How to Create Winning Joint Ventures

Transcription

1 How to Create Winning Joint Ventures Jim Ingersoll here with another segment on private lender financing and your private lending course. I'm excited to have you along. Now that you know why you want to get rid of the banks (because banks are terrible, and they suck, and they're hard to work with, and they take all of your money, and you need good credit) and you understand the differences as far as short-term and long-term financing. Now you understand equity financing and debt financing. You know how to go out and connect yourself with people who have retirement accounts who can do deals with you. Now I want to talk to you about how to structure the deal and pull the stuff together. And from here we're going to go into an entire module on how to find the money. Once you have this last piece together on creating joint ventures you're going to be ready to go find some money. It's that easy. What is a joint venture? Is it a partnership, Jim? Is it a strategic alliance? Do you think it's a merger? Is it a business arrangement? Is it just a transaction you can do a deal together, shake hands, and send some money across a wire? What is it? Basically, it's an agreement. If I say the word contract raise your hand if you think contract sounds intimidating? It isn't intimidating. Don't think of it as a contract. Think of it as an agreement. Now an agreement could be anything that two people sit down and talk about over lunch and write down on a napkin. Does that sound intimidating going to lunch, talking about how you're going to do a deal with somebody, and then writing it down? That's all it really is. And it's centered around how you're going to do a real estate deal. It is similar to a formal business partnership, but there's a really big difference. A business partnership can be a corporation or an LLC and things like that. And a joint venture isn't quite like that. It's not as formal as an LLC or being incorporated. You don't have to do individual tax returns. You don't have to have joint checking accounts and all of that kind of stuff, though you might want to. In most cases, you won't. It isn't difficult like a business relationship or a business partnership. The way I like to structure my joint ventures is based on individual real estate transactions. But you could also group a whole bunch of them together. If somebody has, say $700,000, for you to do some joint ventures with you might want to do half a dozen houses, and that half a dozen houses is a portfolio joint venture. But in most cases it's going to be house by house, transaction by transaction. And it's going to be based on individual houses just like the one in the picture. And then individual houses are going to have a set of documentation with it that defines how everything works.

2 So why do you want a joint venture anyways? Most of you are going to want a joint venture because you want to connect yourself with people who have money, and you're going to go out and do the deal. That's really the why behind joint venturing because it eliminates banks. It eliminates money coming out of your pocket, and you don't need great credit and all those things that we talk about. But it also allows you to share strength. And there are going to be cases where you want to selectively and strategically pull other people in to minimize your risk and increase your profits. Now each party in a joint venture may have different skills and different resources for sure. Think about that. You, as a real estate catalyst, as a real estate entrepreneur, a dealmaker, have this particular skill set that's in very high demand now. You know how to go out and source deals, fill your pipeline. You know how to negotiate with sellers. You know how to go to closing. You know how to manage construction crews and do some rehabbing. You know how to manage property. The person that you're going to joint venture with has different resources. He has none of the skillset that you do, though he has resources in the way of finances. When you pull those together you can create a winning joint venture. It's a really powerful force. Somebody may ask you sometime, "What happens if our joint venture loses?" Well you need to be prepared to share in those loses as well. But really if you're careful and you buy the right houses with the right strategy you will minimize your risk. We have a whole segment at the end about minimizing risk. You want to avoid what I call a joint adventure. A joint adventure is where you set false expectations with your private lender and things don't go as plan. And you don't document things. Avoid the joint adventure and create a winning joint venture. That's what this whole module is about. What is it? Well, it's basically an agreement. I'm going to give you, in the keeping deals safe section of this course, an actual joint venture agreement. I'm also going to give you a promissory note that you can use for debt financing. I'm going to give you a sample of a deed of trust. I'm going to give you all the ways to keep deals safe and give you all the documentation that you need. Now the joint venture agreement may also include things like your exit strategy. It may include your acquisition strategy. It should include who does what and the responsibilities of everybody in the joint venture. It's also going to cover things like what happens when the joint venture ends. When you sell the house what happens? What happens if somebody dies and your joint venture continues? Or does it end? Or do the heirs sell the property?

3 Typically though in most joint ventures there are going to be two to three people. But you can sometimes extend it to four or five. Say you were learning to joint venture, and you keep going up, and you want to do some commercial development or you want to invest in a subdivision or something. You're going to want to pull more people in. But in most cases there are two people in your joint venture. That's going to be you, as the catalyst and your private lender as your money partner. But you may extend that to some other people. And maybe you want to bring a contractor in or a property manager or a surveyor. You want to pool the right financial resources to match with your skill set. And when you do that you're going to be able to maximize your returns for everybody involved. Let me review with you, in case you didn't see the other module where I go through this, who does what. In most cases, if you're watching this video, you're going to be the catalyst. The catalyst is the dealmaker. Raise your hand if you want to be the dealmaker. This is the person who does all the work, but it's work building (in most cases) residual cash flow streams and investing in real estate assets. So it's good work. What you're going to do as a catalyst is identify your investing strategy. You're going to go out and find the right property. You're going to negotiate the sale, structure the joint venture. You're going to run the rehab. You're going to screen and market for tenants and manage the property all the way through the final time when it's sold. You're also going to do all the work. You're going to be expected to keep the deal safe. You're going to be expected to be responsible, organized, and disciplined. It's important that you communicate well with your private lender. I can't emphasize enough that your character, your ethics have to be absolutely pure and noble. Say pure and noble, I will be, Jim. Yes, I know you will be pure and noble because you're going to use Other People's Money (OPM), and you need to put it to use and do it the right way on real estate assets that are going to create winning opportunities for you and for your private lender. It isn't a time to be greedy. It's not a time to take advantage of people because there is a lot of responsibility that goes along with using other people's money. If you're going to lend out of your checking account, you would expect the person you're going to lend to to also operate with character and ethics. When you combine that with your knowledge and your experience as a catalyst, you'll be able to structure deals, find money, and buy and hold or buy and flip some houses. Now your financial partner is your private lender. He does no work. Doesn't that sound good? He's 100% passive.

