I'm looking at my first JV and am looking for some expertise on how to structure it. I own a few duplexes and my partner a triplex, and we are looking at a fourplex together. It will be the two of us and our wives also going in. What are the advantages/disadvantages of the different ways to structure the partnership, ex. limited partnerships, incorporated, etc? This property is in Ontario and we do plan to do more of these together.
How to structure first JV? Advice needed
- Thread starter jimcurran
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Decide who does what and what is payment for it. Payment could be $/h, % of value or rent, or equity. Decide how to exit. Decide how to arbitrate differences of opinion. Decide how much leverage to apply. Decide how much cash and mortgage qualification is worth. Decide how to handle a divorce. Decide how to handle if one person wants out but not the other. Decide how to handle negative cash flow or cash-calls. Decide on location, property type and price point. Agree in principle first, then have a lawyer write it in legal form.
Thanks for the reply. All of the things you have mentioned we have discussed and are meeting with lawyers to put them in writing. I was wondering about the different types of ways to hold the property and their advantages/disadvantages, ex. inc, jv, creating a hiolding company, etc? You seen to have extensive knowledge of the real estate business and could maybe provide some insight on which would be the best method. We are planning on holding for the long term and building a few multi-family properties also.
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Four reasons to incorporate for smaller residential properties:
1) limited liability, unless personal guarantee is required for mortgage
2)
income can be paid different ways, such as dividends to various people
(kids, spouse, self) or management fees to various people
3) JV
partner can be brought on board without having him/her on mortgage and
to protect them from a disaster, via shares and/or shareholder loans
4) different shares % and shares classes allow for elegant profit splitting and separation of "control" from "profit sharing"
Four reasons NOT to incorporate for smaller residential properties:
1)
It is slightly more difficult to get a mortgage, as not all banks hand out
residential mortgages to small properties held in a corporations
2)
you will have to sign a personal guarantee .. so in Alberta, for
example, you will be personally liable for a mortgage default if in a
corporation, whereas a personally held non-insured mortgage will have
recourse ONLY against the property, but not you personally ! This is an
Alberta advantage that does not, to my knowledge, exist in other
provinces !!
3) annual filing and accounting costs .. probably about $1000 to $2000 or more PER YEAR .. depending on complexity
4) no flow through of losses to shareholders (if this is required or desired, use an LP)
Suggestion from your input in your post above:
I'd open a new company as opposed to holding them personally.
Corporations allow you to buy and sell shares, advance or repay loans, and pay dividends to family members. There is also, as the name implies, limited liability. It is easier to change the ownership structure, say from 50/50 to 40/60 to 30/70 is parties agree to it and sell shares at agreed prices in case one wants partially out or needs money compared to the other party. You can also add JV partners later if desired.
In a corporation voting shareholders vote for directors. Directors appoint management.
In a 50/50 arrangement a shotgun clause is recommended. Better is if you have the majority of shares as it is clear who makes the ultimate decision.
1) limited liability, unless personal guarantee is required for mortgage
2)
income can be paid different ways, such as dividends to various people
(kids, spouse, self) or management fees to various people
3) JV
partner can be brought on board without having him/her on mortgage and
to protect them from a disaster, via shares and/or shareholder loans
4) different shares % and shares classes allow for elegant profit splitting and separation of "control" from "profit sharing"
Four reasons NOT to incorporate for smaller residential properties:
1)
It is slightly more difficult to get a mortgage, as not all banks hand out
residential mortgages to small properties held in a corporations
2)
you will have to sign a personal guarantee .. so in Alberta, for
example, you will be personally liable for a mortgage default if in a
corporation, whereas a personally held non-insured mortgage will have
recourse ONLY against the property, but not you personally ! This is an
Alberta advantage that does not, to my knowledge, exist in other
provinces !!
3) annual filing and accounting costs .. probably about $1000 to $2000 or more PER YEAR .. depending on complexity
4) no flow through of losses to shareholders (if this is required or desired, use an LP)
Suggestion from your input in your post above:
I'd open a new company as opposed to holding them personally.
Corporations allow you to buy and sell shares, advance or repay loans, and pay dividends to family members. There is also, as the name implies, limited liability. It is easier to change the ownership structure, say from 50/50 to 40/60 to 30/70 is parties agree to it and sell shares at agreed prices in case one wants partially out or needs money compared to the other party. You can also add JV partners later if desired.
In a corporation voting shareholders vote for directors. Directors appoint management.
In a 50/50 arrangement a shotgun clause is recommended. Better is if you have the majority of shares as it is clear who makes the ultimate decision.
Now that I have my partnership taken care of I have another scenario. I have the seller interested in a VTB. My original offer was for full price of 399,900 @ 4% interest for 20 years. The seller via their agent wants me to come back with a better interest rate and also have it at four five year terms.
The property is a brand new fourplex, 3 bdrm/unit steel and concrete construction, assessed for 281K as of Jan. 1, 2012 (has a phased in assessment of 266K right now) but asking price is 399K.
I am considering two options for counter offers.
1. 300K at 8% interest for 20 years with 5% down. The reason I'm liking this option is if I pay 400K the taxes will increase by 30+% and increase my monthly costs. I will also have positive cash flow which my parter and I like.
2. 400K at 5% interest for 20 years with 0% down. Downfall is we would have to pay more per month in taxes with this option but have nothing invested, if they take it.
Rents are basically topped out and I don't see any other way to increase rental income.
