Joint Ventures Opportunities

What are Joint Ventures?

A joint venture partnership arises when two or more parties work together to do a task or project. In real estate purchases, there are times that an individual has some of the resources or skills necessary to move forward, but lacks other vital components. Without a partner, most of these individuals either choose not to move forward with the project and miss a significant opportunity. The alternative is they choose to step blindly into the project, often to run into unnecessary challenges along the way, making mistakes that an experienced individual would have safely navigated away.

In business, these partnerships happen all of the time. The corporations team together to create more strength than either could have achieved alone. The adage of 1+1=3 certainly applies when operated effectively.

It is important to note that you don’t need to be best friends with the other party, however, there does need to be a level of trust and respect. When I have been asked what the most important attribute one needs to have in a joint venture partner, my reply has always been INTEGRITY. You want your partner “rowing the boat” in the same direction you are, and you never want to be fearful of looking over your shoulders to see that is not the case.

The most interesting, often amusing response so many newer investors respond to this breakdown. So often, the people with significant funds to enter into a purchase, but lacking the skills or the time to manage the investment, often devalue the importance of having a skilled partner overseeing the investment. Meanwhile, the skilled investor grumbles at the thought of giving up a significant percentage of the deal that they studied, searched out for, and found. Then will later possibly manage for years to come.

Critics of joint venturing will often state that the most expensive form of financing is bringing in a partner. An experienced investor can often find alternative financing outside of giving up equity in the deal.

Meanwhile, other critics of joint venturing will state that it takes money to make the deal happen. Without that money, there is no deal. Why give up a significant percentage of the deal away with someone who “has no skin in the game”. It is far cheaper to simply hire a team of people to manage the deal, and keep all of the equity for yourself. 

I have never seen a property management company operate with the same level of skill, enthusiasm and care are a person who has equity in the project will have.

It may surprise you to learn that there are far more people with money and available funds, making little to no return on their investments than there are serious, skilled investors who have a proven track record and are WILLING to share their deal with an entry-level or passive investor.

In any other investment, you rarely get to see “how the sausage is made”. If you put your money into a GIC or bond at the bank, you get a set return, but you have no idea of how the bank utilizes those funds. You can’t offer feedback saying that you want the institution to only use the deposited money in a certain way.

The same is true when you buy a mutual fund or an individual stock. Owning 10 shares of Tesla won’t give you access to Elon Musk. You can’t walk into the Tesla dealership and expect VIP service, and walk around the lunchroom, instructing the service manager, that you own the place.

By partnering with a skilled investor, who has a proven track record of success, you can match the return on your investment dollars with the expert in that region.

There is no locked in percentage for each component of the joint venture deal. Often, each component of the JV deal is worth about 25% of the deal. The person who qualifies for the mortgage and brings in the money gets half of the equity and the “active partner” who finds the deal and manages it, may receive the remaining 50%. Sometimes the percentages alter depending on the level of experience of the active partner, the difficulty of the deal, or simply the number of parties needed to complete the deal.

At the end of the day, does it really matter how much equity you own? What really matters is the return on investment you receive. I can share with you that I would rather make 15% annual return on my money in a low-risk real estate investment that I don’t need to manage versus earning say 2% on a “high interest” GIC from my bank. Heck, as someone who has been on both ends of a joint venture arrangement, it is way more fun being the passive investor. The passive investor had to “struggle” to come up with the funds and qualify for the financing to leverage the asset. Then they are pretty much done with their efforts and can collect a return for the life of the asset, or at least as long as you own it.