What can possibly go wrong jumping into a joint venture business partnership with someone you met at a real estate conference?
I mean, you have so much in common; you both love investing, and both want maximum profit. Besides, you’ve got a good feeling about this one.
While I’m the first to tell you to trust your gut, I’ll be the first to tell you to protect your downside risk at all costs.
Why Do We JV?
Typically, the answer is: Leverage.
For some people, they simply don’t have the time it takes to invest into real estate – it is a full time job. For others, they don’t have the knowledge or experience of identifying whether a project is a good opportunity or not. Others do not know where to locate potential projects. What these people do have is cash, or some form of capital that they need to place so they can generate a good return on investment.
When the needs and wants of two parties compliment and fulfill each other, that can be a great opportunity.
When structured well and hosted by an experienced sponsor, these partnerships can be very profitable. They’re prosperous when all parties have done their due diligence on the plan, the assets, the financing, the team, and each other.
The most important aspect of successful JV’s is setting clearly articulated agreements in place that spell out the conditions of the arrangement; including the roles and responsibilities of the members.
I’d love to experience the days where a hand shake and a name was enough to create a lasting promise of fulfillment, but it’s rare to non-existent.
The most common reason why joint ventures fail is because there was no written agreement between the parties.
Many investors tend to shy away from these arrangements because they’ve heard too many horror stories of people ending the partnerships with families and friendships breaking up, or people losing their money, homes, or even the businesses. Some just don’t understand how, when, and where to utilize joint ventures, and therefore don’t consider them any further.
That being said, the majority of joint venture projects I’ve structured or hosted have been profitable. Many of those investor relationships continued into multiple different investment projects, and grew into sizable capital gain nest eggs for those passive participants.
I’ve experienced great results; both in sharing the profits, and in sharing the losses. That’s right, real estate investing isn’t always profitable; in fact, investing in general — in anything — is not always profitable.
Don’t get me started on the volatility of the public stock market…
However, there are things that can be put in place to mitigate risk, and downside losses.
1. Clearly Articulate Your Investment Objective
“If you don’t know where you are going, every road will get you there.” A quote from Lewis Carroll’s Alice in Wonderland. I interpret this quote to mean that if you don’t have your goals clearly defined you are going to take every opportunity that comes your way. Which reminds me of the adage, “If you don’t stand for something, then you’ll fall for anything.” I prefer to think of the wisdom of Henry Kissinger’s saying, “If you don’t know where you are going, every road will get you nowhere.”
2. Understand the Project
What is the purpose of the project? Is it a fix and flip that could change to a buy and hold (rental property) if the market supports it, or if your partner decides to change the plan?
Being in agreement from the start, and having full knowledge of the desired outcome is good for both parties. This ensures a smoother project operation and transaction.
Additionally, seeking clarity, and establishing a path to address:
(a) desired timeframes, how to handle delays,
(b) general budget, how are cost overages and unexpected costs handled, (c) manager appointment, roles and responsibilities, etc.
3. Develop an Exit Strategy
Any business partnership (even passive joint venture projects) should have an exit plan clearly defined for its members.
Family or medical emergencies can happen to anyone. Circumstance may arise where one party may need to sell rapidly, or perhaps the partnership is not working out for either party; there needs to be a predetermined way to exit the association that is fair to all parties.
Linking an exit strategy to agreed-upon project metrics is a good place to start.
In this way, either a third party valuation assessment, a property appraisal, or a predetermined buy/sell agreement based upon fractionally appreciating benchmarks that articulate the increasing value of the initial investment.
It is important for the members to have an emergency exit prepared — but it is also imperative for the investment to have an exit strategy. Personally, I like our projects to have multiple exit (investment) strategies.
For example, I may plan to develop a parcel as a primary strategy; demolish the existing house, build a new home, and sell on the market. Secondarily, I have a plan B articulated to keep the home, redevelop it (improve it), and sell on the market. At times, plan C of continuing the development and selling to a local builder makes more sense in the short-term than the long term. There are many variations of strategy, each with their own trigger of execution.
Profit today is tangible; profit tomorrow is theoretical.
My outlook towards joint venture investing has been largely reinvented by the necessity of our clients needs. In years past, I rarely entertained joint ventures in real estate projects. But as time went on, many people who coveted the upside potential of real estate investing began approaching me. I knew that the majority of these people didn’t have the time, or experience to bring to the table, but had the capital to invest. They needed a safe structure.
A Fund is Born, Joint Ventures A La Carte
The best method of structure for passive investing in local real estate is through SEC Registered funds and partnerships.
Our team works hard to make sure we wade through the semantics of regulation for the benefit of our capital partners and investors.
Be aware, the unfortunate reality is that many (if not most) of the real estate ‘investments’ offered as joint venture partnerships are not filed, or structured appropriately, and are at best, loose partnerships.
I decided to create a model that utilizes the best of hands-free investing.
Not everyone wants to participate in a joint venture. In fact, many of our clients choose the funds only because they are diversified into many different projects. Furthermore, the diversification extends into variable project sizes, locations, neighborhoods, demographics, economics, and more. There is no right or wrong strategy here. What matters is knowing what you’re comfortable investing into.
For Hillstone, once a client participates into one of our fund offerings, they can elect to invest additional funds into a direct investment (joint venture), that we call Preferred Equity™.
The investment is passive in structure and gives the investor the ability to choose which project they prefer.
I hope your take away from this article is a better understanding of the depth of the industry, and the risks associated when investing into real estate alone.
Our team’s desire is to encourage investors to place their hard earned money into real estate with caution, and with firms that have embedded into their structures accountability, experience, diversification, and proven models. Our niche is our strength because of our experience.
Our message surrounds education— education that there are other ways to experience the benefits of real estate investing without the need to quit your day job. Don’t spend thousands of dollars learning the hard way, when you could be putting your money to work right now for the benefit of your portfolio.
— Blake E. Robbins