A real estate joint venture (JV) is two or more partners teaming up for the purchase and operation of an investment property. There are many different ways a JV can be set up. Typically, the reason for a JV is to fill complementary voids in capitalization, skill, and willingness. Explained below is the most common JV system.
Capital Partner-Managing Partner.
The managing partner will basically do all the work finding and operating the property. The capitol partner simply supplies the down payment, purchase costs and holds the mortgage. At the end of the deal, the initial capitol is returned to the capital partner and the profits are split 50/50.
I will break down the duties a little further.
After agreeing to work together, the two partners will agree on a property style, area and price. This is the area of expertise of the managing partner. The capital partner must be able to qualify for the appropriate size of the mortgage. The managing partner will facilitate financing through their connections.
The managing partner will find the property, analyze the property and perform diligence on the property to ensure it will cashflow. Most properties do not pass diligence. This process can’t be rushed. This is where a mistake can be costly. This is where the expertise and training of the managing partner and their team come into play. The property then goes through the offer and purchase process. The managing partner completes the work necessary for the capitol partner to go through financing.
Once the property is purchased, the managing partner will either manage the property (find tenants and deal with rent and any issues that occur) or manage and monitor the property management company. This is another area where the managing partners training, team and experience will pay off and reduce risk. The managing partner will create property reports for the capital partner at an agreed upon frequency. The capital partner simply watches his net worth increase.
Conclusion of the deal
At the end of the agreed timeline (typically 5 years minimum) on the deal, the partners agree to sell or continue with another timeline. When the JV partners agree and sell the property, there will be gains from cashflow, mortgage paydown and market appreciation. The first money out would pays back dollar for dollar the money they put in by the capital partner to begin with. The rest of the profits will be split 50/50.
If there are no profits, then the managing partner does not get paid. You can input some numbers to calculate deals and better understand the calculations.