Mr. Cheap who writes for Money Smarts Blog is one smart cookie. After my post yesterday on Cash Flow Positive buildings he wrote me this nice email about how to structure a joint venture. It’s awesome! I’m in! All I need is a money partner.
"I’ve been thinking about your cash flow positive post and how you could structure a JV to rehab such a building. Find a money partner,and get them to buy the building (with cash, if needed, if a mortgage isn’t possible). Get them also to put some fund in to cover expenses / renovations. You manage the building and rehab, and once it’s been brought up from the 40% to the 90% (as you suggest as the most profitable improvement, I agree), sell it.
You then split the NET PROCEEDS 50 / 50 (i.e. Sale Price + Current Funds – Purchase Price – ALL money your partner put in). Your interests would be perfectly aligned (a lower purchase price earns you both more money, lower renovations costs earns you both money, a high sales price earns you both money). You both also have an incentive to wrap the deal up in a reasonable amount of time (since you both want the cash out of the property).
If the 50/50 split didn’t work, you could negotiate the proportions to whatever you both felt is fair (while still keeping your interests aligned). The big thing that might make some people uncomfortable is that the money partner has more “skin in the game” at the beginning,since he puts the bulk of the cash in at the start, while you invest your labour over the 2 or 3 years it take to bring the building back. If someone was convinced of your ability to do this (which I imagine they would be since you’ve been doing it for a living for years), they might be ok with this. Heck, you could even propose this to owners you’ve worked for before (who KNOW you’re capable of doing this)."
- Mr. Cheap
What Mr. Cheap doesn’t know is that I’ve spent most of my adult life being self employed, first in construction with a property management portfolio on the side. When I did have a job kind of job it didn’t end too well. I’ve figured out the problem and I won’t be doing it again I can assure you. The problem is that I’ve been working in vacancy reduction and the number one reason these buildings end up vacant is because the owner’s don’t want to spend the money on their assets. I usually have to convince them that spending the money will more than repay them. Deferred maintenance is a real problem. Obviously they are not overly generous with their pay. In fact I am still waiting for my commission check for $800 bucks from Derek A Lobo and Associates from when I worked at 3400 Riverspray Crescent in Mississauga. I am also owed $4200 still for my work at 255 Porter Street in Oshawa for Derek Pantling. When this last incident happened I decided I would never work for the guys who get their buildings in that condition. I decided instead that I wanted to work for the investors who wanted to buy these buildings and fix them up and make tons of dough in the process.
The townhouse complex in Oshawa, for example, was listed for sale when I started renting and managing the place for $1,900,000 but he would have taken $1,700,000. He had tried to sell the place repeatedly and failed. March 15th of this year it closed, I helped him sell it privately for $2,200,000. That’s pretty good considering I also got him a $60,000 grant for his building! Plus we went from 25% vacancy to full!
The last few month’s my husband’s been sick so I’ve been quiet.I’ve been taking care of him and my great son. Now I’m looking for my next project. I’m still renting apartments of course but that involves a lot of waiting for phone calls. It pays the bills but it certainly doesn’t strain my intellect. So as Mr Cheap says I’m looking for a money partner. I want to take distressed buildings that no one wants and fix them up, rent them out and make lots of dough for everyone.
Happy Canada Day!