Owning real estate by an individual that does all management, repairs, marketing, tenant selection, legal structuring, financing, and improving income does not require joint venturing. The problem with ‘the one man show” is that the individual quickly suffers from restricted cash, mortgage financing, time and profit.

The purpose of the joint venture is to allow individual joint venturers to specialize in his role while allowing the business of real estate investing to grow. The business of joint venturing can be scalable to very large money raises, different geographies, and different properties. In simple terms, there are really only two components required for joint ventures. These are time or expertise and the other is money or mortgage qualification.

The theory
Finder
There are in essence three roles in joint ventures discussed today. The first is the finder, who is the individual that has found the property, has contracted the property, done due diligence and has the expertise to decide the quality of the investment. The finder is usually the deal scout or real estate agent that understands the neighbourhood or type of investment. The finder has expertise in negotiating the contract, negotiating financing and negotiating terms of ownership. The finder usually produces an agreement of purchase and sale for the joint venture to review in addition to market data and financing options for the joint venture to decide on.

Manager
The second role is the joint venture manager. The manager is the property manager, or manages the property manager, and the financial manager. The property management is the dealing with tenants by selecting them, collecting rent from them, the procurement of bids for review for repairs and the advertising for new tenants. The financial management includes the creation and reporting of the income and expenses for the joint venture including filing for income taxes and GST. The financial manager deposits rents cheques, reviews the utility bills, property taxes and repair bills and makes sure payment is made.

Investor
The third role in a joint venture is the investor. The investor will come up with deposit for the agreement of purchase of sale, the down payment for the purchase and participate on the mortgage qualification. The investor usually plays a more passive role and is dependant on the expertise of the other two parties of the joint venture.

Simple Example
Percentage of contribution, ownership, distribution and responsibility are all negotiable. An example that is on the far side of the spectrum is the assistance of a parent of a child buying his first house. The mother can be the investor providing the down payment and co-signing on the mortgage. The son can be the manager that is responsible for paying all mortgage payment, utility bills, paying for all repairs. Additionally the son is also the finder that is working with his realtor to find the property that he wants to live in. The requirements for cash calls on major repairs may be the full responsibility of the son or the son may make a cash call to Mom to fix the roof or repair the garage because it would be in both of their interests to protect the value of the asset. Both parties may have an arrangement that upon the sale of the house Mom would get her down payment plus half of the profit of the sale. If the son chooses to finish the basement for his enjoyment he may require that the additional $20,000 that he invested in the house be paid back to him upon the sale before the profit is distributed. Mom may require that a separate bank account be kept and funded by both parties 50-50 every year in the amount of $2,000 which will be the repair fund for the property and Mom may require to review the repair quote if more than $2,000 is being paid from or withdrawn from the account for the repairs.

Legal forms of ownership in a Joint Venture

Joint Tenancy and Tenancy in Common
The parties of a joint venture could both be on title in the form of Joint Tenancy or Tenancy in Common. Joint Tenancy is equal ownership where upon the death of one party, that joint tenant’s interest automatically goes to the other joint tenant. The liability of the mortgage is joint and several meaning that both parties are responsible for the mortgage qualification and the mortgage liability.

Tenants in Common own a property in a percentage of interest and upon the death of a tenant in common, the percentage of ownership goes to their estate. The liability is again joint and several. The percentage of ownership interest can be sold to any third party unless in the joint venture contract the other joint venture party has the first right of refusal.
Partnership
The above forms of ownership can be done by individuals which can be legal human entities and legal corporate entities. These two entities can form a Partnership which is a legal entity that must be registered in each Province and is an entity that must file taxes for the partnership in addition to the individuals. Also all cash distributions of gain or loss must be passed onto each individual. The danger of such a partnership is that one party can sign cheques or make commitments on behalf of the partnership and the liability of the partnership is joint and several.

