really don't understand this hype about 50/50 JV where the managing partner is doing nothing relatively and bearing zero risk and could mess up with management as well while the money and mortgage partner is contributing everything but management which you can hire someone to do it.

I would maybe do a JV if it was like say 20/80 or 25/75 but 50/50!? Really!? Come on I am not going to give you my hard earned big money for free.

I don't think you're missing anything. The only thing you would need is a good realtor to find you a good asset and as far as I know realtors are paid by sellers not buyers.

Finally and just so no one gets me wrong I'd like to clarify that I am only talking about this 50/50 home purchase JV but not all other forms of JV or partnerships. There certainly are other ways where JV makes sense.

Not quite so simple as many folks do not know where to buy, at what price to buy, how to fix assets up that are ugly & neglected, how to buy or who is a good PM.

Feel free to re-read my link about blue-green-red money and all the valuable tasks a real estate expert does. That has value. Likely not 50% if money partner does mortgage qualification and invests all $s but perhaps 25-35%.

 

[Matt Crowley]

I think the 50/50 split is very rich. You will only sell to inexperienced investors, far too expensive.

Front end: "expert" lets call GP gets acquisition fee of 1.5% - 2% of overall asset (sometimes equity depending on capitalization)

Ongoing: asset management fee 1% of asset value / 7.5% NOI, this is to review the documents sent by the property manager, create a strategy, direct the PM

Property management: totally separate charge, 10% - 12% EGI (effective gross income)

Profit sharing:
Generally there is a waterfall structure. LP (investor) gets some preferred return (say 8%) + return of capital first.
Then, some split between GP and LP, on the very very high end would be 40% to GP but that is after providing investor 8% preferred return and full ROC before GP gets paid at all. More common that GP gets something like 40% catch up after the 8% preferred until 12% IRR is achieved, thereafter the share to GP begins to drop.

Waterfalls are complicated topic. Good introduction: https://www.propertymetrics.com/blo...y-waterfall-models-in-commercial-real-estate/

...bottom line 50/50 split is way too rich in my opinion. PM shouldn't be part of the profit split discussion at all, that is an operating expense item to get to NOI, separate issue.

 

[Thomas Beyer]

I think the 50/50 split is very rich. You will only sell to inexperienced investors, far too expensive.

Front end: "expert" lets call GP gets acquisition fee of 1.5% - 2% of overall asset (sometimes equity depending on capitalization)

Ongoing: asset management fee 1% of asset value / 7.5% NOI, this is to review the documents sent by the property manager, create a strategy, direct the PM

Property management: totally separate charge, 10% - 12% EGI (effective gross income)

Profit sharing:
Generally there is a waterfall structure. LP (investor) gets some preferred return (say 8%) + return of capital first.
Then, some split between GP and LP, on the very very high end would be 40% to GP but that is after providing investor 8% preferred return and full ROC before GP gets paid at all. More common that GP gets something like 40% catch up after the 8% preferred until 12% IRR is achieved, thereafter the share to GP begins to drop.

Waterfalls are complicated topic. Good introduction: https://www.propertymetrics.com/blo...y-waterfall-models-in-commercial-real-estate/

...bottom line 50/50 split is way too rich in my opinion. PM shouldn't be part of the profit split discussion at all, that is an operating expense item to get to NOI, separate issue.

You're right about waterfalls and excessive manager take in larger syndications like industrial assets, mobile home parks or multi-family buildings as the manager typically arranges and co-signs for mortgages and the workload doesn't scale up proportionally to funds raised or asset size.

However in smaller deals like a TH or SFH a 20-35% stake for the manager is warranted (without a hurdle rate) given the list of activities required and the level of unsophistication by the investor i.e. handholding required from the manager. If she/he can sell 50% even for her/himself why not. A sophisticated investor like you and me wouldn't do it but others might though.

 

[Cory Sperle]

50/50 is absolutely reasonable for the money partner when you consider:

A. The money partner generally does nothing except write one check and sign one document.
B. Often the expert is the only one personally guaranteeing the mortgage.
C. The expert has experience and expertise and a proven track record of success.
D. The deals are often wholesale and out of reach of novice investors, apartments, trailer parks, etc.

In general you may or may not do better on your own, but you will spend hundreds of hours acquiring, and managing your assets. I personally do both, invest in my own projects and with others, but it depends on each individual deal. 50% of a great deal is still a great deal provided the expert doesn't gobble up huge fees along the way and is compensated based on performance.

 

[Cory Sperle]

I think the 50/50 split is very rich. You will only sell to inexperienced investors, far too expensive.

Front end: "expert" lets call GP gets acquisition fee of 1.5% - 2% of overall asset (sometimes equity depending on capitalization)

Ongoing: asset management fee 1% of asset value / 7.5% NOI, this is to review the documents sent by the property manager, create a strategy, direct the PM

Property management: totally separate charge, 10% - 12% EGI (effective gross income)

Profit sharing:
Generally there is a waterfall structure. LP (investor) gets some preferred return (say 8%) + return of capital first.
Then, some split between GP and LP, on the very very high end would be 40% to GP but that is after providing investor 8% preferred return and full ROC before GP gets paid at all. More common that GP gets something like 40% catch up after the 8% preferred until 12% IRR is achieved, thereafter the share to GP begins to drop.

