Financing and partnerships
How to Structure a Joint Venture to Buy Apartments With No Cash
The JV rules I used to buy hundreds of rentals: five partners max, active roles for everyone, how to structure returns, and a four-step dispute clause.
Today we're talking about the joint venture. I've used this to buy hundreds and hundreds and hundreds of rentals and build complete financial freedom.
If you're sitting there wondering why you're listening to a tattooed guy in a Buc-ee's tank top talk about joint ventures: I've used this structure at an extremely high level to build a portfolio that built this house, built this studio, and got me financially free in under five years. You can do the same, if you know how to play the game.
Here are the rules I follow, the exact structure of a JV that worked, how to compensate your partners, and the dispute resolution language that would have saved me a very expensive lesson.
Rule One: Five People, Max, and Everyone Has to Work
Joint ventures are not for large capital raises. This is for up to four partners. You should not have more than five people total in a joint venture.
Why? Because the law says everyone needs to be an active member. Otherwise you're creating a security. You don't want to create a security: that means filing with the SEC, and that's a totally different structure called a syndication. You're allowed to do a syndication, but I wouldn't do one if you're new to real estate, and I wouldn't do one on a small cap raise. By small I mean a million dollars or less.
You want to raise from a few people. You don't want to borrow their last dollar, but you want a few people who have some money.
Here's the actual power of a JV. You file an LLC with multiple members, and each member has a specific role and a specific contribution: experience, money, time, or the deal itself. You're bringing a team together to knock out a project you couldn't do yourself for whatever reason. Maybe you lack the funding. Maybe you lack the experience. Maybe you lack any number of things.
In the eyes of the law, everyone needs to be active. So in your operating agreement, figure out the role of every single person. If they're bringing capital, awesome, but they need to do more than that. Who's maintaining the books? Who approves large projects? Who's responsible for day-to-day, which is often you?
Make sure everyone has a set role so no one is on for a free ride. There are no capital partners who just put in money and sit back waiting for their return. That is not allowed. You can be the primary operator and managing member, do most of the work, and bring the opportunity, but if you need to borrow something from someone else, the JV is a great way to assemble that team.
Why a Joint Venture Instead of Debt?
If you just need somebody's money, why not borrow it?
Because plenty of projects have a no-further-encumbrance clause. Whether you went to a bank or you seller financed, the lender can ask for language saying you can't stack additional debt on the project while they're financing it.
Right there, if I need outside capital and I can't get it from that bank and I can't put on a second position loan, my option becomes: go get a partner. Play with the equity and the ownership instead of further encumbering the property. A JV isn't further encumbrance: it's just part of the ownership of the building.
There's a second reason. If it's bank financed and I'm newer and I don't qualify, I can bring on a more experienced investor and we can qualify on their qualifications, their money, and their bank statements in addition to mine.
So if you're trying to get started and you don't have all the pieces: that's totally fine. Borrow them. Create a joint venture with someone who can move you to the next level.
A Real Example: The 26-Unit in Stephenville, Texas
Here's a JV that shows all of this working at once.
My buddy Caleb Hommel found a 26-unit in Stephenville, Texas. He brought it to me, and I got us qualified for the bank debt as well as the experience requirement the bank needed to lend: they wanted a seasoned investor, because there was a lot of raising rents and some renovation involved in this project.
Related reading: Inside My $6.4M 76-Unit Deal in Stephenville, Texas
So: Caleb had the opportunity. I had the experience and the qualification the bank was looking at. And we're already partnered in a property management company, so it was convenient to do.
The problem: neither of us had the $400,000 we needed to put down to close it. And the price was beautiful: $1.6 million for a 26-unit building in excellent condition, a newer build. I'm so excited about that project.
Where did the money come from? A one-third investor came in. A guy we'd never met before: Caleb met him playing pickleball. He had $400,000 to put into the deal and he invested it.
That's three people:
- Caleb found the deal.
- Caleb and I are the primary day-to-day operators.
- The investor funded it, and he isn't passive. We meet with him quarterly, he approves the rental budget, we go through the numbers with him, and beyond the capital he's a huge input on our leasing strategy, how we do rent bumps, and how we handle the renovations. He's an active participant in the LLC.
Three people: the deal finder, the deal manager, and the deal funder. Everyone has an active role in the management of the property. That's the perfect use of a JV, and notice that Caleb and I bought that building zero dollars out of our own pockets.