Limited Partnerships
Limited partnerships are a sophisticated form of ownership of a property. Limited partners are simply money partners that play a passive role and are only liability for their investment. There can be many limited partners but there can only be one General Partner. The General Partner can be a person or a corporation that is the active manager and owner of the property that has liability beyond its capital investment. Limited Partnerships that raise money through many unrelated parties are selling securities and thus must register an Offering Memorandum with the provincial securities regulating body and those that sell these securities in Ontario are called Limited Market Dealers (LMD). I am registered with a LMD in Ontario and the investment is sold in increments of $25,000 each. The return offered to limited partner units is 12% paid on a quarterly basis with a profit-share of all limited partners participating in 15% of profits made on the sale of the property. Therefore there may be an annualized return upwards of 20 percent per annum.
Bare Trustee
So far the property is owned by all parties of a joint venture which means they are all on title and on the mortgage. Some investors may not want to be on title nor on the mortgage for various reasons including confidentiality and limited liability beyond their investment. In this case the property and mortgage qualification would be the role of the individual in the Joint Venture that will hold the property “in trust” for the Joint Venture. In other words, a Bare Trustee is the individual that has full title ownership and is on the mortgage. An investor will hold ownership interest in the property by contract with the Bare Trustee which can be registered on title in the form of a Caution, which in the Ontario Land Registry, is a caution requiring all parties to make themselves aware of the Caution registered before the mortgage is refinanced or the ownership interest is transferred. Another way for an Investor to register its ownership interest is in the form of an equity participating mortgage registered on title.

Corporations
A corporation is a practical Bare Trustee that has share ownership in the form of joint venture percentage interest. The joint venture agreement can in the form of a shareholders agreement. Shares can be held by persons and corporations. The benefits of corporations holding property are limited liability of shareholders; the privacy of the shareholders; the separate accounting, banking and tax filing required. The negatives of corporations are additional paperwork and costs to maintain the records and tax filing. This form of joint venture vehicle is for sophisticated parties and larger properties including commercial properties with sophisticated commercial tenancies. Another difficulty is that for shell corporations that are formed for the purpose of holding property have no credit history and require shareholders to give their personal covenant for the liability of the mortgage.

Certificate of Independent Legal Advice

All parties of a Joint Venture are highly recommended to receive legal advice to complete understand the implications of the joint venture relationship and agreement. In the courts of law, the unsophisticated investor can weasel out of an agreement by claiming ignorance and a sophisticated party such a realtor or manager of a joint venture would be liable for releasing the unsophisticated party, unless the investor received Independent Legal Advice (ILA).

Cash calls and Property Reserve Bank Account and Operating Account

The Financial Manager will deposit the rental income and pay the expenses of running the property. To prevent additional cash calls beyond the initial capital invested the Joint Venture may require a Reserve Fund to be funded with a minimum of about 12 months gross rental income before there are distributions to joint venture parties. Controls on how funds are being spent by the financial manager may require a limit of example $1,000 dollars before the joint venture parties must all sign off on funds being spent.

What if a cash call is made and an investor does not fund within a reasonable time? Then other investors may be able to acquire additional ownership interest by funding the required capital.

Reporting, Notifications, Distributions and Sale

Modes of communication should be properly defined either by mail, email, fax or phone. Accounting, investor relations and property management communication by the Financial Manager should have their frequency of reporting agreed upon giving investors comfort that the property is being taken care of and all needs are being met to protect and grow their investment.

Distributions of rental income, proceeds from refinancing or proceeds from sale of the property are definitely something to celebrate and bring comfort to investors. Sale of ownership interest should give current investors the first right of refusal to retain ownership within the original ownership group.

About the author: Randy Ramadhin is a professional real estate investor, has an honours degree from the Rotman School of Business in Toronto and possess both the real estate brokers and mortgage brokers licenses in Ontario. Randy is also the Chair of Condominium Committe of the Building Industry and Land Development Association, an Accredited Mortgage Professional and a member of the Commercial Division of the Toronto Real Estate Board. Randy and his wife Loretta are proud parents of one child living and serving as Rotarians in the community of Brampton, Ontario, Canada.

