Buy and Hold Rental Properties with a Joint Venture


In my book, “cash Flow Now,”  I capture a number of income streams that are possible when investing in real estate.  My favorite long-term investment is to simply buy and hold single family homes and enjoy the positive monthly cash flow. 

The question is, how can you buy and hold investment real estate without needing cash, credit or a bank mortgage? 

One solution is to establish funding lines and joint venture with self-directed IRA’s accounts.  This joint venture works great for the account holder and for the active real estate investor.  Both parties in this investment make great returns.

The self-directed IRA is perfect for a savvy investor who wants to make his/her own investments outside of the traditional stocks, bonds and mutual funds because it offers the account holder many alternate investment options.

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Everyone knows that real estate is on-sale across America and that plenty of fantastic deals are available in all markets and in all asset classes. The good news is that with a self-directed IRA it is easy to invest in real estate. Even better news is that a self-directed IRA can be passively invested into real estate without the account holder needing to deal with any tenants or toilets.

“The Self-Directed IRA is the best kept financial secret in America”  Jim Ingersoll

Joint Venture Investing

Joint Venture IRA Investing in real estate works extremely well when a self-directed IRA account works directly with a real estate catalyst. The real estate catalyst is an experienced investor who does all of the work and the self-directed IRA funds the investment and shares the upside return on investment. Both parties in the transaction are critical to the overall success and return on investment.

The Real Estate Catalyst will identify the real estate opportunity, negotiate the price and complete the acquisition using the funds from the self-directed IRA. Once the acquisition is completed, the real estate Catalyst will then be responsible for managing construction and renovations, if required. Once the renovation is complete the Catalyst is responsible for managing the property, along with all the tenants and everything that goes along with property management. Essentially the Catalyst does all of the work and is the active member of the joint venture. The Self-directed IRA infuses the capital by funding the venture, but remains completely passive and does no work.

Discounted Real Estate

In today’s real estate market a good Catalyst should be able to find and acquire houses at a 30% discount price point. What that means is that the purchase price and all the necessary repairs together will not exceed sixty percent of the value of the house.

Here is an example:

Purchase price of house: $50,000
Necessary repairs to house: $20,000
Value of house after repairs: $100,000

The total investment is $70,000 and the house is worth $100,000 which equates to a 30 percent discount on the overall value.

Looking at it the other way, the $70,000 investment has $30,000 of built in equity upon purchase of this property.

Monthly Income Stream

In my market here in Richmond, VA, a house like this one will be a typical 3 bedroom, 2 bath house in a county suburb working class neighborhood. This house in Richmond will rent for $900 per month creating a nice Monthly Income Stream for the joint venture investment. The primary on-going expenses associated with holding real estate are taxes and insurance. In Richmond, the taxes and insurance combined will be about $150 per month for the house in this example which leaves $750 net for the on-going monthly income stream for the joint venture.

The $70,000 investment has now been used to pick up $30,000 of gross equity and a $750 monthly income stream. I hope you are wondering how this gets applied back to the members of the joint venture because the answer is that the Self-Directed IRA and Real Estate Catalyst come to terms. For the sake of simplicity, let’s assume that the two joint venture members agree to a 50/50 split in this venture.

With a 50/50 split, the $750 monthly income stream is split so that both members receive $375 each month; along with this monthly dividend style income stream both members will also share the upside equity at some point in the future.

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Overall Earnings

Let’s make one last assumption to show how the ultimate return can be easily calculated for both members of this joint venture. Let’s assume that both members hold onto this investment property for five years and then sell it for $100,000 which is today’s value of the house. What did both members earn on this joint venture?

SELF-DIRECTED IRA EARNINGS
$375 per month for 60 months: $22,500
Upside equity split of the total $40,000: $20,000
Total return over the five years: $42,500
Total investment made: $70,000
Annualized return on investment: 14.16%

REAL ESTATE CATALYST
$375 per month for 60 months: $22,500
Upside equity split of the total $40,000: $30,000
Total return over the five years: $42,500
Total investment made: $0
Annualized return on investment: Infinite

This is an example of a win-win transaction for an IRA that can joint venture with a sharp real estate catalyst. The real estate catalyst can invest without needing a traditional bank mortgage to buy real estate and will earn $42,500 which is an infinite return since he/she made no capital investment. The IRA invested $70,000 and received dividend type earnings of $42,500 which is an annualized return of 14.16%.

The self-directed IRA is the perfect vehicle for capitalizing in today’s real estate opportunities.

The key is to joint venture with the right catalyst who can do all of the work while keeping your investment safe and returns high.

Would you be interested in making investments like this one?

Make this year the year you commit to learn real estate investing without using banks for your financing!

What is holding you back? Leave comments or questions and I will be happy to respond.

Jim Ingersoll

Author, Entrepreneur, Coach

www.investingnownetwork.com

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6 thoughts on “Buy and Hold Rental Properties with a Joint Venture

  1. Michael Power

    Hi Jim / Good post! I have done more than several JV deals like this as the financier and the debt holder, (lender). Your example gives a simple rate of return, ROI of 14.16%, (actually, it is 12.14%). The compound ROE in this example is 9.95%. A very respectable rate, but for 100% funded is a bit low on the Risk/Reward scale for an equity position.

    The Partner in this case gets 50% of the cash flow with no skin in the game. If the deal falls apart, he is out of some ‘lost time’ and I am out some cash. For 100% financing, I would like to see a 60/40 split, (just my preference). It makes the returns a bit better to compensate for the perceived higher risk.

    But for the RE investor, 40% of the profits is a good pay check. The Promissory Note, Mortgage and JV Agreement need to be very clear and specific. The IRA financier must do their homework and consult a lawyer.

    But, these are great educational posts to get prospective RE Investors thinking about the kind of self-educating they need to do. These are great long-term wealth generating methods. Private lending is terrific as well for those with a desire to be really hands off with a debt position rather than an equity one.

    Reply
  2. lynn

    Good day Jim….
    Just want to know how to go about finding a experienced real estate catalyst and government funding or is the self directed ira the only means of funding……….By the way wonderful article
    Thanks

    Reply
  3. Patrick

    Jim, I’m looking to invest in RE with self-directed IRA and other funds…looking for high value “catalysts” for buy and hold, know any?

    Reply
  4. alden atienza

    Jim
    Great Article. Thank you for posting. I understand that this is a long term investment technique. Learned a lot of things reading this. I’m not familiar with self-directed IRA and now, after reading this, I’m actually looking forward in learning more about it. I’m very interested to learn more about joint venture investments any more articles or sites where i can read and learn more?

    Alden

    Reply

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