How to Structure the Returns
This part matters more than almost anything else. Picture a sliding scale with two ends.
The cash flow end. On a high cash flow deal, I'll pay a partner almost like it's debt: monthly distributions out of the property, often in the form of a preferred return. Say it's an 8% preferred return. The first 8% return on investment fills their bucket. Whatever remains goes to bucket number two, split among all of us based on our equity in the deal. So I get some cash flow, but they get the lion's share, because they put in the money and they carry the financial risk.
Generally you run that until their initial capital is returned, and then you either split pro rata in proportion to equity, or you put in a buyout option and buy them out in the future.
Related reading: The Option Contract: Buy Multifamily With $0 Out of Pocket
The upside end. Now take a deal like that 26-unit, where the rents were very low but very easy to raise over time. Day one there wasn't a lot of cash flow. There was some, but not a lot. What there was, was a ton of value add: that building should be worth $2.8 million if it was bringing in the rents it should today.
When you have a million dollars of upside, you compensate your partner out of the million dollars of upside, not out of the little cash flow you have. Protect the cash flow. Go for the upside.
In that case the investor multiplies his money, and there's a buyout option in place: once the deal appraises for what it needs to, we have an exclusive right within the first three years to buy him out. He put in $400,000; we buy him out at $600,000. We're very, very confident we can go to the bank, do a cash-out refinance, pull out his initial capital plus another 50%, and then own the deal by ourselves.
We end up with a cash-flowing asset. It paid everyone throughout the entire project. He got a return. We got a building. Everyone was active. Everyone's happy.
Where are the goalposts? On one side, compensating entirely out of future upside generally means doubling their money every four or five years. On the other side, preferred returns of 10 to 12% if that's their only compensation, with a future buyout at principal value. You can slide the bar anywhere between those two: maybe an 8% preferred return plus a 50% bump on their money at the end of year four. Something along those lines.
The Four-Step Dispute Clause (Learned the Expensive Way)
The most important thing to remember when you do a joint venture: you want limited variables. You get to borrow a partner's experience, capital, and time, but people are variables. They're not fixed like your debt. They can change their mind. They can have feelings. They can have opinions. All of it can cause conflict.
Every LLC has an operating agreement. It lays out who contributed what capital, the active roles of every member, how cash distributions are handled, how you're filing taxes: the basics. The thing you need to nail is your dispute resolution.
One of the most painful things that ever happened to me in real estate was a very costly legal battle in which I was right, and it still cost me a ton of money to defend being right. The backstory: my partners expected me to personally compensate them for every month of vacancy while we were renovating a building. Why they thought that, I don't know. That's crazy, but as the property manager, their position was that it's my job to keep it full, so I should pay them personally for every vacant month. While we were renovating units that had bed bug infestations.
Defending that position cost me tens of thousands of dollars, and ultimately I wrote a $10,000 check just to end the legal madness and move on.
Here's the four-step process I now put in every single operating agreement. Disclaimer: I'm not a lawyer, get your own legal counsel, but this has worked very well for me.
- Obligation to discuss. When there's conflict, we're obligated to talk it out as humans and as adults: over Zoom, in person, or on the phone.
- Written notice and written response. If that isn't fruitful, the party with the complaint gives written notice, and I have a minimum of 14 days to respond in writing. In my case they'd have written the complaint, and I could have written back that no, that's not how this works.
- Mediation. You schedule time with a mediator. You, your counsel, and their counsel enter a room: usually a virtual chat room, and you're separated, you don't talk to each other. One party talks to the mediator, then they jump to the other party, back and forth. They're helping you reach conflict resolution. In mediation, everyone has to agree on the result. No judgment gets passed. They're facilitating a negotiation to avoid the ultimate bad thing.
- Arbitration. Arbitration sucks. Even if your contract says the prevailing party gets legal fees covered by the losing party, that's often not enforced. You're typically going to spend at least $100,000 going all the way through arbitration with legal fees, discovery, and court dates. It gets ludicrous. Avoid it like the plague. Unless you're arguing over millions and millions of dollars, you'll lose far more money going to arbitration than you'll win by winning it. It's the last step, and it has to be preceded by all the others, including mediation.