How to make money in real estate in a long-term bear market

What is a bear market?   Used in stockbroker bullpens on a daily basis this term refers to a general downward trend of prices, which means in economic terms generally more supply than demand for product.

The traditional view of owning real estate is you bought it for appreciation of the price of the property, or so I had been told.  So how does one buy now in a market that is reversing in value?  Firstly, to say that with a brush stroke over the whole market is not really true as there are weaker markets than others.  For example in Toronto December 2008 sales dropped 45% from the same month last year (http://www.torontorealestateboard.com/consumer_info/market_news/index.htm

) and the average sales price in December 2008 was $387,482 compared to $425,842 December 2007 and $350,139 in December 2006. 

Is this drop in value in Toronto just temporary?  Well considering that we are in a world-wide recession and Toronto’s affordability has eroded according to Royal Bank’s report

(http://www.rbc.com/economics/market/pdf/house.pdf) I am going to safely say that I would not be hoping for appreciation beyond 1 percent per annum for the next few years.

So how do I make money in this long-term bear market?  I think if you meet the old timers who have been in real estate investing for 20+ years you’ll hear something like this:  Buy real estate that is net cashflow positive after all expenses having an efficient management system and it will pay itself off.  What if the value drops during the time I own it?  Who cares, it carries doesn’t it?!  This investment strategy is completely independent of property value and can prove to be a profitable one. 

What if rents drop?  When buyers cool off they rent and this long-term bear will prevent first-time buyers from buying and cause them to rent as written in National Post (http://www.nationalpost.com/todays_paper/story.html?id=1161571).

What is interest rates rise?  Worldwide demand is softening from the BRIC nations (Brazil, Russia, India and China) which are the fasting growing and consuming middle-income nations in the world.  With that comes a lessening desire for goods and services which slows down the economy.  Well interests are low and expected to stay low as a result of this long-term bear as indicated by all bank economists in this article. (http://www.canadianmortgagetrends.com/canadian_mortgage_trends/2009/01/rate-cuts-coming-january-20-say-economists.html

)

Consider this example, Joe adheres to his strategy as he starts his real estate investing at age 35 and buys one $100,000 property per year for ten years.  Assuming that the property mortgages have been amortized over 25 years, have minimal cashflow, require minimal management, and don’t experience any appreciation over the next 25 years, here is the result.  At the age of 60 Joe has one property fully paid off worth at least $100,000 (this example assumes that there is no inflation so $1 today is worth $1 in 25 years from now), and every subsequent year from then on Joe has another property completely paid off for.   Beyond the almost $1 Million dollar portfolio of assets, the properties are generating rental income that subsidies Joe’s lifestyle.  Additionally, Joe can give these assets to his family or sell them for a really nice trip around the world.

Can real estate investing really be that simple?  Yes it can.  While any professional can complicate the example give above, I am firm believer of it.  I am putting my money where my mouth is because my portfolio has a substantial number of these long-term holds.  I own condominiums that are tenanted and professionally managed.  I spend no more than one hour a month driving to the bank to deposit my rent cheques and reviewing the statements prepared by my property manager.  Because I am the President of the condominium board of one of the condominiums I own in I spend an additional one hour per quarter review property management issues with the property manager and I spend another few hours once a year at our annual general board meeting.  I consider this one of my nest eggs for my family’s first $1Million dollars.

About the author

Randy Ramadhin is a professional real estate investor, has an honours degree from the Rotman School of Business in Toronto and possess both the real estate brokers and mortgage brokers licenses in Ontario.   Randy is also the Chair of Condominium Committee of the Building Industry and Land Development Association, an Accredited Mortgage Professional and is the founder of www.MREISeminars.com.  Randy and his wife Loretta are proud parents of one child living and serving as Rotarians in the community of Brampton, Ontario, Canada.

