JV Structure & Finances

[KevinMurray]

Hi All,

When structuring a JV deal for a duplex or multi-family property, would it be advisable to create a corporation for the property? I am assuming it would be easier to manage the finances through a business bank account rather than personal accounts.

Also do you require any special licenses or certifications if the outside investors are not immediate family and friends?

Thanks for your help.
Kev

 

[Cory Sperle]

There are pros and cons to personal vs. corporate ownership, and there are many posts on that here so I would start there. I believe in the kiss philosophy, as a corporation means very high initial and ongoing fees of creating, operating, and dissolving corporations and filing annual tax returns.

I would familiarize myself with securities regulations for the province you are in and pay close attention to the exemptions that are allowed in this scenario.

 

[Sherilynn]

I agree, but you will likely find banks will require a multi to be purchased within a corporation.

As for the securities exemptions (such as high net worth, high income, and "accredited investor"), be sure to consider the regulations in the province of the investor.

 

[KevinMurray]

Thanks Cory and Sherilynn. As always your comments were very helpful!

I did a little research and found some additional information on deal structures specifically for multifamily properties.

For the smaller properties like a duplex or fourplex I would avoid setting up a corporation. For large multifamily buildings with several outside investors, I would have to set up a real estate syndicate.

Here is a link to an article I found and also each provinces securities info - http://www.whichmortgage.ca/article/guide-to-real-estate-syndicates-118740.aspx

All the best,
Kevin

 

[Thomas Beyer]

Also do you require any special licenses or certifications if the outside investors are not immediate family and friends?

Yes you have to be aware of security implications when venturing outside of friends & family or close business associates. I talked about structuring JVs for win/win and securities implications in the last Multi-Family & Commercial REIN event in late August 2015 which is available online in the REIN knowledge vault for REIN members.

 

[KevinMurray]

Yes you have to be aware of security implications when venturing outside of friends & family or close business associates. I talked about structuring JVs for win/win and securities implications in the last Multi-Family & Commercial REIN event in late August 2015 which is available online in the REIN knowledge vault for REIN members.

Thanks Thomas. I am currently traveling abroad in Asia but when I return I will be joining REIN. This network is the real deal and I can't say enough about all the great people involved. Cheers

 

[Matt Crowley]

Great advice above. Call up a couple mortgage brokers in Canada when you get back and find out the latest scoop on qualifying for multi's. Rules are changing and they know best.

Personally, I would start off with a SFH to get my feet wet before jumping into a multi. Right now in Canada cap rates are really compressed. It will be hard to offer your investors a very attractive return without buying a bit of a dog, redeveloping, and refinancing. That is a bad strategy for your first purchase in my opinion. Better to start off a little smaller probably and set up the processes you will need to expand. Time and patience!

 

[Cory Sperle]

Disagree completely. Go multi family right away if you are able to. Also there are plenty of good deals all around if you look. But buy with your own cash first to show a track record before you co venture with whichever asset class you chose.

 

[KevinMurray]

Disagree completely. Go multi family right away if you are able to. Also there are plenty of good deals all around if you look. But buy with your own cash first to show a track record before you co venture with whichever asset class you chose.

At this point I have two properties, one in Vancouver and one in Edmonton (joint venture). I have been able to manage them successfully and they have provided consistent returns. For my third property I could finance a townhouse by myself but a multifamily piece would have to be with a JV. How many properties would you consider a good track record before venturing into a multifamily deal?

 

[Cory Sperle]

I bought my first two apartment buildings with my own cash, from the gains from my singles that I sold. Those were bought in 2008 and 2010 and almost broke me financially, although they were solid buys the economy struggled and we sailed through. When I said go multifamily if you are able to I meant with your own capital and not co venture partners, until you have some more experience. If you really want to get into multi units now I would sell the singles and move up to a multi, as they do in monopoly.

 

[KevinMurray]

I bought my first two apartment buildings with my own cash, from the gains from my singles that I sold. Those were bought in 2008 and 2010 and almost broke me financially, although they were solid buys the economy struggled and we sailed through. When I said go multifamily if you are able to I meant with your own capital and not co venture partners, until you have some more experience. If you really want to get into multi units now I would sell the singles and move up to a multi, as they do in monopoly.

Thanks Cory. Multi is my long term goal and I am looking forward to the challenge. Cheers

 

[Cory Sperle]

I would also suggest perhaps co venturing with someone else to learn the ropes and avoid costly mistakes yourself. This is exactly what I did from 2004 to 2008 where I invested and learned under a professional and I credit this important step in being a key factor of where things are at today. If this gentleman is reading this I thank you once again.

 

[Cory Sperle]

I agree, but you will likely find banks will require a multi to be purchased within a corporation

Although it is not a requirement to purchase within a corporation it will limit your LTV from 75% to perhaps 60% or less. I understand this to be because of a personal guarantee given when you borrow through a corporation. If I was to inherit a property with no mortgage frow a wealthy relative (I wish) I would do it personally, but If I wanted to go for max financing it would be 1234 Alberta Inc.

 

[KevinMurray]

I would also suggest perhaps co venturing with someone else to learn the ropes and avoid costly mistakes yourself. This is exactly what I did from 2004 to 2008 where I invested and learned under a professional and I credit this important step in being a key factor of where things are at today. If this gentleman is reading this I thank you once again.

Definitely open to learning from an experienced investor. Hopefully when I join REIN I can explore these opportunities. I have worked in sales and digital marketing for a long time. I just need the real estate chops to round everything out

 

[Thomas Beyer]

I just need the real estate chops to round everything out

I am with Cory here. Invest your own money first for 2-3 profitably executed deals before asking others to co-invest with you. Each asset class has a learning curve. That is why a pilot on one aircraft type is not immediately flying as a pilot on another aircraft type, but as a co-pilot for a while as the risk of damage is too great.

There is a saying in the airline industry that applies here:

We have old pilots, and we have bold pilots, but we do not have old bold pilots !