In the links I could read about joint ventures and came across the risks associated with it. In one of the risks it says minimum ROI is not guaranteed which I understand. But There's another risk that confused me a little bit. The one that says the return of capital is not guaranteed and here I'm confused as to what might happen so the investor might lose the capital. Any explanation as to how this could happen?
Educational REIN Posts by Thomas Beyer
- Thread starter Thomas Beyer
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You buy a house for $400,000 with $100,000 cash and a 75% LTV or $300,000 mortgage. After a recession and 2 bad tenants the reserve fund is gone and house is worth $350,000, minus realtor fees and legal investor gets $35,000 back and lost 65%. Very possible.
Even worse scenario: there is a fire and house is uninsured because "expert" forgot to renew the insurance. House is sold for lot value, say for $125,000. Investor lost all his money AND because he qualified for a mortgage he also lost $175,000 on top of it.
That is why investors that also qualify for a mortgage need to get more than 50%. Feel free to re-read the green, blue and red money thread above to explain it in more detail.
In the case of a joint venture in a big syndication on an apartment building where investors don't qualify for a mortgage and just have shares in the venture are the risks similar to a single house venture mentioned in your example above?
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In that case you can “only” lose your investment. That’s why it is called a limited partnership as the liability is limited. The General Partner ( and its shareholders) usually put up a personal guarantee on these mortgages and are personally liable for any mortgage loss.
Similar in a limited liability corporation with multiple shareholders. The corporation is limited in its liability but often the shareholders are asked to sign a personal guarantee for the mortgage. That differs by bank, sometimes all shareholders over 10%, sometime only over 25%, sometimes only the biggest shareholder if sufficiently high net worth.
In a husband and wife configuration directors can also be liable for GST, fraud or payroll taxes. As such ensure that only one of the spouses is a director but not both, even if each own shares.
Thomas Beyer, Asset Manager, Investor, Community Improver, Author, Father, Mentor www.prestprop.com