Most of these partnerships are created by placing a property into an LLC and having the partners all own a portion of that LLC. If anyone wants to sue you or your partner they will not be able to go after the other person—the LLC makes that protection possible.
In the video above, Scott talks about how charging order against the LLC can make things messy and painful.
The best strategy to deal with this type of situation is to have both yourself and other partners enter into the Joint Venture LLC through your personal LLCs. This takes minimal effort to establish, but can prevent the messy and costly potential of dealing with a charging order.
How To Structure Your Partnership To Protect Your Assets
Say you and your friend that start a company together to invest in real estate.
Now say your friend gets sued, and next thing you know there's a charging order against the LLC. If you don't know what a charging order is, start with this article and come back.
The Cliff Notes version is this: If there's any money distributed from the LLC, it has to be used to pay off the creditors to the extent that your friend has an interest in the LLC.
This means you can't get any money out of the investments you and your partner made—even though he (or she) is the one being sued!
This will allow you to distribute money that you can now control without having to pay off those creditors and hurt your friend or your business partner. It keeps everything nice, smooth and amiable.
How Does a Series LLC Work?
The Series LLC will work it's much like a parent/child structure. At the very top, you'll have your parent, the series LLC. The state assigns an EIN number and an official formation document for the state (Delaware, Nevada, Texas, etc).
Below the series LLC, you have the actual individual series. You'll have series A, series B, etc. Therefore, these are what I refer to as the "children."
A parent Series LLC can have as many children series it wants. Each one of these series is going to be treated as if it were its own LLC, for liability purposes. So, we hold an individual property or asset in each given series. In the case there is a lawsuit resulting in action against a house in series A, it won't affect the house in series B, C, etc.
Now you may have the need to be able to do joint ventures as your real estate business grows. These function just like LLCs. Due to that Series C could be a joint venture agreement with as many people as you would like. It'll have its own EIN number, tax return and its own operating agreement to conduct the business of that JV agreement.
With a series LLC, what it will allow you to do is to expand your business in a very professional way, protect your assets. So with all of these companies and all of these assets that you own individually, this will pass straight up through the series to have one tax return. Which means thousands of dollars a year in tax preparation savings for you.
My name is Scott Royal Smith, I'm an asset protection attorney focused on real estate asset protection and I'd like to help you.
Joint Ventures in Real Estate Investing: How They Work
After the recession, Joint Ventures were hotter than documentaries about corruption at investment banks. If you’ve been in real estate investing since then, you’ve probably entered into one at some point.
These tasty commodities were attractive because they gave loan-to-value ratios as high as 70%. Not many real estate investors like to gamble with those kinds of numbers, at least not alone. However, get a pack of lemmings together and they’ll pretty much gamble on anything, up to and including jumping off of a cliff.
What is a Joint Venture in the Context of Real Estate Investing?
A JV agreement is a contract between two or more parties that divides up the investment, the responsibilities, and the profits or losses. You know, an agreement. It’s for those entering into a one-time deal. You aren’t wining and dining here. You’re in and out fast for a quick and tidy profit.
Parties usually form a new company to own and operate an investment if it is a long-term deal. For short-term investments, a Joint Venture does have some great benefits.
Example of Joint Venture Agreements in Real Life
This is a common JV Agreement scenario for real estate investors. My friend Randy purchased a property with his LLC that he intended to restore and then sell for a profit. Then he hired a contractor, our buddy Johnny.
Together, they agreed that Randy would reimburse Johnny his expenses and they would share the profits from the sale, in accordance with the terms of the JV agreement they’ve drafted.
By the way, you can add a contractor to your S Corporation or LLC in order to share profits, but that can be a bad idea. If you don’t want to give up a permanent piece of your company (and there are a lot or reasons why you might not want to do that) a JV agreement will bridge can bridge the gap without giving away your firstborn. It is a collaborative contract between companies, rather than a permanent marriage.
By creating a venture-specific LLC, all of the parties acquire some much-needed liability protection. If you find that the arrangement is worth keeping to explore new opportunities, there is no reason why you can’t modify the terms.
Who knows? Maybe this short-term fling will become the real thing.
Your new LLC will also isolate the JV’s capital and resources in the event of litigation. Your other companies are safe from being liable for this new one.
Is a Joint Venture Right For Me?
As in so many things finance related, your decision really depends on the size of the deal. If you are pushing millions around, the added liability protection of an LLC is essential. If you’re just puttering around with tens of thousands of dollars, as was often the case between Randy and Johnny, that JV agreement is the cheaper option.
