Hi, I am new to real estate investing, and a friend approached me to JV on a buy-and-hold property. He will do all the leg-work and 75% of the ongoing management, in exchange for me shouldering the downpayment, securing the mortgage, and 25% of management. He expects 50-50 ownership and sharing of monthly expenses.

My immediate reaction is that both downpayment and guaranteeing the mortgage is a lot to ask. And I asked if he's open to going 50-50 on the downpayment, and he countered that is okay only if he will be compensated for the legwork.

Since I am new to this, I don't have a clear idea of what is considered fair. Can someone please share what they would suggest doing in this scenario?

Thanks in advance!

My rule of thumb is 50% for money partner, 20% for mortgage, and 30% for finding asset and managing it.

Unclear what 25% of management means ? Every Thursday and every other Wednesday ? Kitchen issues only ? April to June management only ? That usually does not work.

If you both co-qualify for mortgage then 40/60. If you alone qualify and put the money up, then 30/70 in my books.

Hey Sherwin, what is legwork? If you have access to the REIN vault, I would highly recommend going through the JV checklists with your partner and write down everything you discuss. I think you will find it really challenging to draw a line of 25% / 75%. Maybe one person is responsible for all exterior issues? Sounds really messy. Anyways, once you get a handle on what 25 / 75 is, it may be worthwhile to spend an hour with a lawyer to get some language around these expectations.

In my experience, having two points of contact does not work great for PM. Best to have one person managing. Having two managers with differing communication techniques and sets of expectations is really frustrating for tenants. Any mistakes of one person fall entirely on the head PM's shoulders. Even if it isn't their fault at all. The tenant has a right to complain if something goes wrong and if someone is inexperienced or a bit careless as it reflects poorly on the head PM and the care they have for the tenants and the property. It is not the tenant's problem if one of the owners puts in a half effort.

I agree with Matt. It sounds messy.

Furthermore, if you are new to real estate investing, why would he expect you to do 25% of the work? How experienced is he at investing to ask a newbie to do any of the work? And does he mean management of the investment or management of the property?

As the "real estate expert," I find, execute, and manage the investment from start to finish. All the investor is required to do is provide investment capital and possibly qualify for the mortgage. Some money partners like to have more of a say in major decisions such as the actual purchase, but it is usually a review of my work for final approval rather than an active part in it.

Property Management (PM) is completely separate and usually costs 5% - 10% of the rent. In my case, my company handles PM and charges the PM fee. However, I believe the majority of investors (expert or not) hire a PM company.

In any case, my money partners are never required to have any part in managing the property or the investment.

What is the property exactly and how experienced is the operator? 50/50 seems to be the model if one provides cash and the other does all the work. The qualification part seems to be a bit confusing, I know that for some people they expect their money partner to also qualify for the mortgage and still take 50%. The operator does not sound reputable as an expert would generally not negotiate their position that much since they are the expert and you are the newbie. I would walk away from this one.

ThomasBeyer said:

My rule of thumb is 50% for money partner, 20% for mortgage, and 30% for finding asset and managing it.

Unclear what 25% of management means ? That usually does not work.

If you both co-qualify for mortgage then 40/60. If you alone quaify and put the money up, then 30/70 in my books.

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Thanks Thomas. Yeah, you're correct in pointing out that 25% mgmt is not very clear. Thanks as well for sharing your guideline ratios.

SweetZone said:

Hey Sherwin, what is legwork? If you have access to the REIN vault, I would highly recommend going through the JV checklists with your partner and write down everything you discuss. I think you will find it really challenging to draw a line of 25% / 75%. Maybe one person is responsible for all exterior issues? Sounds really messy. Anyways, once you get a handle on what 25 / 75 is, it may be worthwhile to spend an hour with a lawyer to get some language around these expectations.

In my experience, having two points of contact does not work great for PM. Best to have one person managing. Having two managers with differing communication techniques and sets of expectations is really frustrating for tenants. Any mistakes of one person fall entirely on the head PM's shoulders. Even if it isn't their fault at all. The tenant has a right to complain if something goes wrong and if someone is inexperienced or a bit careless as it reflects poorly on the head PM and the care they have for the tenants and the property. It is not the tenant's problem if one of the owners puts in a half effort.

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Thanks for sharing your thoughts and experience on the 25 / 75 split of property management. The way you explained it, I can see how it will not work. I didn't think much of it, now I am glad to have asked for advice here!

Legwork would be finding the property and writing the offer.

Sherilynn said:

I agree with Matt. It sounds messy.

Furthermore, if you are new to real estate investing, why would he expect you to do 25% of the work? How experienced is he at investing to ask a newbie to do any of the work? And does he mean management of the investment or management of the property?

As the "real estate expert," I find, execute, and manage the investment from start to finish. All the investor is required to do is provide investment capital and possibly qualify for the mortgage. Some money partners like to have more of a say in major decisions such as the actual purchase, but it is usually a review of my work for final approval rather than an active part in it.

Property Management (PM) is completely separate and usually costs 5% - 10% of the rent. In my case, my company handles PM and charges the PM fee. However, I believe the majority of investors (expert or not) hire a PM company.

In any case, my money partners are never required to have any part in managing the property or the investment.

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Thank you for the insight, Sherilynn. In the case where your partner provides downpayment and mortgage qualification, how much share of the property ownership would you expect?

