Untold numbers of Canadians are suffering through the same frustrating conundrum: They feel ready to invest in real estate – they’ve educated themselves; they have the time and energy a successful portfolio demands – but they’ve been pushed to the sidelines by higher interest rates, new mortgage rules and, in a number of key markets, a forbidding combination of high prices and dwindling supply.
These prospective investors simply don’t have enough money to get started. Even purchasing a beaten-up, below-market property to flip is beyond them. If that describes you, and you’re dreading your next visit to a lender, you’re not alone.
Let’s see if you can put off that trip to the bank. Have you thought about joining forces with an investor who will be your partner during the flip? It can be both economical and fruitful to have a joint-venture partner to help you along the way. The basic dynamics are pretty simple: They get access to your deal-finding and property management expertise; you get access to their money.
But, just like any relationship, things can fall apart quite disastrously if you rush into a JV agreement. A poorly thoughtout partnership could lead to lost money, damaged trust and hellish legal nightmares. Here are five things to consider when choosing a joint-venture partner.
1. Trustworthiness
Trustworthiness should always be at the top of your checklist when evaluating an investment partner. Your JV partner should be responsible, stick to their word and follow through with both their obligations and promises. If this person isn’t trustworthy or has a record of bailing out and skirting accountability, avoid partnering up with them at all costs.
2. Expectations
There is no way around this: You and your potential JV partner must have an open talk about what you both hope to accomplish at the end of the project. Many times, unrealistic expectations can lead to disappointment and mistrust, whereas underestimating the project’s worth can derail its productivity.
Be direct with your prospect and ask, “What are your expectations, financially and time-wise, and what does success on this particular project look like to you?” It’s also a good idea to answer these questions yourself so you can find common ground when it comes time to discuss your expectations as well.
Before entering a JV project, each party needs to make their own financial decisions around tax minimization and income distribution, so financial logistics should also be a part of the conversation.
3. Skill level
In the early stages of your search for a JV partner, it’s important to determine what skills they are bringing to the table. Will they excel at bringing in the financial resources? Or do they lean more toward being a handyman with exceptional manual labour skills?
4. Agreement
Once you’ve decided to work with your business partner, remember to solidify your agreement in writing. Draw up a contract and get it reviewed by a lawyer. All joint-venture and money partner agreements should be in writing and verified by an independent solicitor for all parties.
An important matter to outline clearly in the agreement is what percentage of upfront costs you and your partner are going to pay. Flipping houses requires a down payment, as well as payment for renovations, so the amount of initial capital being injected is critical to the success of the project.
5. Exit strategy
All good things come to an end. As such, a JV partnership must have baked into it the understanding that you will eventually part ways when the project is done. You and your JV partner should talk about effective ways of being able to exit a house flip efficiently. Find out if your potential partner’s exit strategies in previous projects were abrupt. This may reveal how they will behave if your joint venture ends due to unexpected circumstances. You don’t want someone who has the potential to be hostile or possibly leave you with an unfinished house.
JV partnerships have helped thousands of Canadians follow through on their real estate dreams. Working with someone else will always be fraught with potential problems – people are people, after all – but being smart about who you work with will get your flipping project up and running, hopefully all the way to the bank.
PAUL D’ABRUZZO is a real estate investment advisor, industry-leading Realtor, speaker and private performance coach. He and his team specialize in the acquisition, purchase and sale of investment grade property in southern Ontario. Get free, instant access to real estate deals in southern Ontario before the general public and learn how to analyse them quickly and easily, just like the pros do, at investmentpropertyanalyzertool.com
