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Hello cashflow’ers. I am looking for tips on working with passive investors in joint ventures, ala Dennis Koelsch who Jack Miller spoke of often and was a financial friend too.
My goal is to find someone who will fund deals, whether that is the full purchase price or down payments combined with owner financing, in which I would do all of the initial and on going, hands on work for a 50% interest in the property.
More than anything, I am trying to wrap my head around the best way to structure the ownership in order to best protect each party, limit liability, avoid issues related to death or disability, and allow for each property to be it’s own little island.
I feel like a land trust will be the best choice, but I am not certain which spot each person/entity occupies within it. Who is the beneficiary? Who is the trustee? Who is the grantor? Do I participate through a recorded option? Do I lease it from the trust with an option to buy? And so on.
I have investors willing to do these types of deals, I just need to be able to get it straight in my head how all the pieces fit together.
Thanks for any help.
Paul,
The paragraph were you start talking about the land trust is good stuff. I almost always use land trusts. I guess it depends on the level of real estate knowledge your investor has to use this on the first deal. I mind that does not understand very often says no. It can be very simple. Does your investor want to be a lender or an owner of the property. If a lender you can use an equity participation note and mortgage. If he wants ownership of the real property then you can use a lease with an option for you to purchase 1/2 interest (if 50/50 deal) in the property for 1/2 the money funded. In both cases you craft your agreement in the note and the option agreement on what you both agree upon as far as responsibilities, costs, future costs, term, and profit. It does not have to be complicated.
Don Wede
Dallas,
In your scenario you appear to be the “mouse” looking for the “elephant”. However you and your investor
decide to hold title to the property i.e. trust or LLC would usually depend on the sophistication of the lender.
Do they want cash flow, tax benefits, use of the property? To isolate liability risk, the lender would only have
a note and mortgage against you and the property, or as Director of Beneficiaries in the trust. That would leave you to do all the leg work(acquisition, rehab, management, etc.) My advise would be to finish one before
starting the next one, because the next four or five years may be a real strain on the pocketbook as this
economy struggles to achieve liftoff. Hint, don’t buy near bodies of water as insurance coverage will surely
increase as more weather anomalies create flooding conditions in areas that haven’t experienced it before.
As far as holding title in a Land Trust if your state has statutes for it or a standard revocable trust if not, you
will have to identify in the body of the trust agreement as to the obligations and rights of the parties involved.
Since you will be the “expert” in these ventures you could be the trustee at the direction of the beneficiary
(investor) and you could have an option to buy half of his/her beneficial interest as the equity is increased
by you efforts. This is only my simplistic opinion of your situation. Hope it helps.MAC, Trustee
Paul,
How you structure a “deal” will depend on the understanding & trust-in-you comfort level of your investor/partner/financier, and how you want to operate the deal to work for you. Expect each “deal” will be different. Remember to “draft your paperwork by design” for the project at hand – there is a reason we strive to learn from Jack & David & Peter & Jackie.
All my successful private borrowing (and lending) has been with people I have known for years. They have trusted me and I have trusted them – on two occasions (once lender and once borrower) it became uncomfortable about 2008-2009, however because the underlying trust factor was there, we were able to work things out for all party’s concerned.
My one bad experience was with someone I knew for less than a year before lending $$$. I can’t imagine that happening again unless highly collateralized/optioned with other property. There is lots of info in Jack’s teachings on how to protect yourself – wish I had been introduced to Jack’s teachings before that episode.
Hank
Hi Paul
Each lender’s preference will be different so you will have to create multiple ways to make the lender comfortable.
Some will want to hold title, then give you an option for 50% of profit. Hopefully, they hold title in an entity or a land trust.
Some you can create a land trust with you as 50% beneficial interest and the lender as 50% beneficial interest
So will want you to hold title, then they get a equity participation note and deed of trust
One thing you do NOT want to do it to set this up as a partnership. If the lender gets in trouble, you (and the property) will also be pulled in to the cross fires.
If the lender is not familiar with land trusts, then they will probably not feel comfortable using them. You could give them some literature about the benefits but they may still push back. Be prepared for that and have a Plan B – like using an entity even though it is not the ideal tool.
And make sure you include an exit strategy if either party wants out of the deal.
Hi Paul,
All of these replies are excellent and I think the take-away is to tailor the agreement to your financial friend’s preferences while protecting yourself. I would keep it simple and start by proposing a couple of options, sincerely explaining the pros and cons to him/her.
One deal I recently did like this had the financial friend lend on the property recording a note/mortgage as well as have 50% interest in the land trust we set up to hold title. A co-venture agreement detailed who did what and all responsibilities.
Functionally at the end of the day the mortgage payment guaranteed him some minimum payment each month which was important to him and the 50% interest offered half of all profits including cashflow and any future sale/upside. The interest payment was included in his share of half the profits thereby giving him the guaranteed minimum but also a maximum making sure he was only getting 50% of all profit.
The rate was very low so I felt comfortable with that, plus having a lien on the property could offer some asset protection.
Good luck
I appreciate all of the great replies. It is clear, as Jack and Peter have always taught, that there is no one way to go about anything in real estate.
The scenario that prompted the question was where I had found a cheap house in the MLS that I knew was this guys cup of tea in his earlier days. He has had medical issues but still wanted to accumulate some properties but wasn’t able to do all that he used to. We talked and I told him that I was able to do a lot of the physical work if he would provide the money and expertise. I would not take anything out of the deal until he had all of his money back. I would get the benefit of the experience and learning how he did things as well as half of everything after that.
When we got to the point of making an offer, he immediately posed that the property would be in his name. I knew that wasn’t the way to go but wasn’t sure how to explain the other possibilities in a way that made him comfortable. We did not end up making an offer on the property.
I agree with Hank. I only deal with people that know me as someone who can be trusted to go above and beyond to keep up my end of the deal. I will keep trying to find the right person and the right structure for each of us and keep the group posted.
Thanks again for the helpful responses.
No problem having the property in his name. You just need a lease and an option. Record the option or a Deed of Trust to secure the option.
After he has done several deals with you he may feel more comfortable putting it in YOUR land trust.
When working with new private lenders, you need to go with the flow. Let them call the shots about who takes title. It is not a big deal.
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