I am also wondering if there would be tax benefits for the seller as far as capital gains or income selling for 300 vs 400. It is a builder that owns the property so I believe that the tax rate is lower for the company vs personal income.
The property is a brand new fourplex, 3 bdrm/unit steel and concrete construction, assessed for 281K as of Jan. 1, 2012 (has a phased in assessment of 266K right now) but asking price is 399K.
I am considering two options for counter offers.
1. 300K at 8% interest for 20 years with 5% down. The reason I'm liking this option is if I pay 400K the taxes will increase by 30+% and increase my monthly costs. I will also have positive cash flow which my parter and I like.
2. 400K at 5% interest for 20 years with 0% down. Downfall is we would have to pay more per month in taxes with this option but have nothing invested, if they take it.
Rents are basically topped out and I don't see any other way to increase rental income.
I am also wondering if there would be tax benefits for the seller as far as capital gains or income selling for 300 vs 400. It is a builder that owns the property so I believe that the tax rate is lower for the company vs personal income.
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What is the rent/month ?
What expenses are you budgeting ?
What happens in a year or two if you default on payments and the house is trashed ?
What personal recourse, if any, is demanded by seller ?
Why would the seller accept a 0 down deal ? Why not rent it via a PM ?
What expenses are you budgeting ?
What happens in a year or two if you default on payments and the house is trashed ?
What personal recourse, if any, is demanded by seller ?
Why would the seller accept a 0 down deal ? Why not rent it via a PM ?
Rent is $3700/mo (950,950, 900,900). or 44400/yr.
Expenses
Taxes-$4000/yr (this will increase by roughly 33% if I pay the full 400K price vs the current 266K assessment)
Insurance-$1000/yr
Water-1400/yr
Snow/yard-1000
Vacancy-1200/yr
PM-5% or 2200/yr
Maint-1200/yr
total expenses=12 000
44400-12000=32400
Mortgage will be 2361/mo. After mortgage is paid there will be a positive cash flow of $339/mo
My wife and I are both professionally employed with decent paying jobs. My other properties (all +ve $ flow) can assist in payments, I also have a secured LOC, investments and a partner and his wife that are also professionally employed. We have no personal debt, just a mortgage payment. I don't see ever defaulting on payments but if the units were vacant we can afford the payments ourselves. As with the other properties I manage, I am very strict on who I rent to and in 6 years have never has a unit trashed. The possiblity is there but highly unlikely. If it did happen we repair it and move on.
There is no recourse set by the seller yet, we are still negotiating. They are a builder that is testing the market to see if there is a demand for this type of property. My initial offer was 330K and there was a much higher offer than mine but they rufused both. I think they are intrigued by a full price offer but I realize that I would be overpaying for the property. I don't see it being worth more than 350K.
They might accept a 0 down deal because they want full price or near to it which will never happen because they probably have less than 300K into it including the lot. The downtown area has been completley revitalzed in the last 10 years and the demand for higher end rentals has increased. But, this would be the only new building in the area other than commercial and a semi 1 block over. Nothing multi-family sells for this price in the area but nothing like this has been built either.
As far as PM, I have always done my own because I have yet to find a company to do it for me. I have it set up well so far with all tenants paying via email $ transfer, always paid on time and contractors in place to do the work. I also have a flexible job which allows me the time to manage them. It's not that I wouldn't hire it out, but locally there isn't a company I trust. I think I need to look elsewhere for PM
Expenses
Taxes-$4000/yr (this will increase by roughly 33% if I pay the full 400K price vs the current 266K assessment)
Insurance-$1000/yr
Water-1400/yr
Snow/yard-1000
Vacancy-1200/yr
PM-5% or 2200/yr
Maint-1200/yr
total expenses=12 000
44400-12000=32400
Mortgage will be 2361/mo. After mortgage is paid there will be a positive cash flow of $339/mo
My wife and I are both professionally employed with decent paying jobs. My other properties (all +ve $ flow) can assist in payments, I also have a secured LOC, investments and a partner and his wife that are also professionally employed. We have no personal debt, just a mortgage payment. I don't see ever defaulting on payments but if the units were vacant we can afford the payments ourselves. As with the other properties I manage, I am very strict on who I rent to and in 6 years have never has a unit trashed. The possiblity is there but highly unlikely. If it did happen we repair it and move on.
There is no recourse set by the seller yet, we are still negotiating. They are a builder that is testing the market to see if there is a demand for this type of property. My initial offer was 330K and there was a much higher offer than mine but they rufused both. I think they are intrigued by a full price offer but I realize that I would be overpaying for the property. I don't see it being worth more than 350K.
They might accept a 0 down deal because they want full price or near to it which will never happen because they probably have less than 300K into it including the lot. The downtown area has been completley revitalzed in the last 10 years and the demand for higher end rentals has increased. But, this would be the only new building in the area other than commercial and a semi 1 block over. Nothing multi-family sells for this price in the area but nothing like this has been built either.
As far as PM, I have always done my own because I have yet to find a company to do it for me. I have it set up well so far with all tenants paying via email $ transfer, always paid on time and contractors in place to do the work. I also have a flexible job which allows me the time to manage them. It's not that I wouldn't hire it out, but locally there isn't a company I trust. I think I need to look elsewhere for PM
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Well, give him two or even three offers you find acceptable, and see where it goes. As a seller, he has to see an exit strategy, so I'd be surprised if he took anything over a 5 year deal. The question is, how can you pay him out in 5 if you overpay now ?