Unpacking Joint Venture Deals with Tyrone Shum of Property Investory

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Unpacking Joint Venture Deals with Tyrone Shum of Property Investory Freedom Warrior
Tyrone Shum of Property Investory joins me in unpacking the concept of joint ventures. While most investors intuitively understand what it means to invest in a joint venture, they get stuck when it comes to gauging what’s equitable and fair in these kinds of deals.

Joint ventures can be structured in so many different ways. So it’s important to understand how experienced your partner is, what they’re going to bring to the table and how crucial their contribution is to be able to establish contractual terms that are flexible and fair for everyone involved.

We cover:

– the concept of joint ventures,
– determining fairness in a deal,
– the risks of going into a joint deal,
– the concept behind an Assumed Mortgage, and
– strategies on having a fair and equitable joint venture.

Show Notes:

00:00:00 – Intro

00:02:40 – What are Joint Ventures?

00:03:06 – Joint Ventures in the Alternative Space

00:04:44 – The Process of Going into a Joint Venture

00:06:25 – Determining Fairness in a Deal

00:09:29 – The Risks of Going into a Joint Deal

00:12:17 – Salena’s Experience in Joint Ventures

00:17:29 – Cost & Litigation Timeframe of Joint Ventures in the States

00:22:16 – The Concept behind Assumed Mortgage

00:27:20 – Strategies for Having a Fair & Equitable Joint Venture

00:30:07 – How Much Work is Required for a Joint Venture?

00:33:22 – Outro

Q: Can you give us an overview of the concept of joint ventures?

  • The concept of a joint venture is about leveraging networks and other people’s skill sets to gain access to deal flow.
  • There are many different ways you can describe joint ventures, but it has one particular meaning to me in the alternative space.

 

Q: So, what do joint ventures mean to you in the alternative space?

  • In the traditional sense, joint ventures simply means partnering to achieve an outcome. .
  • For me, in the context of alternative investing, joint ventures are about leveraging the network, skills, and access to deals to be a more passive armchair investor.
  • The thing that distinguishes it from other kinds of deals is the ability to profit share.

 

Q: What kind of joint ventures have you been involved in in the past?

  • When people go into joint ventures, especially if they’re not familiar with the strategy, they have no sense of what is fair and what isn’t.
  • So, if you’re going into a joint venture, the first thing you want to do is make sure your capital is protected. You also need to have full faith in the person you’re doing the deal with.
  • The second thing you need to understand is that every deal is completely different in terms of profit share and protection level. So, having a bit of context into what is normal in a particular space is super important.
  • With other strategies, like lending deals, syndications or managed funds, your return can be capped at a certain rate that has to be palatable. But in a joint venture, your rate of return will be on par with how the deal pans out.
  • So, if the deal is a home run, you want to make sure you’re getting a piece of that profit. That’s why having an understanding of what a normal return is vital.

 

Q: How do you determine what’s fair and what isn’t fair in the types of deals?

  • That is the most interesting point of conversation around joint ventures.
  • I’ll give you an example. I have a close friend who has recently become a successful developer. Initially, when he started, quite a few of his friends wanted to jump in on deals with him.
  • So, it was a joint venture to some degree. But he was offering them a profitable fixed rate of return and then making quite a lot of money in terms of the profit on the development itself.
  • He was doing all the work while these guys were just piggybacking off his experience and efforts.
  • After doing a couple of those deals, he decided that he wasn’t going to enter into joint ventures anymore because it wasn’t worth the headache.
  • The thing to recognise here is that the media gives a lot of importance to the money partner – especially if the capacity to go ahead with the deal depends on them putting the money in. So, they have a lot of power in that sense.
  • But frankly, most people who are worth entering into a joint venture don’t necessarily need your money – you can’t access those sorts of returns without them.
  • So, it essentially comes down to recognising who you’re working with.
  • For example, if you’re working with someone super experienced who has access to killer deals, you’re probably going to trade a bit of return for safety. Whereas if you’re going with someone less experienced but they’re offering a higher return, then you’re going to adjust your risk return.
  • There are so many other variables to factor in, but it’s important to consider your partner’s experience, how much time is involved, what your level of exposure is and then establishing what is normal in the industry.

 

Q: Can you share an example of some of the joint ventures you’ve done in the past?

  • In my world, there’s what I call short term joint venture deals and then long term deals. Short term is anything up to two years, and then the long term is theoretically between two and five years.
  • But on average, they all end up being around the two-year mark. So, the major difference is how the deals are structured.
  • I predominantly lean towards joint ventures in the United States because my network there is really good at small joint venture deals. Most of the ones I’ve entered into over the last twelve months have been short term ones.
  • In February last year, I did a twelve-month short-term joint venture where there was a particular house that my trusted advisor had acquired for $96,000. The after-repair value was $188,000. The loan that he was looking for was $19,900 – which is tiny.
  • There were no major structural updates; it was just a cosmetic update – a bit of paint and updating some bits and pieces. Obviously, in the US, $20,000 goes a long way compared to here, where $20,000 here will barely even get you a bathroom.
  • The interesting thing over there is how the deals come into play – there are so many different ways to acquire real estate that we just don’t have over here.
  • For example, say there is a distressed homeowner who, for whatever reason, can’t meet their mortgage repayment obligations. You can go in and assume the loan without dealing with the banks at all.
  • So with this deal, the advisor assumed the mortgage for $96,400. In terms of the loan-to-value ratios, the mortgage plus my money was only 60% – so that’s a huge equity cushion for me.
  • In terms of the structure of the deal, I call this a hybrid deal. It’s a joint venture because I get a taste of the profit. But it’s hybrid because it’s also a lending deal as well.
  • On my $20,000 loan, I’m going to get 11% per annum, plus I will get a 10% profit share. So that’s a total of around 22% return.
  • Obviously, $20,000 is not crazy money, but if I’ve got five or six of those going at any one time, they average somewhere between 18% to 28% per annum.
  • So, I love these deals because you don’t have a tonne of money sitting around every time. You get a good rate of return, a high degree of downside protection, and it’s short-term.
  • If I want to invest in another deal in 12 months, I know that this particular deal maker has a plan A, B, C and D to get me my money. It doesn’t hinge on a refinance, and it doesn’t require a sale – there are multiple ways for them to get my money out.
  • That allows me to plan for other deals that I’m going to do.
  • The only thing I would say about short-term joint ventures is that you’re in the second position. The bank that holds the primary mortgage is in the first position, and I’m in second. But, because the total debt is only 60% of the home value, I’m okay with being in the second position.

