Finding the Perfect Balance: The Do’s and Don’t’s of Joint Ventures

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Many believe that having the money to invest in real estate, but limited expertise, still makes it easy especially when compared to not having any money but a lot of expertise. Well, they are right, in a way – having capital to invest does make it easier easier to make bigger mistakes that is. Money without expertise is much more dangerous than having a lot of expertise but no money.

In our book, Joint Venture Secrets, we speak mostly to those investors who have found themselves in a situation of needing to raise capital. However, there is a large contingent of Canadians who find that they have the capital to invest but no time or expertise to do so.  This is where a properly chosen Joint Venture or partnership structure can provide a solution.

These partnerships (which can be structured many ways, but for ease of discussion we ll call them Joint Ventures) help you and your partner combine your capital and their critical expertise to build a strong portfolio.

Warning Your Partner s Influence May Be Detrimental!

A joint venture really proves to be successful over the long haul only if the parties each bring something unique to the relationship. Sadly, a partnership of equals often leads to stress, disagreements and eventually dissolution. It is quite easy to partner with someone in the same boat as you (i.e. no money attracts no money; no expertise attracts no expertise) but that will get you nowhere.

For instance, if you have cash but lack the real estate expertise, don t partner with someone who also has money and no expertise. That is simply a recipe for disaster. On the flip side, if you re an expert in real estate investing but lack the funds to make a deal happen, don t partner with someone in the same situation as you. That can lead to stagnation, frustration and mistakes.

Stronger Together Than Apart

The goal is to build a partnership that is stronger than the two parties existing on their own. You may have time and expertise and they may have investment capital and relationships with key professionals in the industry. That tag team of money and knowledge would be the makings of a potential huge winner for both sides of the equation! Choose your potential partners not for convenience, but for how they can complement your weaknesses.

What do you need to do as the money partner?

1. Take Control

Even if it isn t your deal, it is your money. In all cases, there is no excuse for you not to complete your full due diligence, even if you have limited expertise. Rely on your joint venture partner s expertise when looking for deals, but always do your own checking of the numbers. It is important that as partners you are both equally responsible for the whole deal.

Could ve; Should ve; Would ve the real estate investment world s three most depressing words. Seven letters that also imply that there was a lack of due diligence before the deal got off the ground. If there is information available that could make a difference tomorrow, you need to be in the loop today. You need to take your capital seriously. Sadly, I see a lot of people with capital and not a lot of time, just throwing their money at deals that seem good on the surface, only to find out a year later that with even a little bit of diligence they would have uncovered the obvious flaws in the deal structure, partner or property.

Make sure your full business relationship is detailed in a written agreement that has been reviewed by all of the partners lawyers. Design the divorce in advance and hope that you never have to implement that design. No money should ever cross hands without a detailed written agreement on what it is to be used for, what fees are involved, and what ownership structure will be used.

2. Check Out The Actual Real Estate Deal Yourself

Take a look at the basic details. Even if your partner is the one finding the deals, it is still your responsibility to make sure that all of the due diligence is complete so that you re satisfied with the deal.

JV deals are often bigger than those financed individually and that will be reflected in your financial responsibility as the money partner. Sometimes a deal will sound too good to be true this usually means it is. Be realistic about the rates of return and the timeline for payback on your initial investment. Don t chase the shiny piece of gold (high guaranteed returns , for instance). Ask the key questions to get the answers you re looking for. Just because you have partnered with a real estate expert, that doesn t mean you abdicate responsibility for the proper deployment of your capital and the operations and management of the partnership and its underlying asset(s). 

Even though you are not doing all of the initial diligence, take a few moments to check that what you are being pitched is actually true. For instance, use the readily available REIN Goldmine Scorecard to ask key questions about the location of the property in order to ensure it is in a region of growth.

Make sure the rents, vacancy rates, management costs and all other operations costs seem to match the local region. Then get on the internet and do some cursory checking to ensure that incomes are not overstated and expenses understated.

Also, never assume the basic facts. Ask real estate agents familiar with the neighbourhood about current market prices. Even better, hire an accredited appraiser to review the property so you know that you re buying at an accurate value. This is the cheapest insurance of value you can buy.  If renovations are required, make sure there is a decent sized financial buffer built into the budget, at least 20% on average.

The strategic investor or money partner should tour every part of the property sometime before closing. It s worth the effort, if you have the time, OR if you don t, have someone you trust do it in your place.

If the JV involves a condominium unit purchase, get a copy of the deferred reserve plan study. Look at how maintenance issues are going to be dealt with: Are there large cash-calls on the horizon you must prepare for? Or, is the building being maintained to avoid these?

