PLP-024 My First Joint Venture Deal and the Lessons Earned

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1 – How I got involved in my first Joint Venture deal:

  • Investor friend came to me for a private mortgage on Single Family Residence he owned as a rental in Baytown, TX.
  • Coming up on 5-year anniversary and balloon note was due: $55,000, looking to borrow 65k.
  • Had too many mortgages in his and his wife’s names – Banks said “NO”
  • Originally asked if I would refinance him for 5 years at 5% (take some cash out)

Well. . . .

  • I only wanted to loan for 12 months
  • Interest rate too low, and higher interest rate would significantly reduced his monthly cashflow
  • House had a really good tenant (building their retirement home)
  • I declined the, didn’t meet my criteria on paper, and my gut said no
  • He tried other sources of money but was unsuccessful and came back

 

  • He suggested
    • Option 1: He sells the house to me/my IRA at slight discount
      • Not want I wanted to do
      • I wasn’t comfortable with his asking price (~75k, his ARV ~90-95k)
    • Option 2: We do Joint Venture on the deal,
      • he sells the house to my LLC at a significantly reduced price
      • He retains a percentage of the deal (TBD) and I get to keep the cash flow
  • I chose to Joint Venture
    • My LLC got a loan at a community bank (w/ personal guarantee)
    • I had to come up 20% down payment
    • Down Payment and my share of closing costs = 14k
    • Partner retained 40%
    • Closed in early September
  • How things worked out
    • First 3 months were easy
    • Tenant called on Oct 23rd and apologized for mailing the rent payment late (arrived on the 26th)
    • Tenant finished building retirement and moved out in December
    • Who does what? Who manages property? Who handles repair requests or contacts the tenants?

2 – Lessons Earned and what you should take away from this story:

  • Didn’t run the numbers well enough.
  • Became too active an investment for my liking
  • Should have negotiated better terms – I had the most leverage and all the time, balloon due, un-mortgageable) not to take advantage of the partner but could have made the deal work better for me and I never asked
  • Failed to confirm tenant’s security deposit transferred to me (LLC) 1k
  • Didn’t outline each partner’s precise responsibility, duties, obligations
  • Didn’t discuss or formalize how the property would be managed

However, aside from some tenants headaches, miscommunication between the partner and I sold the house to a group of 3 investors (my partner was one).  When the final sale settled, I run some numbers and found that I had made about 8.5% on my money in 26 months  – not the ROI was hoping for on a “passive” investment.

But all is well that ends well!  I did made money so the investment was not a loss.  And besides, I was able to earn a good education by taking action – not by reading about it or looking at someone else’s case study. I was in the middle of it and felt all the emotions:  the good, the bad and the horrific.

My education consisted of the following crash courses in such topics as:

  • Where there is a will there is a way
  • The power of a network
  • How to be creative when putting together a deal
  • How not to JV when you don’t ask questions or get a second opinion (until its too late)
  • How one should always let someone else look over the deal if you are not sure (investor and lender)
  • Property managers need to be managed, closely
  • Tenant screening is VITAL to getting a good tenant and increasing your ROI

 

 

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About the author, Keith

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