Hi All,
I have a friend that would like to invest with me. He is cashed up, and lives in America.We are interested in doing something together where I will find, execute and do everything related to the deal and he will simply put up cash.
I have a few questions,
– What sort of property deals lend itself to this sort of arrangement (I was thinking along the lines of a buy, reno, sell). What else is there?
– What is a reasonable way to structure the deal that is fair and worthwhile for both parties (I was thinking he pays for deposit, closing and reno costs, we use my borrowing power and my time for reno and finding the deal etc). Our fallback strategy would be to keep the property (negative geared state) but I am not keen on tying up to much of my borrowing power on a joint venture, but I am not sure if it is a fair call to get him to lend the money as well. What do you guys think?
– I know this question is for my accountant, but how should I structure the deal? Does he simply buy units in my trust? Then there’s asset protection through the duration of the deal.
-What would a good return be on the partners outlay? And my time outlay. Which I think will turn out to be considerable.
-Can anyone suggest a good book with this sort of thing in it or any resources that come to mind that I could get (I am going to do the obvious search forums etc)
I am sure that there are many people on this forum whom have done this sort of thing . Any advice or comments would be welcomed.
Many questions.
Thanks
I posted to another forum on this (well some parts anyway)
1) search the web for investment clubs
2) there are mags out there
3) there are books available (a few women did this on one of those current affairs programs so do a searhc on that.
4) ask your accountant
5) you need to decide, no one can do it for you.
6) structure is needed
7) protection is needed…
try google searchElves
I’ve been considering a similar deal where the labour and capital are unequally distributed.
Haven’t done a lot of research, but have spoken with a few wiley old codgers about it. I have come up with two options:
Scenario 1.
my accountant recommmends just taking a private loan from the passive partner. Any profit or blow out in costs will have to be accounted for via the terms of the loan.Making it a loan with a fixed rate of return keeps it nice and clean for your mate. You are the local yokel who is supposed to know the risk, your mate doesn’t. So your mate should be protected from that by offering a guaranteed return.
scenario 2.
After talking with a bunch of people:– work out your acquisition, holding, and exit costs
– work out all your building costs, generally $/sq.m.
– from these, put a dollar value and percentage of whole on each person’s contribution to both.
– use that percentage to split the profit.– for the capital invested, grant each other bank lending rates for the time your money was tied up in the project, before you work out the profit.
– If you are not going to sell for a while, then the guy who does the work also needs to grant himself bank interest rates on the labour component from when he would normally be paid until the profit is realized.
If you have ongoing unseen costs, these are added into the equation and taken out of the final profit figure. Be very conservative when calculating your costs.
I think what you are trying to do is a great idea when your partner is in Oz. Being OS, you want to really do your homework on tax rules.
There is a severe lack of tradesmen around at the moment, and they have all put their rates up. So anyone who can do the work themselves is creating a job for themselves. Just make sure you got the land for the right price. Building materials are only going to keep going up. The downside is if the market softens significantly, and one of you wants to get out before it firms up again.
Oh and take on board that the USD may strengthen over the next 12 months. That is the other risk for your mate.
Bruce
Mooloolaba, Qld“What sort of property deals lend itself to this sort of arrangement (I was thinking along the lines of a buy, reno, sell). What else is there?”
This depends on the location, available funds/finance, expected return on investment, supply and demand, your experience.
“buy, reno, sell” may not be the most profitable strategy at this time, other options include land flips, or a small OTP development – avoid subdivisions if not experienced in this segment.
“What is a reasonable way to structure the deal that is fair and worthwhile for both parties.”
If you are doing all of the ground work, offer market experience and contacts etc – and your partner is investing all of the “shortfall” capital [assuming you leverage institutional loans], then a 50/50 arrangement is common.
“Does he simply buy units in my trust?”
Not recommended. Form a seperate entity to conduct a partnership. And have an operating agreement prepared which includes each parties contribution [monetary or otherwise], tax/financial and liability considerations, and exit strategy.