JVs work well where the goal is quick cash and in cases where the partners do not qualify for financing. They also let you partner with companies that have different skills than you. The investor/contractor arrangement like Randy and Johnny’s is a perfect match for quick flips on real estate.
In the end, no matter how short-term a deal is, you’re going to have to work with the person you go into business with for longer than you think. Whether starting a new company or signing a Joint Venture, find people who you trust and who you like to work with. Make sure you understand Joint Venture liability. Forge business relationships that have potential for growth and leave the door open for more collaboration. A good deal is an awful thing to waste.
Do you still have questions about your Joint Venture or LLC? Take our quick investor quiz and we'll help you find the solution that is best for your situation.
Joint Venture Agreements For Real Estate Investors
If you've been in the real estate business for awhile now, the chances are extremely high that you've entered a Joint Venture Agreement at least once.
Right after the recession hit, Joint Venture Agreements became all the rage. Mainly because lenders began imposing loan-to-value ratios as high as 70%. Not many real estate investors are willing to put that much on the line, not by themselves anyway!
But maybe you don't know what a Joint Venture Agreement is? Whether you do or don't this article might can teach you something new. Let's begin.
What Is a Joint Venture Agreement?
A JV Agreement is a contract between two or more parties. It outlines who is providing what. (Money, services, credit, etc.). It also outlines what the parties responsibility and authority are, how decisions will be made, how profits/losses are to be shared, and other venture-specific terms.
A joint venture agreement is typically used by companies or individuals (like real estate investors) who are entering into a onetime project, investment, or business opportunity.
Usually the two parties will form a new company such as an LLC to conduct operations or to own the investment. This is usually the recommended path if the parties intend to cooperate over the long term.
However, if the opportunity between the parties is a one-time venture where the parties intend to cease working together once the agreement or deal is completed, a joint venture agreement may be an excellent option.
Typical Joint Venture Scenario For Investors
For example, consider a common joint venture agreement scenario used by real estate investors, and let's say you're the real estate investor. You purchase a property in your LLC or s-corporation and intend to rehab and then sell the property for a profit.
Then you, the real estate investor, finds a contractor to conduct the rehab. Your arrangement with the contractor is that the contractor will be reimbursed their expenses and costs and is then paid a share of the profits from the sale of the property following the rehab.
In this scenario, the joint venture agreement works well as both you and the contractor can outline the responsibilities and how profits/losses will be shared following the sale of the property.
It is possible to have the contractor added to your s-corporation or LLC in order to share in profits. But that could be bad for you.
If you did add the contractor to your s-corporation or LLC, that contractor would permanently be an owner of your company. Which is bad because you will likely use that company for other properties and investments where the contractor is not involved.
As a result, a JV Agreement between your company that owns the property and the contractors construction company that will complete the construction work is preferred.
A JV agreement lets each party keep control and ownership of their own company while they divide profits and responsibility on the project being completed together.
Why You Should Use a Joint Venture Specific LLC For My Assets
While a new company is not required when entering into a joint venture agreement, many joint venture Agreements benefit from having a joint venture-specific LLC that is created just for the purpose of the joint venture agreement.
This venture-specific LLC is great in situations such as:
Where the parties do not have an entity under which to conduct business and which will provide liability protection. A new company should be formed anyways for liability purposes and depending on the parties future intentions a new LLC between the parties may work well.
Where the arrangement carries significant liability, capital, or other resources. More time, money and liability involved in the venture will give you more reasons to have a separate, new LLC. This new LLC will own the new venture and isolate liability, capital, and other resources.
A $1M deal or venture could be done with a joint venture Agreement alone, however, you would be well advised to create a new entity as part of the JV Agreement. On the other hand, if the venture is only a matter of tens of thousands of dollars, the costs of a new entity may outweigh the benefits of a separate LLC for the venture.
Enter Agreements With Joint Ventures Wisely
Joint venture Agreements are great when you need cash now or can't qualify for financing. They also enable you to work with someone who can bring something to the table you can't. But in any case, always make sure you carefully consider everything before entering into one.
As always, if you have any questions about this article please do not hesitate to ask. If you're wondering whether a joint venture arrangement is right for you or have questions about setting up a venture-specific LLC, contact us today.
