You Have The Cash To Invest, But No Time or Expertise To Do It… What Next?
You Have The Cash To Invest, But No Time or Expertise To Do It… What Next?

 

 

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

In our Joint Venture Book, we speak mostly about how to raise the capital, as that is the position the majority of investors eventually find themselves. 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. A Joint Venture structure can work in that case just as well.

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 capital and expertise to build a strong portfolio.

Warning… Your Partner May Be Detrimental!

A joint venture is really only an option when two or more parties are joining together and each party brings something unique to the relationship. It is quite easy to ‘partner’ with someone in the same boat as you, 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 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 making mistakes.

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 with convenience, but with complementing each other’s weaknesses in mind.

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. Rely on your joint venture partner’s expertise when looking for deals, but you should always take full responsibility for your side of the partnership. Make sure your relationship is detailed in a written agreement that has been reviewed by all of the partners’ lawyers. Design the divorce in advance!

Could’ve; Should’ve; Would’ve – the real estate investment world’s three most depressing words. They 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, and 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.

2. Check Out The 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 they are your partners does not mean that they have done as much due diligence as you demand as a sophisticated real estate investor.

Even though you are not doing all of the initial diligence, take an evening to check that what you are being pitched is actually true. In a region of growth, make sure it is structured the way you are promised, you get your capital back before profits are divided and you have seen the actual facts and figures (line by line) on the analysis of the property. Then get on the internet and do some cursory checking to ensure that incomes are not overstated and expenses understated.

Never assume the basic facts. Ask real estate agents familiar with the neighbourhood about current market prices. Even better, have an accredited appraiser to review the property so you know you’re getting an accurate number. If renovations are required, is the dollar figure close to accurate and is there a 20% overrun factor built in to your costs?

  • Tour every part of the property yourself sometime before closing. Worth the effort, if you have the time – OR 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.

3. Always Ask The Tough Questions!
As we’ve mentioned every single quarter 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
2. Veteran and rookie REIN™ Members
3. Other investors and past partners
4. Award winners
5. Friends

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. You can 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 direct they will say, it will take too much time and you’ll miss the deal. Tell them OK and then move on.

If the other part is a family member, friend or fellow investor, it is especially important to do extensive due diligence on them. Your perception of the other party is often not based in reality – just because they are familiar or an award winner, or someone who has been nice to you, or has the same blood lines as you, does NOT mean they are a great business partner or are looking after your self-interest.

The only person you will truly look after your own interests is you…
You have the tools to do your homework – don’t skip any of the steps!

Ask the hard questions, including, but not limited to:

• 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? (Don’t use the same lawyer as the other partner to review the 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 they actually live up to their financial commitments if the deal goes sideways or are they already in too deep and inevitably stop returning yours calls? What protections do you have in place when this occurs?
• Is your feeling 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 to occur versus the honeymoon stage when you are just starting on the journey together.

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 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 a in-demand commodity – 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.

Want to learn more about how to use joint venture partnerships to invest in real estate? Grab a copy of my “Joint Venture Secrets Book” now on sale at Amazon. Or attend an upcoming Real Estate Investment Network event.  Here is the calendar, check out event near you: REIN Events Calendar

See you Soon

You Have The Cash To Invest, But No Time or Expertise To Do It… What Next? was last modified: June 3rd, 2015 by maddy
 

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2 Responses to “You Have The Cash To Invest, But No Time or Expertise To Do It… What Next?”

Richard Crenian says:

January 14, 2016 at 3:04 pm

Savvy Canadian investors know that their net is much more important than simply gross returns. One of the biggest factors in this equation is taxes. Lower your taxes, and increase your net gains. There are many ways to reduce overall tax liability. This includes travel and how many days you spend in and out of the country each year, how much you donate to charity and how much is invested in retirement accounts.

Richard Crenian

For more information on Seven Strategies to Net Better Investment Returns in 2016 visit: http://richardcrenian.ca/seven-strategies-to-net-better-investment-returns-in-2016/

 
 
 

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