Knowing how US investors operate, if your partner has any investment experience, this agreement will be a requirement. If you proceed without an operating agreement, no matter how much money is invested, you have increased your risk factor ten fold.
“What would a good return be on the partners outlay?”
You need to ask your partner.
“And my time outlay. Which I think will turn out to be considerable.”
If you feel your investment equates to 50 percent of what will be contributed to the partnership, then you aim for a 50 percent interest [i.e. equity, units] in the partnership. If you feel your contribution outweighs your partners, aim for more than 50 percent – less contribution, less equity.
The equity split will decide profit share.
When discussing/negotiating equity there are two important considerations.
1. Always put yourself in your partners shoes – understand/discuss the importance of the partners contribution to the partnership and allocate equity accordingly. [Your partner should do the same]
2. Never agree to an equity arrangement that your “gut” tells you is not fair. More than often this is the catalyst for failed partnerships.
“Can anyone suggest a good book with this sort of thing in it or any resources that come to mind that I could get.”
A qualified lawyer and accountant.
— Michael
“Scenario 1.”
A loan is not recommended because it will often restrict the investors rate of return – meaning it may be more difficult to reach an agreement.
Furthermore, there is limited security in a loan arrangement for a foreign investor, versus an equity-based arrangement i.e. Unit Trust.
—
“Scenario 2.”
“for the capital invested, grant each other bank lending rates for the time your money was tied up in the project, before you work out the profit.”
This [bank lending rates] is not common or necessary.
Generally funds invested into a real estate partnership are used for project expenditure – not remunerating partners, unless there is an agreed periodic management fee.
Remuneration is based on profits generated upon implementing a divestment or exit strategy. Otherwise, if each partner was receiving an interest rate – whether called on during or after the project, the partners would have to service this cost.
“If you are not going to sell for a while, then the guy who does the work also needs to grant himself bank interest rates on the labour component from when he would normally be paid until the profit is realized.”
See above. Alternatively, if the cost incurred is for “labor”, then this would be budgeted accordingly – i.e. as a salary/wage for services.
“If you have ongoing unseen costs, these are added into the equation and taken out of the final profit figure. Be very conservative when calculating your costs.”
The budget should include contingencies for unexpected costs from day one – generally a percentage i.e. 5-10 percent of the total projected expenditure. It is never advisable to commence a development [which your post indicates] without having all funds in place, or accessible under contract.
All costs should be accounted for “before” a final profit is realized.
— Michael
One of my bros did this with success, but without the help of the rising market I doubt it would have amounted to anything as of course you are cutting your profits in half which will make it even tougher if prices stall/dive.
If you are not in a position to do anything on your own it may be a worthwhile plan if you don`t have too bigger expectations.Hi all,
Really great points, thanks.Although a profit is paramount. The establishment of a successful joint venture is way up there on the priority list as well. I’m even willing to get a lower return for this first deal. If we can make this work once then I believe that we would both be interested in continuing in the future. Its not that I am in NEED of a partner at this stage but there is a limit to what I can do myself, so with a partner I can get into additional investments.
In the scenario of taking a private loan from the passive investor. Are you saying that rather than put capital(i.e. time/money) into the deal as a partnership, he gives me a loan and I simply give him a set rate of return. I am then free to go off and invest the money as I choose? He gets a guaranteed return with no risk. This puts the onus on me allot more. This scenario could have an effect on cash flow and I am taking all the risk. However, the return, if successful, could be better for me.
One other question.
What does OTP mean?Thanks again
“I am then free to go off and invest the money as I choose?”
The loan agreement will likely stipulate the investment parameters.
“He gets a guaranteed return with no risk.”
I think you will agree, no investment is ever guaranteed or risk free – within reason.
“This puts the onus on me allot more.”
Which is why an equity based arrangement is recommended – supported by an operating agreement.
“What does OTP mean?”
OTP = Off-The-Plans i.e. selling a property/development prior to and/or during the construction phase.
— Michael
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