Waterfalls are complicated topic. Good introduction: https://www.propertymetrics.com/blo...y-waterfall-models-in-commercial-real-estate/

...bottom line 50/50 split is way too rich in my opinion. PM shouldn't be part of the profit split discussion at all, that is an operating expense item to get to NOI, separate issue.

The excessive fees mentioned are far too rich in my opinion as every dollar needs to work from day 1. 25% taken off the top for fees, regardless of performance means the investment must earn 33% to get back to 0. This is too rich in my opinion so 50/50 is not unreasonable.

 

[MarkOnaba]

I've learned from my limited experience that not all deals are created equal and the structure of a JV should be dependent on the type of deal.

What I've seen is most people get caught up on what the ownership structure is and miss the true value of the "expert".

The "expert", assuming they know what they are doing, is like your insurance policy.

I'd put my money on a seasoned investor, who's seen most of it, has a good track record and can not only breeze through the good times but, more importantly, knows how to navigate the storms that are guaranteed to come.

Your property manager will have a few different excuses (been there, got the t-shirt) for you because quite frankly the hassle isn't worth what they get paid. And there are certain aspects of the project that they wouldn't help with... like financing strategies as a simple example.

Return on capital is important... but return OF capital is more important in my opinion and I'll take a smaller ownership position if I get my capital returned quickly.

Look back to 2008 to see just how many were left standing after the boom times came to an abrupt end... THAT is the true value of an "expert"...

Like Warren Buffet said, "you never know who's been swimming naked until the tide goes out".

 

[Willyboy]

50/50 is absolutely reasonable for the money partner when you consider:

A. The money partner generally does nothing except write one check and sign one document.
B. Often the expert is the only one personally guaranteeing the mortgage.
C. The expert has experience and expertise and a proven track record of success.
D. The deals are often wholesale and out of reach of novice investors, apartments, trailer parks, etc.

In general you may or may not do better on your own, but you will spend hundreds of hours acquiring, and managing your assets. I personally do both, invest in my own projects and with others, but it depends on each individual deal. 50% of a great deal is still a great deal provided the expert doesn't gobble up huge fees along the way and is compensated based on performance.

What do you think the ratio of partnership should be if the money partner is guaranteeing the mortgage as well?

 

[Willyboy]

I've learned from my limited experience that not all deals are created equal and the structure of a JV should be dependent on the type of deal.

What I've seen is most people get caught up on what the ownership structure is and miss the true value of the "expert".

The "expert", assuming they know what they are doing, is like your insurance policy.

I'd put my money on a seasoned investor, who's seen most of it, has a good track record and can not only breeze through the good times but, more importantly, knows how to navigate the storms that are guaranteed to come.

Your property manager will have a few different excuses (been there, got the t-shirt) for you because quite frankly the hassle isn't worth what they get paid. And there are certain aspects of the project that they wouldn't help with... like financing strategies as a simple example.

Return on capital is important... but return OF capital is more important in my opinion and I'll take a smaller ownership position if I get my capital returned quickly.

Look back to 2008 to see just how many were left standing after the boom times came to an abrupt end... THAT is the true value of an "expert"...

Like Warren Buffet said, "you never know who's been swimming naked until the tide goes out".

Don't you think the help with financing strategies should be the job of your mortgage broker?

 

[MarkOnaba]

Don't you think the help with financing strategies should be the job of your mortgage broker?

Financing is a combination of debt and equity. Most mortgage brokers (that I know) help with the debt side of things.

Financing strategies MIGHT not be a big deal on single family homes (mostly cookie cutter, 20% down and Bob's your uncle), but it is quite critical on the commercial side of things... A savvy investor can structure financing in a way that mitigates risk and returns capital back to investors sooner rather than later.

Ultimately, I believe all investors need to understand the motivations of the different players in the real estate world and take their advice with a grain of salt.

The game of real estate can have several moving parts and you'll PROBABLY be the only one at the dinner table when a project doesn't go right, regardless of the "help" you got to acquire the project.

 

[Matt Crowley]

My reasoning for why 50/50 is way too high... because all syndicate-quality private real estate investments are WAY lower than that!

https://app.crowdstreet.com/properties/ (lot of REOCs US $100m-500m AUM)
https://www.r2-re.com/

It's frankly a terrible deal and no one with any exposure to private equity would ever, ever EVER agree to it. Why should the expert get 50% of profit before investor has received all of their capital back? Why is the capital in such a subordinated position?

"Off-market"... well that is all private equity deals. The investors get the benefit of buying into the property at cost in any deal. That isn't special. 50% is an awful deal, sold to, unfortunately, very uneducated investors.

Whether you have $5,000 or $500,000 to invest, your capital is a priority and the investor should not be taking profits before you get your capital back! Giving away 50% of profit is too much. Think about how much the property needs to yield for you to get even 12% return...The property would need to yield 24%! That is not realistic. It isn't. Why would someone with $0 in the deal get 50% of profit? Way, way, way too rich.

