Blue $s, Red $s and Green $s: Why the real estate expert deserves to make some money, too !

Thomas Beyer

Senior Forum Member
REIN Member
A successful real estate project requires three investments, be it a single do-it-yourself deal, a JV with 2 or 3 parties, a syndication with 167 people like we do, or a publicly traded REIT with $2B in assets:

1) money (i.e. "green $s") for the downpayment, upgrades, reserves and upfront costs for the venture,

2) mortgage ("red $s" as in below the red line, i.e. debt/mortgage) and

3) management: skills/time/expertise applied throughout the venture, heavily upfront but usually ongoing.

I call the latter "blue $s".

I have seen many REIN members struggle to attract JV capital because the money partner thinks that a 50%, 40%, 33% or sometimes even only 20% equity stake for the expert, with or without modest fees, is unjustified because she/he puts up no money.

Usually we tell people s.th. like this: "We bring 60-80% of the money to the table (via an ever more difficult mortgage) and we do the following, and we take only 40% of the profit, and only after you get 100% of your money back. We also invest our own money for the same term, and we have experience, and not one has lost money in 13+ years in business thus far":

  1. Investigate location/area of North America to invest in
  2. Investigate micro-location once city or metroplex is selected
  3. Screen/filter potential investment properties using realistic rents and/or expenses.
  4. Write offer on selected property (this may involve multiple offers and multiple iterations since typically not all offers will be accepted).
  5. Negotiate terms and conditions of offer.
  6. Finalize offer.
  7. Inspect property
  8. Get reports, such as appraisals, engineering reports, structural reports, RPRs, fire inspection reports
  9. Apply for mortgage, direct or via mortgage broker
  10. Negotiate with financial institution to obtain, initially and/or later, re-finance using 1st, 2nd and/or CMHC (or in the US, FannieMae) insured mortgages.
  11. Set up the legal structure/corporation, and co-investor structure usually via a joint venture or limited partnership agreement.
  12. Select property manager, onsite manager and other professionals (such as tax advisors, inspectors, appraisers, bankers, engineers, roof experts, boiler mechanics) that may be required to further inspect the property initially and operate the property on a day-today basis.
  13. Will market, rent, fix up, repair, paint, landscape and/ or enhance said property to standards that expert sees fit to achieve appropriate rent and/or resale value.
  14. Will keep a record of such fixtures, repair material and/or landscaping material expenditures and/or of all other expenses, such as property management fees, subcontractors , onsite managers, taxes, insurance, realtor, legal, advertising and/or related expenses to market, upgrade, rent and later sell said property.
  15. Set up WCB (Worker's Compensation Board), contractor, Rona, Home Depot or supplier accounts.
  16. Negotiate and set up preferred vendor, supplier and contractor list.
  17. Manage all relationships with banks, realtors and/or 3rd parties.
  18. Set up reporting and e-payment mechanism to investor.
  19. Act as the primary interface to property manager, or may manage properties inhouse.
  20. Adjust rents frequently with market realities.
  21. Invest frequently (but not always) personally into the venture.
  22. Sign all necessary legal documents.
  23. File annual or quarterly statements/documents that may be required by various jurisdictions, incl tax withholding for non-resident Canadians
  24. Sign required personal guarantees for required mortgage(s).
  25. Suggest exit timing
  26. Suggest exit options
  27. Prep asset for exit
  28. Liaise with realtor & lawyer on exit
  29. Prepare document for exit
  30. Manage exit procedure
  31. Do more reporting & filing on exit


This long long list shows what the expert has to bring to the table - all necessary and very valuable tasks that are often very time consuming and certainly knowledge intensive (through hands-on experience or knowledge obtained by joining education/incubator groups like REIN) - and you have to get paid for it.

And yes, Mr(s). Investor if you do it all yourself you should then keep that portion of the profits, too, if you are actually able to invest the time or have those skills which often take years to acquire.


Happy JVing in a win/win fashion !
 
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Sherilynn

Real Estate Maven
REIN Member
Great post, Thomas.



I think that some REIN members may have difficulty 'convincing' a co-venturer that the split is fair because the REIN'ers themselves don't see the value in what they bring to the table. This list may help.



I believe it was either Richard Dolan or David Chilton who said something like "you usually get what you expect to receive."
 

LAndersen

Inspired Forum Member
Registered
Thanks Thomas! You replies and posts as always are very inciteful with lots of wise words!
 

MG911

New Forum Member
REIN Member
Really makes you re-think the 50/50 concept in our favour. As has been mentioned before in other posts, it's important to know what the investor is looking for in terms of ROI. If 8-10% makes them happy then perhaps we truly are giving up too much in a 50/50 JV that nets them 15-20% or more in the end.

