How To Build A Rental Portfolio In 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 private 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. 

There are a lot of sources of private capital available for joint ventures and these include:

  • CD’s – Typically earning less then 1%.  Often times an account holder can pay a minimal fee and capture the funds for a joint venture with a much higher return
  • HELOC –  Lines of credit are cheap and a savy investor can leverage them for a nice return into a Joint Venture
  • Retirement accounts – My personal favorite.  A passive investor can tap into the power of a self-directed IRA (Roth, Traditional, SEP, HSA, ESA) and then invest directly into a Joint Venture.

Let me show you how it works.

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.

 

Everyone knows that real estate can be purchased at  a nice discount so equity is captured on the day it is bough.

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 a case study 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.

 

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!

Thank you for sharing this article, it is much appreciated.

 

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

Jim Ingersoll

Author, Entrepreneur, Coach

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Comments

  1. Jim,
    I love the example. I have done deals very similar to this as a catalyst and like you said it was a true win win.

    My only comment would be that the $750/mo is likely too high for net income. What about maintenance? Capital expense reserves? Vacancy and turnover? I can see the catalyst contributing management for free. I think including those would give a more realistic picture, and I sure the return would still be attractive.

    Thanks for sharing.

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