Honestly, for any investors wondering what a "fair" profit split should look like, take a look at some of the deals from the websites above... if you are investing in a riskier investment with an expert that has lower assets under management or development experience, then you need to have more security, higher returns, and a higher priority of capital returned that you could get with these alternative investments with more experienced owners.

Pretty much all deals on the above websites will be above what all experts on this website have to offer (except for maybe 3 or 4 that I know of), the waterfall split you should be agreeing to should be at least as good as what is on these websites.

 

[MarkOnaba]

My reasoning for why 50/50 is way too high... because all syndicate-quality private real estate investments are WAY lower than that!

https://app.crowdstreet.com/properties/ (lot of REOCs US $100m-500m AUM)
https://www.r2-re.com/

It's frankly a terrible deal and no one with any exposure to private equity would ever, ever EVER agree to it. Why should the expert get 50% of profit before investor has received all of their capital back? Why is the capital in such a subordinated position?

"Off-market"... well that is all private equity deals. The investors get the benefit of buying into the property at cost in any deal. That isn't special. 50% is an awful deal, sold to, unfortunately, very uneducated investors.

Whether you have $5,000 or $500,000 to invest, your capital is a priority and the investor should not be taking profits before you get your capital back! Giving away 50% of profit is too much. Think about how much the property needs to yield for you to get even 12% return...The property would need to yield 24%! That is not realistic. It isn't. Why would someone with $0 in the deal get 50% of profit? Way, way, way too rich.

Honestly, for any investors wondering what a "fair" profit split should look like, take a look at some of the deals from the websites above... if you are investing in a riskier investment with an expert that has lower assets under management or development experience, then you need to have more security, higher returns, and a higher priority of capital returned that you could get with these alternative investments with more experienced owners.

Pretty much all deals on the above websites will be above what all experts on this website have to offer (except for maybe 3 or 4 that I know of), the waterfall split you should be agreeing to should be at least as good as what is on these websites.

On deals of this size... yes, 50% may be too rich! And I also agree that in a liquidity event, the investor should get all their capital back BEFORE the split (cash flow splits are a negotiation between the investor & expert, some investors don't need it and some do)

However, keep in mind that in these types of syndicated deals, the proverbial pie is large enough that the GP can afford to charge SIGNIFICANT upfront and ONGOING fees (dollar amount that is... percentage is pretty standard), get paid at closing and not inversely affect investor returns.

Would these fees (if added to their current 20-30% stake) amount to 50% of the profits if you run the numbers?? I don't know... haven't done the math... but the GP taking a small ownership stake definitely helps the marketing department!

On smaller SFH deals, returns (ROI not dollar amounts) CAN be similar with no fees (on most deals. Some don't even charge management fees)... though cash flow yields are typically very low.

I own a Stripmall in a small town that I bought off Kijiji. The owner offered financing for 15 years at 6.5% interest only payments. Tax assessed value was $1.4 million, I paid half that. Gross rents are at $12k per month with room to grow to $15k on lease renewals. And I only needed $100k to close. The yield on this deal is insane (double digit cash on cash from day 1), and I would have done it with a 50/50 JV if I didn't have the money to do it all myself at the time... and they would have been happy with the returns regardless of their investment profile (assuming they like cash flow )

And I'm sure there are experts on this forum that have done WAY better deals than this but don't tell the world about it... so I wouldn't be too quick to paint everyone with the same "incompetent investor" brush... just saying

And I'm not saying one is better than the other... deals are different, ownership splits are just one metric in analyzing a JV deal...

End of rant... I think...

 

[Sherilynn]

For those who think 50% JV's are a "terrible deal," I ask you to consider the following.

In many cases, the money partner is someone either from another city, or who is an experienced investor but has no time due to other business ventures, or who is in a profession which does not allow other active businesses (so that person may invest money but not time).

In any of the above cases, the investor has either no time or no ability to research and acquire the property, oversee the required repairs or renovations, and oversee the operation of the investment (regardless of who performs the property management tasks).

While a great property manager (in house or professional) is key to ones team, a property manager can't buy the property, decide when is the best time to sell, or a hundred other aspects of managing the investment. A PM can only manage the property, not the investment.

A solid JV with an expert ensures the investment is properly managed to a successful conclusion with excellent returns. Sophisticated investors understand the value of this service.

 

[kfort]

Sophisticated investors understand the value of this service.

And there's the key point in my opinion. Investors with less experience seem more likely to view the time/ expertise combination as less valuable than money.

 

[Thomas Beyer]

In these days of muted real estate performance a 50/50 is usually excessive .. unless there is a minimum say 6 or 8% annual investment hurdle rate, or the deal is unusually good, or the investor writes only a cheque to an existing mortgage ( i.e. less risk for investor). A 50/50 deal is especially unusual if investor also has to qualify for a mortgage.

Kindly re-read my link above re red, blue and green money as all three have to be adequately rewarded. Rarely does it justify 50/50. Sometimes, but rarely.

It is also better if the expert charges an annual or monthly fee as no fee but 50% in 5 years (that may or may not materialize) is an unsustainable business model if you aim for multiple JVs per year.