50/50 .. is this fair ?

albainstar

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Thanks Rob, I see your point. i guess i just have to focus on what i am getting like you said, and hopefully its a great ROI!

you have helped me to see this differently
 

Thomas Beyer

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QUOTE (albainstar @ Jul 8 2008, 01:20 PM) Thanks Rob, I see your point. i guess i just have to focus on what i am getting like you said, and hopefully its a great ROI!

you have helped me to see this differently
in life you don;t get what you deserve .. you get what is negotiated !

50/50 may make sense .. as may 30/70 or 80/20 .. or ..
 

CalgaryExpert

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Hello Garth, could you please give an example of what you mean? thanks so much


QUOTE (GarthChapman @ Dec 12 2007, 02:18 AM) I would propose that the split percentage should be `driven` by the `return` for the money partner, along with a risk component to the calculation.

I would work backwards from the predicted `Cash Flow plus` (cash flow + mortgage paydown), and consider appreciation as a bonus. The alternative would be to include the paydown and therefore measure from the total predicted ROI.

Many Investors do not take this into account, and thereby are offering vastly differing returns to their money partners. And I suggest that many Investors are giving away too much to their money partners.

Remember, as Thomas says, this should be win win, and that means you should ensure a fair return to you and to your money partner.

For example, I hear from investors who have refinanced the property and thereby reduced the return, and used some or all of the proceeds to pay out some of the money partner`s cash invested, and yet they have not reduced their money partner`s share of the return. In so doing the Investor`s return has shrunk, and the money partner`s, as a percentage of cash invested, has skyrocketed.

And that`s my take on this complex area of JV investing...
 

GarthChapman

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Tim, let`s say you have the scenario below. Remember that I am not including the predicted Appreciation of the property - that is the `bonus` return for you both. Therefore the expected returns of the JV Partner realistically should be adjusted downwards from returns expected when including projected appreciation, as cashflow and mortgage paydown should be considered as pretty secure returns. Appreciation, on the other hand, is not something one can predict accurately over the short term (do you know anyone who was close on each of the last 4 years?)

Subject Property:
Cash investment required of $40,000
Cash Flow Plus (cashflow + mtge paydown) of $1,000 per month. or $12,000 annually

Subject JV Partner:
Expected annual ROI of 12% (not including property appreciation)
This is $400 per month, or $4,800 annually

Therefore the total Cash Flow Plus return is $12,000 on $40,000 invested, which is 30% annually

So with your JV Partner expecting an annual ROI of 12%, and the total annual ROI being 30%
You would offer them 12/30ths of the ownership
12 divided by 30 = 40%
40% of the $12,000 annual Cash Flow Plus is $4,800
Their share of ownership would be 40%

And that completes the arithmetic circle...

And, just to throw another twist into the mix, you could offer them 40% of the cashflow plus, and a different percentage of the ownership.


Hope that explains it a little more clearly,
 

TommyK

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QUOTE (GarthChapman @ Aug 4 2008, 09:34 AM) Tim, let`s say you have the scenario below. Remember that I am not including the predicted Appreciation of the property - that is the `bonus` return for you both. Therefore the expected returns of the JV Partner realistically should be adjusted downwards from returns expected when including projected appreciation, as cashflow and mortgage paydown should be considered as pretty secure returns. Appreciation, on the other hand, is not something one can predict accurately over the short term (do you know anyone who was close on each of the last 4 years?)

Subject Property:
Cash investment required of $40,000
Cash Flow Plus (cashflow + mtge paydown) of $1,000 per month. or $12,000 annually

Subject JV Partner:
Expected annual ROI of 12% (not including property appreciation)
This is $400 per month, or $4,800 annually

Therefore the total Cash Flow Plus return is $12,000 on $40,000 invested, which is 30% annually

So with your JV Partner expecting an annual ROI of 12%, and the total annual ROI being 30%
You would offer them 12/30ths of the ownership
12 divided by 30 = 40%
40% of the $12,000 annual Cash Flow Plus is $4,800
Their share of ownership would be 40%

And that completes the arithmetic circle...

And, just to throw another twist into the mix, you could offer them 40% of the cashflow plus, and a different percentage of the ownership.


Hope that explains it a little more clearly,

Very interesting way of establishing ownership. The challenge is where to find $1000 (cash flow plus) with only $40K down? Very difficult to do with 35+ year amortization with so little principle paydown each year.

Thanks for the example
 

GarthChapman

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QUOTE (TommyK @ Aug 4 2008, 11:54 AM) Very interesting way of establishing ownership. The challenge is where to find $1000 (cash flow plus) with only $40K down? Very difficult to do with 35+ year amortization with so little principle paydown each year.

Thanks for the example



Agreed that cash flowing properties are getting tougher to find, but not impossible. Suggest you use my model and substitute your own numbers, in all the elements of the calulation. You may be surprised by what you find.
 

