What is a Joint Venture? Wherein two or more entities (people, corporations, etc.) work together to accomplish a mutual goal; that is a Joint Venture. As for our discussion here, we are talking about one party (the investor) who provides the necessary funds to acquire a property, and a second party (the entrepreneur) who will provide the management and expertise necessary to accomplish the mutual goal. Let me give you an example that I have used many times. This will be an example wherein I was the entrepreneur, although I have been the investor also in many transactions.
Charlie Harris, the entrepreneur, has located a nice house in a middle class neighborhood which is for sale by owner. the owner is really motivated to sell the house and has even indicated that he would be willing to finance the purchase with at least 10% down. Charlie has established that the house’s fair market value , if in good condition, would be $120,000. also, the house should rent for about $1,100 a month.
The house has some minor repairs that need to be made. Charlie has a bid of $3,000 from an experienced handyman to make all the repairs. Charlie has negotiated with the owner for a purchase price of $80,000 with $8,000 down. the owner will finance the balance of $72,000. The loan will be amortized over a 30 year period (with no pre-payment penalty) with payments of $479.02 per month, including interest of 70% per annum.
Charlie obtains information from the County that the annual Real Estate taxes are $1,800 per year. Fire & Casualty Insurance will be $800 per year. Both added together and amortized would be $216.67 per month. This amount added to the loan payment ($479.02) and subtracted from the Fair Market monthly rental amount ($1,100) indicates a positive cash flow of $404.31 per month.
With this information packaged, Charlie, who lacks the needed up-front cash to close the purchase, looks for an investor to Joint Venture the deal with. Through research with Realtors that he knows, newspaper ads, and referrals, Charlie finds Janice Ellis who has done Joint Venture investments before. Janice has an excellent high salary job with A.T.&T. She also pays considerable income taxes each year which is one reason she is always looking for opportunities to grow her wealth and get some tax benefits.
So, after making initial contact with Janice, Charlie proposes the following:
1. Janice will contribute $15,000 to the Joint Venture which will pay the down payment ($8,000); pay for the needed repairs ($3,000); and leave $4,000 for reserve and unforeseen contingencies, which always come up.
2. Charlie will manage the property; although he may hire a Property Management Firm to find and manage tenants. The cost is 10% of the rental income or $110 per month, per tenant.
3. My recommendation is that Charlie let’s Janice have ALL the tax benefits; interest, taxes, maintenance, insurance, etc., deductible to Janice.
4. Both parties would equally share the monthly cash flow of $294.31 per tenant.
5. When the property is sold at a later date, Janice will receive her $15,000 back FIRST, then the balance of profits are equally divided between the parties.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
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