Jv/partnering structure

Hey all its been awhile!

I’m trying to get involved in a joint venture/partnership arraingment with an individual that I met through the local rei club. Here’s what he does:bulk purchase reo’s, rehab, and rent for 2-3 years before selling. He needs $$(1mil+)! And while I do not have the $$ I do have one of networked contacts that is flush.

What I want to do is bring the two together and get a) an education in deals like this from start to end and b) a piece of the action. Here’s my purposed offer to the partner:

  1. I lock up the $$.
  2. I get paid a 5% finders fee of the invested cash (need $$ so I can reduce my hrs at the day job and spend time on working this deal.
  3. 15% of cash flow. Figuring a 15% interest to the investors, it should leave him with 25% of gross as his cash flow.
  4. a 20% equity share. Assuming the same for the investors, leaving 60% for him.

Question is, am I being too greedy expecting a cut on all three sides?
What are your thoughts on a student or mentoree coming to you with $1mil and wanting this kind of action on your deals while they are learning?

Hi,

Ashon let me start by saying if it was just this easy everyone would be doing it! 

The reality is if your experienced enough and have a track record there is money out there needing good investments. The question would be is this a potential debt or equity investment? Either is great but normally debt investments are paid interest and have a payoff date in a written agreement which indicate the loans terms and conditions.

Now in an equity investment an investor normally would not recieve monthly or yearly income but would own some percentage of the business and would have a written agreement which indicates the investment term and exit strategies. Then of course are funds to be direct dollars or are funds to be leveraged? This will determine more about risk.

Your proposal is equal to you receiving 20% of this deal.

If this deal were leveraged a outside mortgage holder receives mortgage payments out of a portion of revenue. I think the premise you were indicating since this involves multiple properties is using the 50/50 rule for expenses and debt / positive cash flow which probable as single families will really be for rehabbed property probable 20/80 (Expenses vs Debt) in the first few years because of that rehab.

Your connection with capital should indicate upfront which type of investment he / she would rather do IE: Debt or Equity and what kind of returns he might want, then of course your connection who invests in REO’s should indicate what he needs and what he would be willing to give for it. This will tell you if these two could even work a deal?

Your scenerio is much, much more than I would pay; but hey you never know until you try? Currently I can get private capital for between 8 and 12 percent as debt capital depending on position, risk, etc. and as equity investments I can get $1m for about 20% of ownership (Equity) so paying you 20% would certainly not work for me.

My guess is your REO connection is looking for money at market value as if as you state he’s experienced and has a good track record he is looking to give up as little as possible.

Your last question: I would not give up this kind of action on my deals for this scenerio!

Good Luck,

               GR

Thanks GR.

When the REO Connection laid out his scenario it was an unleveraged purchase, with an interest amount to be paid to the investor, and then an equity share on the back side.

I appreciate the insight as it gives me a little more than just the thoughts rattling around in my head, and throws some real world advice in there. While I am begining to understand how much money is sitting out there waiting to be invested, I am looking to build a track record, and mentoring set of opportunities with this deal so that I can begin to tap into that money and unlock the door to my real estate dreams.

Just as a followup to the conversation and to see if you have some more advice on the situation, here’s a little more of the details. He currently has 10 properties that he has purchased using the reo system. He is currently paying the private investors 1. 0-12% and is looking to refinance all the properties (payoff the investors) and lower that interest rate to 5- 6%. He offered to pay me a finders fee, and work with me on the next round of reo purchases that he is going to do.