50/50 Joint Ventures
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If you have less than $150,000 cash to buy deals at the trustee's sale you might seriously consider partnering with passive investors wherein they put up the money and you do all the work for a 50/50 profit split. You would get your capital base up to where you can go after a lot more deals (both the entry-level and move-up levels of housing) and you'd earn substantial profits right along with your investors.
Let's say you have $75,000 of your own to start. You should be able to buy and rehab one foreclosure with it and then resell it in a span of 5 to 6 months. Thus, if your timing is just right, you'd be able to do a maximum of two deals per year.
On the other hand, with the same $75,000 you could have access to an additional capital
base of $750,000 if you took in investors and put in some of your own money on a 1:10 ratio. Then you'd have the cash to do fifteen or more deals in a year and profit accordingly.
Investors want equity and a share of the profits. A successful formula we've been using is to give them all the equity and half of the profit. When we're also part of the investment pool then we also share in the equity and the investors' profit proportionate to our cash in the deal (which is in addition to the 50% profit we receive as the active partner finding and working the deal from A to Z).
Our arrangement is quite simple. We don't get a penny until the property is successfully resold and we have an actual profit to divvy up. There's never any front-end load and we only charge a management fee if the property is generating current income and if we've already held it more than six months. And since we don't collect any commission or fee when we buy or sell the property we have no incentive to buy a marginal deal. Finally, by pegging our payoff to the resale of the property it ensures that we'll consummate the transaction as quickly as possible.
The way we begin is to have the investors put their money in their own savings account at our branch bank. They give us a revocable power of attorney over the account, allowing us to deposit and withdraw cash from it for buying foreclosures. Working with separate investor accounts prevents the commingling of investor funds. Even when we go to a foreclosure sale we have each investor's funds in separately nominated cashier's checks.
When we buy joint venture property we shield its title from any possible threat, cloud or liability, from any quarter, by placing it into a "title holding" trust. The beneficial interest in the trust is split up amongst the investors according to their percentage of the invested capital. The controlling document is a multi-page Declaration of Trust, which details the agreement (limits, powers, duties, etc.) between the managing trustee and the beneficiaries concerning the trust-held property.
Each property operates its own, separate checking account, providing an exact, ongoing record of all receipts and disbursements which is sent with every progress memo to the partners every 60 days or so. At year's end a CPA generates the federal and state tax returns for the partnership, sending each investor the resultant "K-1" schedules to attach to their individual tax returns.
By Ward Hanigan
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