Chapter 5 Rich Idiots don’t get rich alone

written by Randy Ramadhin

Robert shares with us that most of the successful people in our history like Thomas Edison did not discover the light bulb on his own.  Did you know that he had a team of 21 assistants!?

A lesson from Donald Trump at a Wealth Expo in the speaker’s lounge was that one of the speaker’s phone rang and he answered it.  Donald went up to the speaker when he was done his conversation and said “You don’t make enough money”.  The speaker replied that he did not make as much as Donald but made plenty and Donald replied “You don’t make enough money; if you did you wouldn’t have to answer your own phone.”

Robert suggests us to think about using O.P.’s (Other People) in our life because we can always make more money but we can’t make more time.

OP’s to stay away from are the “I mean well” group that thinks they know it all but never tried it.  The “Tried it and failed” group that will tell you all the reasons why it won’t work. The “Dream stealers” are secretly jealous every time you succeed.  The “Ouch it’s me” group is our own self-sabotage which we need to check in the mirror every once and a while. The “Comfort zone” group is all those buddies we hang out with and are comfortable with but do not push or support us to take the leap in becoming a Rich Idiot.

-“Hang out with Rich Idiots and you’ll get rich.  Hang out with RUB’s and you’ll stay a RUB”-

I use the five finger rule.  I raise my hand and tell someone, show me your hand.  Then I ask them to point to the palm and I say that is YOU.  Then I ask that person to tell me who each finger represents.  “Who are the five closest people in your life right now?  If you had to tally up the hours you spent with everyone in your life over the last year and pick the top 5, who would they be?”  The result is that YOU are the average of those 5 people- simple.  Their wealth, their health, their attitudes and beliefs.  Did you want to make a change?  I know I sure do.

The following enablers are the OP’s that we should be striving to attain:

1. The OP E.xperience group
2. The OP I.deas group
3. The OP T.ime group
4. The OP M.oney group

OPE have done it and are willing to share their experiences with you.  OPI is akin to using other systems and ideas that are created for me to leverage to help me build wealth.  I see this as similar to Network marketing opportunities as they are systems that I can join with little cost and use to create wealth, learn from and build a network of like-minded people.  OPT are all the service providers that we can hire so that our time is spent doing what we LOVE.  A maid, a landscaper, a supplies delivery company, a mailing services.  DO WHAT YOU LOVE AND DELEGATE THE REST.

OPM is using other people’s money and Robert shares that if you think it is hard to lose your own money, try to lose someone else’s money so he says check, double check and triple check the proposal before you are looking to raise money.

Robert uses an example of not asking for money but asking for advice on an investment that you found.  From this consultative point of view you ask a banker for his feedback on what you have found and then ask them, how do you think I can get the money for this?  If what you have is good, the banker will truly try to find the money for you.  Robert takes it one step further and shows you how to “shop” the deal between different money sources.

Finally, Robert talks about building a Dream Team of experts by asking for referrals to these experts that are paid what they are worth.  This dream team would consist of a good accountant, property manager, lawyer, mortgage broker, etc.

About the author:  Randy Ramadhin is a professional real estate investor, has an honours degree from the Rotman School of Business in Toronto and possess both the real estate brokers and mortgage brokers licenses in Ontario.   Randy is also the Chair of Condominium Committe of the Building Industry and Land Development Association, an Accredited Mortgage Professional and a member of the Commercial Division of the Toronto Real Estate Board.  Randy and his wife Loretta are proud parents of one child living and serving as Rotarians in the community of Brampton, Ontario, Canada.

Buying an apartment building and making the necessary improvements on it so that you can easily sell it is one of the best ways to make a serious profit in the real estate market. Making a bigger profit is easier to do when talking about a higher priced property like an apartment building than if you were to consider investing in single family homes.

Let’s say you are going to make a 10% return on your investment no matter if you invest in apartment buildings or in single family homes. Which return would you rather realize? The 10% on the $900,000 apartment building or the one on the $125,000 single family home? The answer is obvious and it can be realized much easier on an apartment building than a single family home.