TommyK

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QUOTE (GarthChapman @ Aug 4 2008, 12:09 PM) Agreed that cash flowing properties are getting tougher to find, but not impossible. Suggest you use my model and substitute your own numbers, in all the elements of the calulation. You may be surprised by what you find.

Your way of calculating ownership is great. You mainly look at cash flow side of it. I find this more believable without factoring in the potential "appreciation" into the overall return.

Potentially, if a person can establish 40% or more ownership from cash-flow plus, then an overall return would be amazing if the appreciation is 4-5% a year for 5 years! Haha.
 

GarthChapman

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QUOTE (TommyK @ Aug 4 2008, 01:02 PM) Potentially, if a person can establish 40% or more ownership from cash-flow plus, then an overall return would be amazing if the appreciation is 4-5% a year for 5 years! Haha.


Absolutely - remember that the appreciatoin percentage is leveraged, likely by 5 to 1/ So a 4% gain is really a 20% ROI based on that 5 to 1 leverage!
 

CalgaryExpert

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yes it does .....thank your very much!!!!!!!!


QUOTE (GarthChapman @ Aug 4 2008, 10:34 AM) Tim, let`s say you have the scenario below. Remember that I am not including the predicted Appreciation of the property - that is the `bonus` return for you both. Therefore the expected returns of the JV Partner realistically should be adjusted downwards from returns expected when including projected appreciation, as cashflow and mortgage paydown should be considered as pretty secure returns. Appreciation, on the other hand, is not something one can predict accurately over the short term (do you know anyone who was close on each of the last 4 years?)

Subject Property:
Cash investment required of $40,000
Cash Flow Plus (cashflow + mtge paydown) of $1,000 per month. or $12,000 annually

Subject JV Partner:
Expected annual ROI of 12% (not including property appreciation)
This is $400 per month, or $4,800 annually

Therefore the total Cash Flow Plus return is $12,000 on $40,000 invested, which is 30% annually

So with your JV Partner expecting an annual ROI of 12%, and the total annual ROI being 30%
You would offer them 12/30ths of the ownership
12 divided by 30 = 40%
40% of the $12,000 annual Cash Flow Plus is $4,800
Their share of ownership would be 40%

And that completes the arithmetic circle...

And, just to throw another twist into the mix, you could offer them 40% of the cashflow plus, and a different percentage of the ownership.


Hope that explains it a little more clearly,
 

Thomas Beyer

Senior Forum Member
REIN Member
QUOTE (albainstar @ Mar 13 2008, 07:09 PM) to me it seems like the expert investor is being over valued
experince is valuble but to me capital is more valuble.

i have looked at jv`s but ask myself why am i putting all the capital in and getting only 1/2 the profit?
it seems a little like really expensive property management....

i as an investor am putting up all the hard earned cash and they rent it out and put time into it - but i dont see this as equitable
i would see 75/25 more fair

maybe i am missing something
both have value .. and the allocation has to be fair for both parties. And "fair" is in the eye of the beholder and as such, negotiable.

We usually now do 0/100, then after investor has all their money back, 40 (for us) and 60 for investor AND we also sign personal guarantees on all mortgages. Sometimes we do 60/40 after investor has doubled his money.

Rule of thumb:
expert is worth 30-40%
cash is worth about 50% to 60%, assuming no more than 75% leverage.
access to add`l cash, i.e. mortgage another 10-20%, slightly higher if LTV is over 75%
 

gwasser

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Thomas Beyer

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QUOTE (gwasser @ Jul 21 2010, 08:57 AM) It`s the economy!

It all depends on the economic conditions. In the 2008 Credit Crunch, you would promise a JV investor with access to cash the moon. When JV investors throw money at you with the bucket full, you`re likely to keep a larger proportion of the profit yourself. It is all `supply and demand`.
indeed .. if you show people an honest way to make 8 to 12% with low risk of capital loss they will invest !

Be suspicious of advertisement promising 15%+ on real estate based investments as they likely have a very high risk of failure due to overleverage or bad value assumptions !
 

Apt_Bldg_Ontario

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Although 50-50 split between the investor and the expert is the norm, I don`t agree with it.

I think that the expert can get his/her commission in few ways:

- When buying the property, if the expert is also a real estate agent, he/she should get his commission. from the seller and not the investor. If the expert is not a real estate agent, then the investor should pay the expert a commission of about 2% of the asset purchase price.
- Managing the property should be another profit the expert can make which should be about 4%-5% of the total rental revenue of the property.
- Assistance in organizing a mortgage should be another 1% of the mortgage amount.

The expert give his expertise at the beginning when purchasing the apartment, and then when managing it. He should be compensated directly to his added value.
 

