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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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