A personal story of joint venturing and how you can prosper
People often ask me to share the secret to building a multi-million dollar portfolio when not starting with a mountain of cash, or having banks tripping over themselves to lend you money.
The answer is simple, don’t go it alone.
One thing I learned early in life is the power of joint ventures. There is no chance I would be where I am today in real estate, if not for amazing partnerships. It is the key to getting started, or unstuck, because when people join forces to create win/win scenarios that otherwise would not have been obtainable, amazing things happen, and fortunes are made. A well structured JV is one of the most gratifying things one can do in business.
My personal story of joint venturing starts with my very first home. As a completely naïve 19 year old, all fired up after reading Rich Dad Poor Dad, I was ready to jump in head first.
One night in a bar, where most great ideas are conceived, I struck up a partnership with an acquaintance from high school. He had sterling credit, and I had a bit of cash saved up. We bought a basic bi-level home, put some sweat equity into it (read terrible DIY renovations the future owners couldn’t wait to tear up), and sub-letted our basement to our buddies.
As a couple of 19 year old home owners, you can bet we had a heck of a time living there (if those walls could talk). Little did we know, it would be the decision that gave us both a massive head start financially and a lifelong friendship.
Fun fact: The process of buying that house was what led me to take my real estate course.
The following year, I came across a downtown condo that I wanted real bad. Same problem, the banks can’t get new realtors out of their offices fast enough.
Give up? No way!
I approached a friend from baseball who also had terrific credit. We went 50/50 on the condo and held it for 10 years, running it together as a successful vacation rental. We recently sold it for a tidy six figure profit. I was sad to sell it, but joint ventures do end eventually. That little condo at discovery bay was a cash-flow rock star bringing in $1800/week through VRBO.
As an aside, I highly recommend those units as an investment, and believe they are still undervalued.
Now, it hasn’t all been sugar plums and lollipops for me, this next one haunts me to this day.
Days before my 24th birthday, the market is on fire, and I’ve got a serious case of hubris. I’ve joined forces with a client of mine to purchase ‘The Big One’, a 1.3 million dollar palace on two acres that had development potential. As this was out of our league, we went to a Vancouver business man, one of my partner’s contacts, and structured a joint venture to subdivide and build.
This was my first attempt at a something more complicated than your typical 50/50 JV - it included Investors and commercial financing. We formed a corporation, created a partnership agreement, and off we went. It was looking as though it would be a home run.
A few weeks later, we bull-dozed the home. The headlines surrounding the 2008 crash came out . . . aaaaannnd we were caught with our proverbial pants down.
To add insult to injury, my partner and I had purchased two units in waterscapes for a combined value of a million and a half dollars. We lost every single cent we had invested in that deal, a lesson that both cost, and taught, me as well as any Ivy League education could.
The lesson: Don’t be a speculator!
From that day forward I have purchased nothing but positive cash-flow investments.
Every crash brings opportunity. Prices in Arizona had been sliced in half, and this time I linked up with a guy I knew from a boxing club who also had a little bit of cash. Between his mother, myself, and my girl friend - now wife - we put together a little fund, and began buying up distressed condos in Scottsdale. Six years later, it has turned out to be one of the best investments of my career. It was made possible only through collaboration.
I have continued to buy property every year. Sometimes I’m in a position to do it on my own, and I do, but sometimes I’m maxed out at that moment. I don’t let that stop me, there’s always a way to create something great.
What I’m about to share with you is the formula for creating equitable and profitable joint venture partnerships.
First: The Quadrant
This chart shows a quick way to figure out who is doing what, and who is entitled to what in a partnership. In each corner of the quadrant, you will see the appropriate share hold for each component. Many successful joint ventures involve an expert deal finder who will take on all but the initial capital contribution. This allows the investor a hands-free investment that requires none of his own time or personal borrowing power.
There are no shortages of people out there who will warn that family and business don’t mix, or that the easiest way to ruin a friendship is to jump into business together. As someone who has made almost every mistake in the book and come out the other side a little smarter each time, I can tell you with confidence that the times when things go wrong will only stem from expectations not properly set.
Most partnerships out there are done based on a handshake and a pile of assumptions. This is doing everyone involved a huge disservice. For starters, when things aren’t laid out clearly in writing, you are putting your relationship in serious jeopardy. All of this can be avoided with a simple memorandum of understanding that will later be the basis of a partnership agreement drafted by your lawyer.
Who will do what? For how long? How does one of us get out of this partnership if need be? These are the kinds of things often overlooked by overly eager ‘honeymoon phase’ partners. Don’t fall into this trap!
Second: The Partnership Agreement
Your next step is to draft a partnership agreement. I’ve got a great pft that I obtained through my affiliation with REIN. It has a phenomenal checklist to ensure that you get all the expectations and ‘What Ifs’ sorted out prior to committing to a property. Armed with this checklist you are ready to strike up a partnership that could be just the synergistic force that makes both of you very very rich.
Lastly, I’ll say this, the one thing I know for sure: There is zero chance that a 19 year old kid with $8,500 bucks burning a hole in his pocket and no credit goes on to become a multi millionaire by age 30 without utilizing the awesome power of teamwork. I would hedge a guess that the vast majority of self made people did so through a series of win/win partnerships along the way. I encourage you to go out there and do likewise, but learn from my mistakes.
Here is what a typical 50/50 joint venture looks like when one party has the cash and the other has the time and the expertise.