When you fix up a house and want to sell it, you are dealing with a person who is looking to live there. When you make improvements to an apartment building and want to sell it, you are dealing with many investors who want to make a positive cash flow by owning the apartment building.

You can easily raise the value of an apartment building by finding one that isn’t operated efficiently and has rents that are below the average for the area that you can buy for a good price. This is easier than it sounds.

You then make the renovations needed to fill the vacancies in the building and raise the rents as leases come due to the average for the area to increase the building’s income. You have just increased the selling price of this apartment building.

If the units are nice already but the rents are lower than the average for the area, you can add shed units or carports for the tenants and let them know that improvements are being made and their rent will be higher when their leases are up, but they are still comparable to other apartments in the area.

The investor who buys this apartment building from you will be looking at one thing. The capitalization rate or the net returns on their purchase price before their loan payments. If you can make an apartment building generate more income, you have ultimately raised the selling price a considerable amount and you will realize a nice return on your original investment.

Other properties that can be turned into condo conversions include former warehouses, offices and other commercial buildings. They don’t have to be a former residential property to be turned into a condo conversion. Obviously, you will need a much bigger renovation budget for a non-residential condo conversion but you may be able to purchase the property for a far lower price than you would an apartment building making the returns just as great when you sell the individual condos.

If you own an apartment building or other large property already, you are ahead of the game. If not, you will pay a hefty price to purchase an existing building but the returns will be very rewarding for you. By taking advantage of the price difference between the condo market and the single building market you will dramatically increase your bank balance.

Overall when analyzed, the purchase price of an apartment or other building, the cost of renovations into condos and having the titles made into individual units is far less expensive than the total selling price of all the condos together. You will realize a huge return on your investment when you sell your individual condos.

Before you jump into investing in condo conversions, you will want to analyze the market you are investing in and make sure you will be legally able to convert the property you are looking at into individual units. A hot market for condo conversions is generally one where the price of a single family home has risen to more than a first time home buyer can afford.

A market analysis is needed to determine the sales potential of the units you will be converting into individual condos. Included in the market analysis is a study of the neighborhood the building is in and what kind of complexes you will be in competition with. You will also need to know the condition of the exterior and interior of the buildings you will be competing with as well as the condition of the units and their grounds along with the amenity package each unit has available to them.

Knowing the cost of your mortgage and how much it will cost you to convert to individual units, you can estimate the cost of the renovations to see just how much profit you can realize from investing in condo conversions.

There is plenty of money to be made in the real estate market for the smart investor. A smart investor knows that when the real estate market is bad, it’s the best time to buy. Whether you are investing in single family homes, apartment buildings or completing condo conversions, now is the time to buy.

You can either be one of the people who make a fortune in real estate in a bad market or one of the people who sit around and wait on the market to improve before making a purchase, the choice is yours. The people who truly want to make money investing in real estate in the US will buy properties now and become wealthy from them. The people who would rather sit back and wait on a better market will pay a higher price for properties and make less money on them.

There are two factors for selling properties in a bad market. The first is the price and the second are the terms of sale. If you buy a property for a low percentage (60-70%) of the actual value of the property, you will find a buyer and be able to realize a nice profit on your investment. You will also be able to sell your property with owner financing and realize the full market value for the home, putting cash in your pocket in the form of a down payment.

Finding properties to buy at just a percentage of the current market value is easier than you think. Many people got caught up in a no down payment loan or a loan that was more than the value of their home and they simply cannot afford it any longer. If you can get these houses under contract with the owners, you can then contact the lender to negotiate a cash payoff price at a hefty discount. With foreclosures at higher levels than ever, banks will be willing to take a lower payoff on the original loan now more than ever.

It’s important to remember that millionaires are made when the economy is in crisis. There is no better time than now to make tremendous profits investing in real estate in the US.