Apartment Building - Joint Venture Dilemma

[Nir]

Hi All,

I am having a small dilemma I wanted to share: I have an opportunity to purchase an apartment building.
There will probably be 2 partners instead of one due to the high down payment required.

So far, up to 4 units (4-plex or smaller) purchased with one partner only - I am offering 50 50 ownership, 50 50 net income, etc. with
me putting nothing or almost nothing down and offering to do everything for the passive investor from A-Z.
I understand many active RE investors offer/do the same.

My dilemma is regarding apartment building (say 20 units) with two partners: would you still offer to put almost nothing down (I`m guessing YES) and 50 50 ownership and 50 50 net income meaning you own 50% and they own 50% together, you get 50% of the net income and they share 50% of the net income together (that`s what I am less sure about)?

In other words, 2 options I can think of in the case of apartment building purchased with 2 partners.

Which one do you believe is more common and fair:

1. You the active investor #1 own 50% of the building and get 50% of the net income. passive investor #2 owns 25% of the building and gets 25% of the net income. passive investor #3 owns 25% of the building and gets 25% of the net income.

OR

2. Each of the 3 investors – you the active investor and your 2 passive investors, owns 33% of the building and gets 33% of the net income.

THANKS,
Neil
PS. Thomas Beyer has done a superb job covering the topic of working with partners in previous discussions. This is a more specific dilemma I believe was not discussed here yet.

 

[housingrental]

2. is more fair than 1.
2. is still poor value for investors.

Your not delivering whats over time hundreds of K in value to transaction...







QUOTE (investmart @ Aug 17 2009, 02:56 PM) Hi All,

I am having a small dilemma I wanted to share: I have an opportunity to purchase an apartment building.
There will probably be 2 partners instead of one due to the high down payment required.

So far, up to 4 units (4-plex or smaller) purchased with one partner only - I am offering 50 50 ownership, 50 50 net income, etc. with
me putting nothing or almost nothing down and offering to do everything for the passive investor from A-Z.
I understand many active RE investors offer/do the same.

My dilemma is regarding apartment building (say 20 units) with two partners: would you still offer to put almost nothing down (I`m guessing YES) and 50 50 ownership and 50 50 net income meaning you own 50% and they own 50% together, you get 50% of the net income and they share 50% of the net income together (that`s what I am less sure about)?

In other words, 2 options I can think of in the case of apartment building purchased with 2 partners.

Which one do you believe is more common and fair:

1. You the active investor #1 own 50% of the building and get 50% of the net income. passive investor #2 owns 25% of the building and gets 25% of the net income. passive investor #3 owns 25% of the building and gets 25% of the net income.

OR

2. Each of the 3 investors – you the active investor and your 2 passive investors, owns 33% of the building and gets 33% of the net income.

THANKS,
Neil
PS. Thomas Beyer has done a superb job covering the topic of working with partners in previous discussions. This is a more specific dilemma I believe was not discussed here yet.

 

[GarthChapman]

It depends...
It depends on what the ROI will be for the investors.
It depends on what you bring to the deal, particularly regarding experience in apt bldg management.
It depends on what you can negotiate.
It depends on who will sign the mortgage.
It depends on the relative value of what you have done and will do versus what the partners bring to the deal.

Question- why would it be different for 2 parties each bringing half the required cash rather than 1 party bringing the required cash?

 

[wgraham]

QUOTE (GarthChapman @ Aug 17 2009, 08:24 PM) It depends...

I will add
It depends on what the investors expectations are!

Wade

 

[Thomas Beyer]

QUOTE (investmart @ Aug 17 2009, 12:56 PM)
...

Which one do you believe is more common and fair:



1. You the active investor #1 own 50% of the building and get 50% of the net income. passive investor #2 owns 25% of the building and gets 25% of the net income. passive investor #3 owns 25% of the building and gets 25% of the net income.