Making Your Real Estate Dream Team
Believe it or not, making your real estate dream team only requires three people. You need an attorney, a CPA and a deal maker. A deal maker is either a real estate agent or a wholesaler. For the attorney and the CPA, don't go cheap. A good attorney is worth their weight in gold.
You're investing thousands of dollars. Make sure the deal you're working on is going to be protected. As an attorney, that's what I do. I make sure your company structure, as well as the deal itself is going to flow.
My job is to make sure you're not going to lose your money based upon a legal technicality. Or some other event that's going to cause you a legal headache.
A CPA is also worth its weight in gold in terms of tax savings. Especially after your company gets off the ground a little bit, you're going to want to hire a CPA who's also a real estate investor. A CPA is going to know exactly how to structure the tax savings that's gonna save you the most amount of money.
The Cost Of Your Real Estate Dream Team
Now you might think, wow, I have to pay these people a lot of money for a bunch of years and that's going to cost me a ton. Well maybe not. If you're doing a repeatable kind of business, then it's gonna be the same types of legal documents, as well as the same types of taxation that's going to occur every year. Now there's going to be some minor tweaks here and there to the legalities as well as the tax structure.
But any generic CPA at that point is going to be able to look at the model used by that attorney and by the other CPA that's a specialist and be able to tell you where you're gonna need to tweak a tax return. That will mean long term savings for you.
As far as the wholesaler or your real estate agent goes, these are really the crux of your business. Because those are the people that are going to actually be the ones making you money.
Don't Cheap Out On Your Real Estate Dream Team
As a real estate investor myself, I pay my team well. After all, what they really want to do from their position is cultivate a few number of select clients (hopefully you) to be able to build up their business.
This benefits all parties involved because now they don't have to market their business out to hundreds of people and deal with all of the phone calls and headaches from that. And you get to make consistent profits.
If they could just have a few clients and be able to buy all of the properties it makes their life a lot easier. This also means that you're competing against much less people, in terms of who's negotiating after the fact about what that particular deal is going to be worth.
This increases your leverage in being able to make more money working with those people. Now you might not be able to have enough money to be able to keep a wholesaler exclusive to yourself. Which is fine because...
The Series LLC Comes Into Play
Think about the way you can JV (joint venture) with other partners in bringing in other money to investing in a particular deal. If you combine that JV strategy with a series LLC, you're able to get into more deals at no additional cost.
Remember, the series LLC structure allows you to create as many series as you want. And each one of those series is treated as its own LLC.
That means you can bring in their own JV partner. With its own EIN member, operating agreement, everything that you would do in a traditional LLC. And bringing the money there, the Series LLC doesn't require you to have any additional filing.
So you can literally create a new series on your desktop with a new operating agreement bringing in that JV money and closing the deal with that wholesaler before anyone else is gonna be able to do it.
I hope you found the above information useful. And remember, when it comes to making your real estate dream team, don't cheap! Especially on the CPA.
The Two Biggest Reasons Why New Real Estate Investors Lose Money
Welcome to the real estate industry! You'll quickly find out how easy it is to lose money when you don't know what you're doing. And even if you do know what you're doing, you can still lose money if you're not careful. But let's assume you're new.
I'm not trying to be a "party pooper" or anything like that. As a real estate investor myself, I just want you to know what you're getting into. So what exactly are the two biggest reasons why new real estate investors lose money?
You Will (Probably) Make Bad Investments
While it's not necessarily a guarantee that you'll make bad investments, the probability is high. However, it's only natural to be "bad" at something when you first start doing it. *wink wink*
But is there really any other way to learn other than from your mistakes? Yes and no. I recommend new investors do joint ventures with more experienced real estate investors before they go out on their own. Just make sure you find someone who knows what their doing if you choose to do that.
So what's the other big reason why new real estate investors lose money?
You Will (Probably) Get Sued
This one might surprise you. The truth is anyone can and will sue you if you're worth enough. It could be a random person off the street or even a business partner. You never know when it'll happen, but you have to be prepared. Otherwise you could lose everything.
Luckily for you, preventing lawsuits is easier than learning how to not make bad investments. The most proven way to prevent lawsuits is through asset protection. Asset protection involves the use of LLCs and other legal structures when doing real estate transactions and signing contracts.
Like I said earlier, anyone can sue you. But that's only if you're worth enough. Asset protection can make it appear as if you're worth nothing. Or, you can use asset protection as leverage to convince someone not to waste their time suing you.
Well that's everything. As always, if you have any questions feel free to ask me in the comments below. For questions about your individual situation, contact us directly.