Food for thought and a great list Thomas.

Michael
 

sstorrie

New Forum Member
REIN Member
A belated thanks to Thomas for this great collection of inputs from a real estate expert!



Regarding expectations of future profits and anticipated ROI of money partners, I have wondered why RE experts wouldn't choose to engage hesitant investors as debt partners rather that equity partners if the money partner is overly concerned about the split. Could many of these potential partnerships on the rails be saved if given a set ROI option that the expert believes is realistic after a thorough analysis?



I'm fairly new to this world of real estate so curious to hear people's thoughts/experiences.



Thanks,

Stan
 

Thomas Beyer

Senior Forum Member
REIN Member
[quote user=sstorrie] as debt partners rather that equity partners


Debt has two negative attributes compared to equity:



a) it will reduce your ability to get cheap first mortgages, i.e. you will get less of it , and



b) it is an obligation that may cause you to make little or no money if you overpromise.



So, the question to the investor could be framed like "Would you prefer a lumpy, unknown but possible 10-12%, or a straight 6% ?" .. and in almost all cases investor go for equity as the upside potential is there.



Why do companies, like Microsoft or Apple go public and give up 50-80% of the founders equity ? Why did Bill Gates not get a $1B loan at 4% and kept Microsoft 100% Bill Gates owned ? Because no one would give him $1B at 4% due to risk and at 15% it would have been too risky for him as for every Microsoft there are 100's of non-Microsofts that did not deliver 15% compounded growth.



Equity is risk sharing. Debt is an obligation (and a 100% loss possibility nevertheless).



You have to decide how many obligations you wish to engage in in life !
 

sstorrie

New Forum Member
REIN Member
[quote user=ThomasBeyer]a) it will reduce your ability to get cheap first mortgages, i.e. you will get less of it , and


Thanks Thomas! I fully understood negative attribute "b" but not "a". Very important factor I had not thought through or had experience with. Thank you very much for insightful response.



Stan
 

KGuthro

Inspired Forum Member
REIN Member
Thomas, as always you make such impressive statements. It wasn't until you put it in list form did I realize how much work it takes to have a successful investment property with a JV.



Thanks for the great info.
 

Thomas Beyer

Senior Forum Member
REIN Member
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jojozenba

New Forum Member
Registered
Thanks Thomas. These are all great points in negotiating the split. However I believe there is one crutial element missing that shouldn't be overlooked. That's the tens of thousands of real $$$ dollars and years many of us have invested in our Real Estate and Financial education.
 

jnewriver

New Forum Member
Registered
One other critical point to mention in addition to the wonderful list above is the 50% or 40% liabilities we as subject experts sign up for in the process. We are also taking on a good chunk of that risk depending on how it`s structured. In terms of shortfalls or cash calls when needed, we are also there to take the blow. I would say well deserved!!!
 

Shane564

Shane Melanson, Developer & CRE Investor
Registered
In my experience when raising money- much of depends on 'who' you're talking to.

When dealing with 'do it yourself' investors, and those who want to be on the 'GP' side of the table- they don't like seeing the GP make the fee's. They want to be the one earning the up front syndication fee and profit shares (but, they are not doing steps 1-31 @ThomasBeyer above).

Some of the best investors- will be real estate professionals and successful individuals who would prefer to make money doing what they do best (ie, as a Doctor, lawyer, real estate broker) - than to become a real estate syndicator.

Good LP's want me to make money- they now that's the only way for me to stay in business and keep finding great deals for them to invest in. It's the difference between abundance thinking (more for all) vs. scarcity (if Shane makes more money- that's out of my pocket).

All it takes is 1 or 2 transactions to realize how much effort goes into finding the right deal. Then, to actually raise the money and do the required paperwork to comply with securities lawyers.

After that- the fun starts. Operating the property, managing and overseeing the deal. Executing on the game plan to make sure that your 20-30 (or 167) investors are paid their quarterly distribution.

GP's without proper incentives (as I've experienced) can pull the chute early. With the majority of profits on the backend- there needs to be proper alignment of interest between LP and GP.

Now, if you're a new investor- without a long track record, it's common to give up a bigger piece of the pie. Track record= confidence. Confidence = More Investors and More Upside.

Supply and Demand:

When I started, with low confidence (low demand for my deals) - I offered larger preferred returns to my investors and up to 80% of the profit (this was attractive to them).
Today, with a strong track record (high demand), and more investors wanting into my deals (low supply of great deals)- the splits are more in line with the risk associated with the deal.
 
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