 

Q: What kind of litigation timeframe and cost are you looking at in the States if the deal goes south?

  • It’s minimal.
  • That’s why, for various reasons, I perceive this to be a lower risk deal compared to a traditional buy and hold in our market because the downside protection is phenomenal.
  • You need to be mindful that each state does things differently, but essentially the process of going in and taking possession of that property is pretty straightforward and doesn’t cost much at all.
  • This particular joint venture partner has a waiting list of ready buyers. So, in the worst-case scenario, if it all turns south, we will just sell it to the next person on the waiting list at 80% of the property value.
  • Typically, the rate at which we can turn these deals over is what really matters. So, we’re not trying to get top dollar.
  • This property, in an open market, might be worth a couple of hundred thousand dollars. But, I don’t want to list it and wait for a buyer to come and get finance. We’re not trying to get a market rate for these properties – we’re trying to sell slightly below so that we can sell fast, get the cashback and minimise the risk.
  • That’s why we have a massive list of already vetted, qualified buyers who are ready to go.
  • In all of the deals that I’ve seen, they’ve never run over, because plan A you sell it to the list, plan B you sell it in the open market and plan C, you continue to cash flow the property and negotiate to take it over.
  • The idea of having multiple exit strategies really appeals to me.

 

Q: What is an assumed mortgage, and how does it work?

  • If you buy a piece of real estate in Australia, there’s only one way to transact it. You have to involve a conveyancer or solicitor, and we have to transfer the title.
  • If there is any lending required for the deal, the banks have to be involved, and they will vet you, your finances and then the deal.
  • In the States, the banking system has evolved into a much more entrepreneurial system. It’s much more flexible, and it just lends itself to various ways of transacting property.
  • One of the questions that someone asked me once in a Q&A was about what the days on market look like. It’s a relevant metric here because there is only one channel where people can transact real estate.
  • In the States, the concept of ‘days on market’ doesn’t mean much because you don’t know exactly how many properties are getting moved and transacted through other channels. For example, you can assume a mortgage or quit title and give the deed to someone else. You can also do tax liens which means that the council can take the property off you and sell it if your rates haven’t been paid.
  • There are so many ways to transact real estate over there. And most of them you don’t even need money.
  • If you look at the joint venture deal we discussed earlier, the partner assumed a mortgage, combined with my money, did some cosmetic updates, and the value went up massively. I didn’t have to do anything for that, and he didn’t even put any money into the deal.
  • So, without having spent any money, he will make 90% of whatever profits are left.
  • With some of the joint venture deals, I can see that my partner is making a lot of money. But the question that I keep coming back to is whether or not I am happy with my return for the risk I am taking, and for the time it took me to vet the deal.
  • It probably took me 30 minutes to do some due diligence, and I have made a few thousand dollars.
  • Look, the loan was only $20,000; I can’t retire off that one deal. But there are several reasons why I like these deals. Number one, I get paid every month. And number two, I am happy with my 10% profit share.
  • In terms of long-term deals, they sort of look the same. But the major difference is that I’m in the first position.
  • So, for example, we have acquired a property that is massively under market. Now, whether we assume the mortgage or bought it through some other channel, it’s a distressed sale of some sort. I put $45,000 in to acquire the asset, and the goal was somewhere between two to four years. I am getting 8% interest per annum from the lending component because I’m essentially the bank. And I’m getting 45% of the profit on the sale.
  • So, every deal is different – there are millions of permutations. That’s why, at the end of the day, it comes down to establishing what feels fair and equitable for you.

 

Q: Can you give tips or strategies around determining what will be fair value for different parties?

  • The more experienced the joint venture partner is, the less flexible the deal is going to be.
  • So, as an investor, your job is to have a set of rules of what you will and won’t do and then apply those rules to every deal.
  • So, in some cases, if you like the deal, the strategy, and the downside protection but don’t like that you’re only going to get 10% profit, the partner will just move on to find the next interested investor.
  • The more experienced the partner is, the less they need your money.
  • Having said that, you only get 2% from the bank. So, to quibble about 10% profit is a bit foolish; it’s also about common sense.
  • And, the more inexperienced you are as an investor, the more important it is to find experienced joint venture partners.
  • On the other hand, the more experienced you are as an investor, your capacity to discern good deals from bad ones is likely better. So, if you find a partner with less experience, you’re taking a risk, but then you’re expecting a bigger profit share.
  • But, in either scenario, you’re trying to mitigate risk.
  • You shouldn’t go into a joint venture deal unless you feel experienced enough to ride the roller coaster – it may be smooth sailing, and it may not be. But if you’re a difficult investor during the course of the deal, do you think that joint venture partner will ever want to work with you again?
  • So, one of the things I am mindful of is making sure you’ve dotted all your I’s, crossed all your T’s and asked every question you have before you participate.

 

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