A couple foreign investors, who are also friends, are interested in purchasing properties with me. My understanding from the banker is it will require 35% down payment. No issue with that as the investors are willing to provide the down payment amount required (35%).
It will probably be similar to a 50% 50% classic deal where when we sell the investor receives his investment capital first then the balance is split 50/50. No problem with that too.
My question is regarding the positive cash flow:
What type of JV agreement is more common, with friends, and what makes more sense due to the fact the deal is with foreign investors who do not live in Canada:
Share positive cash flow 50/50 after management costs are paid to me orFor simplicity, agreeing on a fixed monthly amount to be paid to the investor like $400/mo.
Obviously an amount that makes sense will be calculated. I understand there is a risk the property will not generate the cash flow required to pay the investor however it works both ways and there is also the option the property will make more than should be paid.
Due to the fact I will be managing the property/bank account etc. and in order to avoid any trust/control/expenses/accounting issues in the future isn`t it much more efficient, simply to agree on a fixed amount without the headaches of calculating/proving the right amount to the investor on a periodic basis?
I`d suggest that 50/50 on cash-flow is fine, with a prudent reserve for upgrades or cash-flow buffer (say, 3 month minimum rent) and a monthly or quarterly estimate is paid to them ..
You also must be aware of any tax issues ! You should register the foreign investor with CRA (NRA-6 form) or risk that any payment is subject to 25% withholding tax, or even 25% of gross rent (and not income after expenses !!) as per CRA requirements !!
I own a number of rental properties in Ontario which I manage personally and am considering a similar arrangement with using investors money in lieu of my own. In the above arrangement would it be (1) the investors entirely on title and a side contract agreement on the 50/50 split of the net equity on the eventual sale or (2) would you ensure to have the investors and your name on title (reflecting 50/50 split) but with their equity for the purchase?
QUOTE (TorontoMike @ Sep 20 2008, 10:11 PM) I own a number of rental properties in Ontario which I manage personally and am considering a similar arrangement with using investors money in lieu of my own. In the above arrangement would it be (1) the investors entirely on title and a side contract agreement on the 50/50 split of the net equity on the eventual sale or (2) would you ensure to have the investors and your name on title (reflecting 50/50 split) but with their equity for the purchase?
Thanks for any information,
Mike Rosenthall CA
We usually have the owning corporation or the general partner of a limited partnership on title.
If you do a JV, I`d suggest you are on title .. and if the investor insists give him the right to a caveat on title.
I`d further suggest you do not have only the investor on title, as you lose control.
One is legal ownership .. the other issue is accounting .. don`t confuse the 2 !
YOU on title and as you said "a side contract agreement on the 50/50 split of the net equity on the eventual sale". keep in mind my question is regarding investing with a FOREIGN investor (well, and mainly on the best way to share positive cash flow but you didn`t ask about that). When investing with foreign investors the bank might strongly prefer that only you be on title in order to reduce their risk so in case there are issues they do not have to go after a foreigner they do not know. HOWEVER, if your opportunity is with a LOCAL investor then it is a different story and you have to investigate further or do as Thomas recommended.
Next month`s western Canada REIN Workshops will be covering this subject in detail. We have an experienced accountant uncovering all of the tax liabilities and situations that can occur when bringing in international JV partner.
