- Hey, welcome back everyone.
It's Clint Coons here.
And in this video, we're going to be talking about
putting together a joint venture with someone else.
All right.
Let's get stuck.
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Okay, so here's the deal.
If you're gonna invest with someone else
to take a deal down,
these are typically gonna be larger deals.
Now it could be single family homes.
Although I don't see a lot of people doing that
unless it's within the family.
Many times what I come across is,
commercial property, multi-family property,
a fourplex, something like that.
Where two investors are coming together
and trying to figure out the best way to structure it.
Now, I've got a few videos on my channel
that discussed joint ventures
and how to create a joint venture.
And I discussed the use of a limited liability company.
By way refresher, let me just show you
what I'm talking about.
Let's assume that there's this property here
and we're gonna buy this fourplex
and there's two investors involved.
So I'm right here and here's my partner Toby over here.
And we wanna buy this fourplex,
and we're gonna own it 50 50.
So how do we go about structuring that?
Well, typically what we're gonna do,
if you go traditional joint venture out with an LLC is,
you'll create a limited liability company right here
for this asset.
And then that LLC that you set up is typically referred to
as a joint venture limited liability company.
It's gonna be a JV LLC.
It's going to describe how the property is being handled,
management, who gets paid,
what the requirements are from the individual investors,
What they have to do that is,
what happens if your run short on cash.
Are you required to contribute money to the LLC to say,
we have to reroof the house, things like that.
You agree to sign on mortgages.
So this joint venture LLC is going to lay out
all of the requirements of the members to participate in it.
And that's of course you would negotiate.
Now coming into this joint venture LLC,
you have two ways to own it of course.
You could own it directly in your own name.
So let's assume that it was a 50 50 deal.
I own 50%, my partner Toby owns 50%.
And so individually we're members in that company.
Now I see a lot of people do this
and I think it's a mistake.
It's a lawsuit in the wings.
It's a problem that's going to
rear its ugly head potentially in the future.
Because when you own this joint venture directly
with someone else,
do you know who you're really partnering with?
Now, it's not just Toby.
It's the spouse as well that you're getting involved with.
And maybe Toby has a girlfriend over here on the side.
Who knows, all right, see this can happen.
And so now you don't know who the heck you're involved with
because you don't know what's going on in his personal life.
But those issues could become your issues
when you have him directly participating.
Let's say, spouse finds out about this person over here,
spouse then wants to do scorched earth on Toby.
Scorched earth now comes up
and affects your limited liability company.
So what I prefer to do when I'm working with investors,
I recommend that rather than own that directly
in your own names.
Give yourself a little buffer here.
All right, keep the individuals out of it.
Have each individual create their own LLC down here
like this.
And then you come in with the LLCs on a 50 50 basis.
So now any problems that we have over on this side,
stay with this company
and they're not affecting this company up here.
So it would be business as usual.
And there's many other reasons
why we do like to do the structure as well.
Now, here's the inherent drawback
to this type of structuring.
If you're setting up a JV LLC, for a quad or a multifamily,
is that when it comes to selling the property, all right?
What are you gonna do?
Well, you may think,
well except for Clint,
I'm just gonna sell it out of the limited liability company.
Yeah, obviously that's what you're gonna do.
But what I'm thinking more on the lines of is
what are you and your partner going to do?
I mean, what are your tax planning ideas?
Maybe when we sell this property,
it's gonna generate for us $500,000 in gain,
which means that I get 250 as a 50% owner.
And Toby gets 250 as a 50% owner.
But the difference is that Toby wants his $250,000
because he wants to put as a down payment
on a new personal residence.
So he wants to go out and buy a fancy car
or something like that.
So he wants his cash.
Whereas I'm not so concerned with that.
I don't want that money 'cause if I take that money,
then I have to pay tax on it.
So what I wanna do is engage in a 1031 Exchange.
So I'm gonna roll it over into this tax deferred exchange
into a different investment property.
In this scenario, that's not gonna happen
because I need to get Toby to agree to engage in the 1031,
because the 1031 is gonna happen up here at the LLC level.
And so if both members you don't agree,
then it's dead in the water.
And so I'll be forced to pay tax.
So how do we solve that issue?
Well, the way to solve the issue then
is to not set up a joint venture LLC
like I just showed you right here.
Instead, what you're gonna wanna do
is come into that property as follows.
So here's the property, the Quad.
Each of you again, you have your own LLC set up.
This is imperative.
Each investor has to have their own LLC.
Yeah, I don't want individuals owning this
in the scenario I'm about to describe to you
because it's gonna compound your potential issues
even more in the future.
And I gave you an example of that.
So now we're going to buy this property
together with our LLC and we're gonna own it 50 50.
So this is my portion.
And it's gonna be held as Tenants in Common.
This is called a TIC agreement, right?
Maybe you've heard this before and you weren't sure
what it referred to.
What it means is that both of these companies
are gonna own that property together.
So on the deed, it's going to state, you know,
Clint's LLC and Toby's LLC as Tenants in Common.
In fact, they'll even state the interest that I hold.
Clint's LLC is to a 50% interest.
And Toby's LLC is to a 50% interest as Tenants in Common.
So both LLCs go on title to the property.
So essentially the property is held by
two limited liability companies at the same time.
Now, when you set this up in this manner,
you do have to file or prepare what is called this TIC,
Tenant in Common agreement.
With the Tenant in Common agreement is that just,
it's a document that you set up
and it outlines out What's gonna happen with the property.
Who's responsible for X, Y, and Z?
How the rent's gonna be collected,
how they're going to be dispersed with the property sold,
things like that, when the property can be sold.
So let's assume that in this deal,
you wanna make sure that the property can't be sold
for a minimum of five years.
So you agree that it's not gonna be sold for five years,
you put that into the agreement
and the agreement gets recorded.
So it's gonna be recorded against the property.
So people know that this property is subject
to a Tenant in Common agreement.
So, you know, Toby couldn't go out there
and try to sell his interest.
In fact, you can restrict that,
you can't sell your interest.
Now, the benefit that we're going for with the TIC
is that it's going to allow us in the future
to be in complete control of our own tax situation.
Because when the property is later sold,
then if Toby needs his $250,000
he'll be able to take his 250K.
But on the other hand, if I don't want that 250,
because I wanna engage in a 1031 Exchange.
My TIC interest will be eligible.
So this LLC will be eligible for a 1031
on that $250,000 in gain.
So I can have my LLC go out and buy another property,
not have to pay any tax.
Toby can take his 250
and do whatever the heck he wants with it.
The idea is we set ourselves up at the outset,
the beginning,
so we can accomplish our tax goals at the end.
Now, in the first example,
there's another way it's called a Drop and Swap.
It's a little more complicated to make that work out
and it can create some issues for individuals.
So if you're investing with someone else,
I think in your plan that you are gonna sell a property
at some point in time,
consider using the Tenant in Common relationship.
You still have the same asset protection.
You just have to make sure you put it together
in the way I just described.
Hey guys, you liked the video?
Give me some likes and be sure to subscribe to the channel.
Take care.
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