Yes, it seems like you are becoming the expert by doing this work, however, I implore you, or someone you trust who is not a part of the deal, to take these extra steps.

3. Always Ask The Tough Questions!

There is an important recurring theme I have discussed at least every quarter at a REIN Workshop for the last 20 years: Before you enter ANY joint venture, RRSP loan or ANY financial arrangement, ALWAYS do extensive due diligence on the other party. This includes EVERYONE, EVERY TIME, especially:

1. Family members Just because they are your gene pool doesn t automatically make them great business partners.
2. Veteran and rookie investors – Even if they are award winning or high profile doesn t automatically make them a great partner for you. Always check the backgrounds and reputations of any potential partner as well as thoroughly review any of their previous deals.  
3. Other investors and past partners – Many people purport to call themselves investors, yet have done very little or have very mixed results. Don t just blindly enter a relationship without first checking their history.
4. Friends – This area is fraught with landmines. Friends, although great fun to do business with, can also turn into disasters – disasters where you not only lose money but also a key friend. Treat these relationships carefully. Make sure it is not euphoria or blind enthusiasm bringing you together and ensure EVERYTHING is spelled out in your Joint Venture agreement.

Joint ventures and working with someone you trust is an excellent way to get involved in real estate. However, you must remember that you are putting your financial future in someone else s hands blind trust is not enough to get by! There are too many wolves in sheep s clothing who have mastered the
You can trust me sale. Don t let that happen to you.

An extra step you can take is to arrange a full background check (fraud, criminal, etc.) from TVS Services (1-877-974-9328). Those with something to hide will often tell you no, or even less directly they will say, It will take too much time and you’ll miss the deal. Tell them okay and then move on.

And, as a clear reminder, if the other partner is a family member, friend or fellow investor, it is especially important to do extensive due diligence on them. For this, you can rely on the best background check site out there to help you out in this regard. Your perception of the other party is often not based on reality. Just because they are well-known in the industry or an award winner, or someone who has been nice to you, or has the same bloodlines as you, does NOT mean they are a great business partner or are looking after your self-interest.

The only person who will truly look after your own interests is you. You have the tools to do your homework so don t skip any of the steps!

Some of the more important questions to get answered honestly are:

Does the property truly fit my goal or am I just excited to do a deal?

Does the JV partner (or RRSP mortgage receiver) have a philosophy of integrity or do they talk about gray area investing?

Is there a written JV or loan agreement that my own lawyer has given their approval of? (Note: Never use the same lawyer as the other partner to review any agreement)

Do YOU have a clear exit strategy? IS it consistent with what you want and what the other party has talked about? What happens when they stop making the mortgage payments?

Can the other party actually live up to their financial commitments if the deal goes sideways or are they already in too deep and will stop returning your calls during times of trouble? What protections do you have in place when this occurs?

Is how you feel about them REAL or perceived? Listen to your instinct, ask around to others, talk to their past partners and get their permission to pull their credit rating.

If the deal does not work out like you expected it to, don t be afraid to ask more questions. Make sure you have safeguards in place BEFORE the joint venture has an opportunity to go deeply sideways. It is much more difficult having that conversation after a disaster begins versus during the honeymoon stage when you are just starting out on the journey together.

Hidden Variables and Black Swans

Sure, real estate occasionally has hidden variables and black swans that no one can foresee, but sometimes you may have been put in a compromising position on purpose (although they d never tell you that!). Too many investors have been blindsided in the past. Your job is to prevent yourself from becoming one of the victims . Do your OWN homework every single time. Never be blinded by perception, awards or personal relationships.

Don t be a silent partner. If the deal is going great, say thank you to your partner. If the deal starts to go off the rails, even slightly, don t be afraid to take swift and immediate action. Ask questions early if it is not living up to the promised figures, the longer you wait the worse the deal can get. Make sure you receive regular updates on how the property is performing so there are no surprises, NEVER wait until year end statements.

Your capital is an in-demand commodity, so don t give it away or invest it blindly. You worked hard to accumulate it. Once you have invested it, don t walk away and hope for the best. There is a reason it is called a partnership. You both are in it together, so be proactive on reading the monthly reports and asking questions if it doesn t feel right.

began his investing career in 1985 with a house purchased in Mission, BC. He is Founding Partner and Senior Analyst at The Real Estate Investment Network and currently owns nearly 200 doors in BC and Alberta. A seven-time best-selling author, Don s expertise and passion for teaching Canadians how to create wealth through real estate are far-reaching and have made an impact on the lives of thousands. You can follow his daily thoughts on Twitter www.twitter.com/ and on Facebook at www.facebook.com/thereinman.

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