JohnS

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QUOTE (lihipr @ Jul 31 2010, 10:08 PM) Although 50-50 split between the investor and the expert is the norm, I don`t agree with it.

I think that the expert can get his/her commission in few ways:

- When buying the property, if the expert is also a real estate agent, he/she should get his commission. from the seller and not the investor. If the expert is not a real estate agent, then the investor should pay the expert a commission of about 2% of the asset purchase price.
- Managing the property should be another profit the expert can make which should be about 4%-5% of the total rental revenue of the property.
- Assistance in organizing a mortgage should be another 1% of the mortgage amount.

The expert give his expertise at the beginning when purchasing the apartment, and then when managing it. He should be compensated directly to his added value.

I can understand not agreeing with the 50/50, but I can`t believe you have weighted the expert so minorly. First off, it`s not a commission - it`s what they bring to the deal. They bring time, energy, knowledge, contacts, systems, experience and a whole host of other things that Thomas has listed in various places in these forums. And they bring these things for the entire length of the deal, often including when the property is sold. All the other partner brings is money, and maybe getting the mortgage, and as we all know, money is a renewable resource whereas time is most definitely not.

Secondly, I can`t believe you believe that they`re worth less than the realtor on the buying aspect. They arguably have to do more work on that aspect than the realtor does, as they`re involved (at least in an overseeing capacity) in everything the realtor does as well as a whole host of other things.

Thirdly, property management companies make somewhere between 8 to 15% of the total rental income, depending on the place, the type of building, their responsibilities, etc. So, you apparently believe that the people who oversee the managers should make one half to one third of the PM companies, and get absolutely none of the equity buildup or mortgage paydown?

Really? The person/team that managed everything and coordinated everyone for years and years (conceivably 20 years or more) should get absolutely none of the equity in the property? That`s the part that floored my the most, actually. At no point did you say that their years of hard work should be recognized with a final payoff. So, apparently they should just be happy doing all this work for years for just a few thousand dollars.

Well, like pretty much everyone else on these boards, I believe in a strong win/win relationship. And seeing as how your idea of a win is miles from my idea of a win, I guess it`s pretty obvious that we won`t be doing any deals together!
:)

Have a good one, all!

JohnS
 

Apt_Bldg_Ontario

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Hi John,

Few answers:
- Usually for a large multi-unit apartment buildings, the commission each side is getting is not more than 2%. That is why I used 2%.
- As for property management company: they usually charge between 5%-6% of the total rental revenue and on top of that you need to pay about 3%-4% for the superintendent.

Most of the knowledge that the expert is giving to the table is at the beginning - looking for the right place, putting the offer, checking all the different aspects, and closing on the deal. I really think that his knowledge should be compensated at the begining which is the about 2% of the purchase price. If the expert is also the property manager, he should also be compensated for that. Let`s take an example to emphasize how much the expert is making at the beginning: if the investor is purchasing $1 Million apartment building, then the expert will get $20,000 for all the time invested in finding the right property and closing the deal.

I think that it is totally a different story if the expert is taking the mortgage upon himself and the investor is only bringing the money. Then I see a fair split of 30-70.

Cheers
 

JohnS

New Forum Member
Registered
QUOTE (lihipr @ Aug 1 2010, 02:49 AM) Hi John,

Few answers:
- Usually for a large multi-unit apartment buildings, the commission each side is getting is not more than 2%. That is why I used 2%.
- As for property management company: they usually charge between 5%-6% of the total rental revenue and on top of that you need to pay about 3%-4% for the superintendent.

Most of the knowledge that the expert is giving to the table is at the beginning - looking for the right place, putting the offer, checking all the different aspects, and closing on the deal. I really think that his knowledge should be compensated at the begining which is the about 2% of the purchase price. If the expert is also the property manager, he should also be compensated for that. Let`s take an example to emphasize how much the expert is making at the beginning: if the investor is purchasing $1 Million apartment building, then the expert will get $20,000 for all the time invested in finding the right property and closing the deal.

I think that it is totally a different story if the expert is taking the mortgage upon himself and the investor is only bringing the money. Then I see a fair split of 30-70.

Cheers


I think we have different ideas on the term "RE expert", then - possibly because you`re looking at bigger deals which I have no experience with. To my mind, what you`ve described is more akin to a birddog than an expert. You`re just paying someone to go and get you a good deal, but you`re going to handle everything after that. Nothing wrong with that - we`re just using different terms.

Have a good one!

JohnS
 

Thomas Beyer

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REIN Member
QUOTE (lihipr @ Aug 1 2010, 12:49 AM) .. Then I see a fair split of 30-70.
why not 25:75 or 40:60 or 50:50 ?
 

jarrettvaughan

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QUOTE (lihipr @ Jul 31 2010, 11:49 PM) As for property management company: they usually charge between 5%-6%

5%-6%????

Where is this?
 
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