OR



2. Each of the 3 investors ` you the active investor and your 2 passive investors, owns 33% of the building and gets 33% of the net income.



THANKS,

Neil

PS. Thomas Beyer has done a superb job covering the topic of working with partners in previous discussions. This is a more specific dilemma I believe was not discussed here yet.



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hard to say .. I have done both .. and both make sense .. so it is up to YOU to negotiate your best deal .. based on prudent assumptions about NOI, interest rates, value in 5 years, cash-flow .. etc. ..



one angle you could take is with your co-investors:



I will sign the personal gauarntee .. and thus I deserve 50% .. I am OK with 33.33% .. but that means you too have to co-sign the personal guarantee on the 1st mortgage .. what would you prefer Mr. passive co-investor ??



add'l thoughts here:





50/50 ` is this fair ?

http://myreinspace.com/public_forums/Real_Estate_Discussion/62-2015-5050__is_this_fair_.html



Equity Gain not the only way to make money in RE: http://myreinspace.com/public_forums/Real_Estate_Discussion/62-10711-Equity_is_not_the_only_way_to_make_money_in_real_estate.html



Multi-Family Primer in May 2009 Issue of Canadian RE Magazine:

http://myreinspace.com/rein_members_only1/Members-Only_Discussion/81-10996-Multi-Family_Primer_-_May_2009_Issue.html

 

[ChrisDavies]

I know someone who just cosigned a mortgage on a multi in return for half of it. Still a win for both parties.

If you go from one investor to two, how come your share goes down? You`ll have to do more admin work...

 

[Nir]

Thank you everyone for the great advice!

Adam, I understand why you mentioned "you`re not delivering what`s over time hundreds of K in value to transaction". However, please look at it from the passive investor`s point of view: 1. upon sale of the property, the passive investor receives all his investment capital first. 2. if the numbers still work so the passive investor gets say 10% return on investment annually before even talking about appreciation and not even including mortgage principle payments (in other words, 10% just based on net income!), then HEY is this not better than putting the money in the bank getting (I don`t know what is it now) 2.0%!? Remember, not everyone is an experienced property manager like you. Millions of Canadians have millions in the banks getting like 1-2% interest and would never buy RE otherwise!!

Garth and Chris, good points: "why would it be different for 2 parties each bringing half the required cash rather than 1 party bringing the required cash?" (Garth)
"If you go from one investor to two, how come your share goes down? You`ll have to do more admin work..."(Chris)
Well, the question is about buying an apartment building with 2 partners VS. buying 4-plex with 1 partner (not just 2 partners vs. 1 partner). In the case of apartment building you have to put higher percent down (assumption) (note higher %, not just $)so more effort proportionally for EACH of the partners. Another way to look at it is in the case of apartment building, to allow each partner to put the same amount down as the 4-plex partner, the number of investors needed would result in each investor owning less RE value if they simply share 50% (25% each) as suggested in option #1 above. Therefore, one way to compensate the two passive investors in order to ensure similar level of motivation to invest in apartment buildings as to invest in a 4-plex, is to offer higher portion of the net income and property ownership - higher proportionally to 4-plex. Otherwise, you guys are correct: 25% with 2 investors is equivalent to 50% with one. Many ways to look at it so perhaps most important is "it depends on what you can negotiate" (Garth)

Thomas, your comment "I have done both .. and both make sense" is VERY helpful! I guess that`s all I needed to know.

Regards,
Neil

 

[housingrental]

Neil - I understand your point.... Try not to get too let greed overwhelm your senses and kill a possible deal! Do a ton of them first, then gouge if you must...

 

[Nir]

QUOTE (housingrental @ Aug 18 2009, 08:13 AM) Neil - I understand your point.... Try not to get too let greed overwhelm your senses and kill a possible deal! Do a ton of them first, then gouge if you must...

Absolutely. All I asked is what type of agreement is "more common and fair" in this case.
Isn`t that exactly the opposite of "letting greed overwhelm your senses"

Thanks.