Key Takeaways
- Keep a JV to five total partners or fewer, and make sure every member has a genuine active role: otherwise you've created a security.
- Use a JV instead of debt when you have a no-further-encumbrance clause, or when you need a partner's experience and balance sheet to qualify.
- Assemble the three roles: deal finder, deal manager, deal funder. On the Stephenville 26-unit, that got a $1.6 million building bought with zero dollars out of my pocket.
- Structure returns on a sliding scale between preferred return (10–12% if it's their only comp) and equity multiple (roughly double their money every four to five years).
- On a value-add deal, pay the partner out of the upside and protect the cash flow: then refinance and exercise the buyout.
- Put a four-step dispute clause in every operating agreement: discuss, written notice with a 14-day response, mediation, arbitration only as a last resort.
I've done about 20 joint ventures and 19 of them have gone very, very well. The one that went sour was the only time I ever invested with a personal friend I wasn't previously in business with.
Money will change relationships. I've seen it make them stronger and better when people go into business together, and I've seen it destroy partnerships and friendships, like what happened to me. Either way, it changes them. So if you want to keep this simple and keep drama to a minimum, don't introduce money into a relationship you're not willing to change, because if it changes negatively it can be devastating.
Outside of that, partner with great people. Partner with people whose pieces move you forward, who you know, like, and trust. And don't be shy about using the joint venture to expand beyond your current economic situation. If your goals in real estate are larger than the money in your bank account today, the JV is the simplest contract with the fewest moving parts and the least expense you can use to take down a ton of real estate.
Watch the full video for the complete walkthrough of the Stephenville numbers and the return structures on screen. There's a free multifamily course linked in the description if you're starting from zero, the Facebook group is open, and the mentorship page is there if you want help putting your own partnerships together.
Read the episode transcript
0:00 Hello and welcome back to multifamily strategy. 0:01 My name is Christian Osgood. 0:02 Today we're talking about the joint venture. 0:04 I have used this to buy hundreds and hundreds and hundreds of rentals to build complete financial freedom. 0:09 In fact, if you're sitting here wondering why am I listening to a tattooed guy in a Bucky's tank top, tell me about joint ventures. 0:15 I have used this to an extremely high level to build a massive portfolio that built this house, built this studio, and ultimately got me financial freedom in under five years. 0:24 You can do the same for you if you know how to play the game. 0:26 I'm gonna share a few rules with you. 0:28 on how to play this so you can go from wherever you're at currently in your portfolio to becoming a master of the joint venture. 0:35 First of all, joint ventures are not for large, large, large capital raises. 0:40 This is if you're going to have up to four partners. 0:43 You should not have more than five people on a joint venture. 0:46 Now, why is this? 0:48 The law is everyone needs to be an active member. 0:51 Otherwise, you're creating a security. 0:53 You don't want to create security. 0:54 That means you have to file with the SEC. 0:56 That's a totally different structure called a syndication. 0:59 While you're allowed to do a syndication, I wouldn't do it if you're new to real estate and I wouldn't do it on a small cap raise. 1:05 By small, I mean a million dollars or less. 1:08 You want to raise it from a few people. 1:10 You don't want to borrow their last dollar, but you have a few people who have some money. 1:14 But here's the power of the JV. 1:16 With a joint venture, it is a business opportunity where you come in, you file an LLC with multiple members. 1:24 These members each have specific roles, specific contributions, be it experience, money, time, the deal itself. 1:32 You're bringing a team of people together to knock out a project that you could not do yourself for whatever reason. 1:37 You might lack the funding. 1:38 You might lack the experience. 1:40 You might lack any of a number of things. 1:43 You're going to build a team and of that team is going to be a joint venture. 1:46 Now. 1:47 In the eyes of law, everyone needs to be an active member. 1:49 So in your operating agreement, you just need to figure out what is going to be the role of everyone. 1:53 Now, if they're bringing capital, awesome. 1:55 They need to do more than that, though. 1:58 Who's maintaining the books? 2:00 Who is going to approve large projects? 2:03 Who's responsible for the day to day in the project, which is often you? 2:06 What you need to make sure you do is in your operating agreement, make sure that everyone has a set role so that no one's just on for a free ride. 2:13 There's no capital partners who just put in the money and they sit back and wait for their return. 