^ Well that is interesting Sherwin. I am a little bit nervous about the deal and the way the investor has left it so vague. Sherilynn has a good point above that it is strange to have a newer investor involved in the PM at all.

Perhaps it would be worth looking into partner's track record and viewing a few of his / her suites. It is very easy to talk the talk. But I think that a professional investor comes through in the little things: quality of the developments, the way the tenants speak with the investor during a walk through, and the attention to suite repair and maintenance during the walk through.

The

CorySperle said:

What is the property exactly and how experienced is the operator? 50/50 seems to be the model if one provides cash and the other does all the work. The qualification part seems to be a bit confusing, I know that for some people they expect their money partner to also qualify for the mortgage and still take 50%. The operator does not sound reputable as an expert would generally not negotiate their position that much since they are the expert and you are the newbie. I would walk away from this one.

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Hi Cory, thanks for sharing your thoughts. The potential property is a detached single-family home in Edmonton, and the operator so far has 4 properties. He's a good friend -- likely the reason he's upfront. And part of his disclosure is that he would have a hard time qualifying for mortgage because of the number of properties he already has mortgages for. So I would have to take that one on.

Being new to this, I just didn't know what "fair" would be. Part of my original thinking was to leverage home equity for the downpayment, but doing that would probably make qualifying for a mortgage a stretch?

Sherwin Chu said:

The potential property is a detached single-family home in Edmonton, and the operator so far has 4 properties.

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This is the market I invest in as well. A few metrics I am seeing in Edmonton right now for SFH. This may help in your analysis when you take a really hard look at his financials.

Yield = NOI / property value, good properties in 6% range
(Note that NOI = rental income less vacancy less all expenses before debt service)

Rents (this is what I actually achieve for well maintained properties)
- Main = $1350 - $1425
- Garage (double) = $150 (I give tenants a bit of a deal here)
- Main utilities = $225 - $300
- Legal basement suite = $1,070 - $1,184
- Basement utilities = $210
Gross rent (low end, before vacancy) = $3,005

Expenses
- Utilities = $215 - 400
- Maintenance $102
- Insurance $108
- Property taxes $205
- Accounting / bank fees $89
- Legal / other $120
Expenses (high end) = $1,024

NOI (monthly)= 3,005 - 1,024 = $1,981
NOI (annual) = $23,772

Maximum property value, I invest for minimum 6% yield:
Maximum property value = NOI (annual) / 6%
Maximum property value = 23,772/0.06
Maximum property value = $396,200 *** before management expenses

^ If you have been looking in Edmonton at legal suites, you probably know that for $396k you might be able to purchase a legal suite but it will probably be in disrepair and you will need a minimum $5 - 10k investment to get it to a stable state with only minor repairs.

The actual amount you can spend on a property needs to consider the cost of management fees however.

If you have to pay management fees of 8% of gross rents = 3,005*0.08 = 240.4 / month. This means that to achieve the same 6% yield on the property you need to reduce the initial purchase price by = ($240.4*12 months)/0.06 = $48,080.

Maximum purchase price for a home with a legal suite in Edmonton becomes 396,200 - 48,080 = $348,120 after management fees. It is going to be very difficult to find that property.

When you run the numbers make sure you get a 100% commitment on those mgmt. fees. It will change the investment drastically.

Cash on cash equity returns before principal pay down: I shoot for 6%.

I have some really detailed financials if you want to take a look as well.

Sherwin Chu said:

He's a good friend -- likely the reason he's upfront. And part of his disclosure is that he would have a hard time qualifying for mortgage because of the number of properties he already has mortgages for. So I would have to take that one on.

Being new to this, I just didn't know what "fair" would be. Part of my original thinking was to leverage home equity for the downpayment, but doing that would probably make qualifying for a mortgage a stretch?

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All professional real estate investors should be up front. Sadly, some aren't, but the fact he is your good friend shouldn't have any bearing on how forthcoming he is.

This raises another point: business dealings between good friends can be great, or they can ruin the friendship. Usually, friendships would be ruined because not all the details of responsibilities, duties, etc., are properly detailed in the JV agreement. People wrongly assume they can gloss over a few details because they are such good friends, and "what could possibly go wrong?" Then something happens, and the ambiguity or lack of detail in the JV agreement strains the relationship.

Exactly. A poor plan is a plan to fail. That failure can be especially costly when friends are involved. I would pass on this one.

Sherwin Chu said:

Thank you for the insight, Sherilynn. In the case where your partner provides downpayment and mortgage qualification, how much share of the property ownership would you expect?

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I have qualified for the mortgage on most of my JV's. However, I have done a few where the money partner has provided both the capital and the mortgage qualification, and in every case the split was 50/50.

While some people assign a specific value to each of mortgage qualification, capital contribution, and real estate expertise, I look at it differently. For many money partners, qualifying for a mortgage is not much work and isn't a big deal because they are not using the mortgage room for anything else.

Plus, money partners are "getting their money's worth" when they work with me. I have a solid history of exceptional management of the investment and the property, and for providing consistently excellent returns. Furthermore, if something goes wrong, I will bear the brunt of the burden whenever possible, thereby leaving my JV partner's return in tact.

To me, those extra benefits to the JV partner justify my 50% share regardless of who qualifies for the mortgage.

Most definitely all of the above but the strength of the deal itself is a huge factor. 10% of a rich deal is often better than 50% of a mediocre one.