4 Personally, the only thing I like better probably than buying houses is being a lender. And I do that out of my retirement account. I like it because it really is passive 100%. You have to work with somebody you can rely on to supply the funding, who doesn't have a last second thing the day before closing where he says, "Well I'm a little short today." You have to be able to trust the person you're working with. You have to have somebody who's got funds available on short notice, say four or five days, and somebody who's easy to work with that you enjoy working with. Like this nice lady in the picture right here she's got a briefcase full of money. She has a deed in her hand. She understands the process. She's ready to go to work as your financial partner, supply funds, and do no work. That's what you want. Your financial partner as your private lender does all of the funding. They're going to pay for the house. They're going to pay for all the closing costs, 100%. They're going to pay for all of your holding costs, what you project your utilities will be until the house is occupied or sold. And they're going to fund your entire rehab budget. It's important that you are able to go out, work with contractors, get formal bids that you can present to your private lender to justify the repairs on the house. And you have to work out with them on the rehab budget one of two things. You can either capture it all up front, which may make some private lenders nervous (rightfully so), or you can work out a draw schedule. Maybe you take 25% or 50% upfront and the other 50% when you're done. Work it out any way that you want. It's up to you and your negotiating skills to get that done. The private lender does no work, just supplies funds. He takes all of his money out of his checking account, and sends it to your attorney or your settlement agent, so that you can buy the house. Building a joint venture is kind of like building a house. There's a foundation that you have to set in place. It'll be a block foundation or a slab. And then you build it up from there. Ultimately what you want to do is create safe transactions, have a long-term vision, work with people you absolutely love and enjoy being around and hanging out with, and have similar goals that you can work with for many, many years. If you're a young person I want you to listen carefully to this because you have a particular set of skills that people are going to want because if you're young that means that a private lender can work with you for 20 or 30 years. You can make a lot of money together. You can do a lot of deals together, take care of each other, and start to become financial friends.

5 Now to maximize your return you have to be able to identify your investment criteria. You already know this from the wholesaling course. You know how to buy houses dirt cheap. You know how to do comps. You know how to project your repair costs. Just go out and meet some contractors and get them to tell you how much it'll be to fix it for. As far as how much it'll rent for, try Zillow or Craigslist, and you'll start to get an idea. You can do this with all different kinds of property. You can do it with commercial or single family homes or whatever. These are two houses I've done in the last year with a private lender. They're both occupied by tenants right now. The one on the right has a Section 8 tenant. The one on the left is rented to a nice family. But you do need to come to grips in your head with what your criteria is going to be. Who do you want to rent with? What kinds of houses do you want to deal with? What kinds of neighborhoods are you looking for? Are you willing to take a little more risk and invest into a transitioning neighborhood a neighborhood that's got a little bit of blight but might be on the edge of blooming? Are you going to be adventurous and go after college students or Section 8? Section 8 is nice. You get your rent on the 1st every month. But there are other issues that make Section 8 not perfect for everybody. Or are you going to go after working class people in suburb neighborhoods that are in little better school districts where you can still buy houses cheap? You have to come to grips with that and be able to articulate that to tell your private lender exactly what kinds of houses you're looking for, what types of assets you're looking to invest in, because they're going to be interested in the collateral. The collateral is your house. If you can buy the house cheap, you have a good cushion of equity there, and you're able to rent it out for a good amount of money you'll have no trouble linking yourself and connecting to people who have that money. I showed this picture because a very good friend of mine is a financial friend. We've done many, many joint ventures over several years. Last summer he called me and said his daughter was buying a house in Cleveland, OH up on Lake Erie, and he wanted me to come look at it because he knew that I know a lot about real estate. And I just showed this picture because as you build your financial friend network you need to realize and always remember that relationships are two-way deals. As you communicate and you're always willing to help He's willing to help me as a financial friend and do deals on very short notice. And I'm willing to do the same for him. If he has a family member that needs some real estate expertise, yes I'm willing to get onto a private, chartered plane and fly to Cleveland. You should be willing to do the same for your joint venture private lender. If they have something they need, make sure that

6 you reach out and help them every single time because that's the way good relationships work. You need to protect them, treat them like a pot of gold, and treat them better than you've ever treated any banking relationship because you can do many, many deals with your private lenders, and they're going to come back and bring more money to you in the future, or connect you to other people who will want your skill set. That's it. That's how a joint venture works. Stay tuned for the documentation on it in the keeping deals safe for everyone section of this course. Go out, find yourself some investment property, and be ready to link together with people who have money and need some great investment partners as well. I hope you enjoyed this segment. Send me some notes in the forum with your questions, and I'll talk to you soon.