2:17 That is not allowed. 2:18 What you can do is be the primary operator and the managing member. 2:21 You can do most of the work, bring the opportunity. 2:23 But if you need to borrow something from someone else and you're trying to put together a team, a joint venture is a great way to do it. 2:28 So why joint venture instead of debt? 2:30 If you just need to bring in someone's money, why do a JV? 2:33 Well, there's many projects where you actually have something called a no further encumbrance. 2:38 That means maybe you went to the bank or maybe you sell or financed. 2:41 Either way, they could ask for a clause that says, hey, you can't stack any additional debt. 2:46 on this project while we're financing. 2:48 Right there, if I need to bring in outside capital and I can't do it through that bank and I can't do it in a second position loan, my option is now, hey, let's go out and get a 2:59 partner. 3:00 Let's play with the equity and the ownership instead of further encumber the property. 3:05 There is no further encumbrance. 3:06 It's just part of the ownership of the building. 3:08 So I can bring in someone's capital, for example, or if it's bank finance, then maybe I'm newer and I don't qualify. 3:13 I can bring on a more experienced investor. 3:16 And we can qualify on their qualifications and their money and their bank statements in addition to mine. 3:23 So if you're trying to get started in this game, you're like, well, I don't have all the pieces. 3:27 That's totally fine. 3:28 Borrow them and create a joint venture with someone else who has the ability to move you to the next level. 3:34 A fantastic example of this is a 26 unit that I bought recently in Stephenville, Texas. 3:39 My buddy Caleb found the deal. 3:41 He brought it to me and I had us qualify for the bank debt as well as the experience requirement to get this thing under contract for the bank to lend. 3:49 They wanted a seasoned investor because there was a lot of raising rents and some renovation that went into this project. 3:55 Caleb had the opportunity. 3:57 Christian had the experience. 3:59 And the qualification to the bank was looking at as well as I'm already partnered with Caleb in a property management company. 4:04 It was convenient to do. 4:06 Neither of us had the $400,000 we needed to put down to close this thing, but the price was beautiful. 4:12 We got an excellent price of 1.6 million for a 26 unit building. 4:16 Excellent condition, newer build. 4:18 I'm so excited about the project. 4:20 Where's the money come from? 4:22 One third investor came in. 4:24 Guy that we've never met before. 4:25 Caleb met him during pickleball. 4:27 He had $400,000 to put into the deal. 4:29 He invested that is three people. 4:31 Caleb found the deal. 4:32 Caleb and I are the primary day to day operators. 4:35 We meet with him quarterly and he approves the rental budget. 4:37 We go through the numbers with him. 4:39 While I do the tax filing, he actually is a huge piece beyond just the capital of the input in our leasing strategy. 4:45 When we do our rent bumps, how we do the renovations, he's an active participant in the LLC. 4:50 There's only three people, but we found the deal finder, the deal manager and the deal funder. 4:56 Everyone has an active role in the management of the property. 4:59 There's a perfect use of a JV and notice Caleb and I bought that zero dollars out of our pocket. 5:05 Now, how do you structure returns? 5:06 If you're doing something like this, this is very important in a joint venture. 5:09 There's two main things. 5:10 Imagine a sliding scale on one end, high cashflow deal. 5:15 I will pay them almost like it's debt monthly distributions out of the property, often in the form of a preferred return. 5:22 What that simply means is the money fills up their bucket first, say it's an 8 % preferred return. 5:27 The first 8 % return on investment goes to the investor. 5:31 The remaining money goes to bucket number two, which is divided among all three of us based on our equity in the deal. 5:37 So I get some cash flow, but they get the lion's share of the cash flow because they put in the money they have the financial risk. 5:43 You keep doing this, generally speaking, until their initial capital is returned and then you either. 5:49 all split pro rata or in proportion to the equity that you have or You put in a buyout option and you buy them out in the future. 5:57 I'll get into that in a minute The other option to compensate them Imagine you have a deal like this 26 unit where the rents were very very low But it was very easy to raise them 6:07 over time day one. 6:09 There's not a lot of cash flow There was cash flow, but there wasn't a lot There's a ton of value add this thing should be worth 2.8 million dollars 6:17 If it was bringing in the rents that it should be today Well when you have a million dollars of upside you compensate them out of a million dollars of upside Not out of the 6:25 little cash flow you have protect the cash flow go for the upside in this case They're going to multiply their money and there's a buyout option in place that says hey Once this 6:35 deal appraises for what it needs to we have an exclusive right you put in 400 within the first three years We have the right to buy you out 6:41 at $600,000, which we are very, very, very confident that we can go to the bank, do the cash out refinance, pull out his initial capital plus another 50%. 6:51 And now we own the deal all by ourselves. 6:54 We have a cash flowing asset. 6:56 It's paid everyone throughout the entire project. 6:59 He got a return. 7:00 We got a building. 7:01 Everyone was active. 7:02 Everyone's happy. 7:03 That is a good use for a joint venture. 7:05 The equity multiple lives on one side, the cash flow and preferred return lives on the other, anywhere between those two goalposts. 7:13 If you compensate them completely out of future upside, generally speaking, double their money every four or five years, that's about where this goalpost is. 7:23 On this side, preferred returns of 10 to 12%, if that is their only compensation and a future buyout at principal value, you can slide that bar anywhere in between to adjust. 7:33 So maybe you do an 8 % preferred return. 7:35 and a 50 % bump on their money at the end of year four. 7:39 Something along those lines. 7:40 If you're wondering where the goalposts are, they're generally somewhere between those two endpoints. 7:45 Now, the most important thing when you're doing a joint venture is remember, you want limited variables when you bring in new people, while you do get to borrow their 7:51 experience, their capital. 7:53 potentially their time in running this deal. 7:56 People are variables. 7:57 They're not fixed like your debt. 7:58 They can change their mind. 7:59 They can have feelings. 8:00 They can have opinions. 8:01 All of these can cause conflict. 8:03 When you write your operating agreement, there's a few things it's going to say. 8:06 So every LLC has an operating agreement. 8:09 What does that operating agreement do? 8:10 Well, it lays out who contributed what capital. 8:13 What are all the active roles of every member? 8:15 You guys need that. 8:16 How are we handling cash distributions? 8:19 How are we going to be filing our taxes? 8:21 It has a lot of the basics like that. 8:23 One of the things that you need to nail 8:25 is your dispute resolution. 8:27 One of the most painful things that have ever happened to me in real estate is a very, very, very costly legal battle in which I was right, but it cost me a ton of money to 8:36 defend myself being right in court to the other partners. 8:40 Little backstory, they expected that I would personally compensate them for every month of vacancy while we were renovating a building. 8:46 Why they thought that, I don't know. 8:48 That's crazy. 8:49 But as the property manager, like it's your job to keep it full. 8:51 So I want you to compensate me personally for every month that's vacant. 8:54 Now, while that's crazy, it costs me tens of thousands of dollars to defend my position in court. 9:00 And ultimately I ended up just writing a $10,000 check to end the legal madness and just move on. 9:05 How do you avoid this in the future and how do you keep these succinct? 9:08 I have a four step process in every single operating agreement. 9:11 You can copy the same thing in yours. 9:12 Disclaimer, yes, I'm not a lawyer. 9:14 Get your own legal counsel, but this has worked very well for me. 9:17 Number one, we have an obligation To discuss. 9:19 As partners, either over a Zoom call in person or on the phone, there's an obligation when we have conflict to discuss as human beings and as adults. 9:28 In the event that that is not fruitful, the party that has the complaint or the disagreement gives written notice and I have 14 days minimum to respond in writing to 9:39 their complaint. 9:40 So in this case, they would have wrote a complaint 9:41 Well, while we were renovating units that had bed bug infestations, I think you should have kept these buildings full. 9:47 I want you to pay me. 9:48 And I could have given them a letter back that said, no, you're insane. 9:52 Which would push us to number three, mediation. 9:55 Now, what is mediation? 9:57 You typically have a judge who you will schedule a time with and you and your legal counsel and then their legal counsel will enter a room. 10:04 You guys don't actually see each other. 10:05 You guys are going to usually a virtual chat room, but you guys are separated. 10:09 You don't talk to each other. 10:10 One party speaks to the mediator, then they jump to the other party and back and forth and back and forth. 10:15 And what they're doing is they're helping come up with conflict resolution. 10:19 Now in a mediation. 10:21 Everyone has to agree on the result. 10:23 There's no judgment being passed. 10:25 They're trying to facilitate a negotiation and avoid the ultimate bad thing. 10:30 Arbitration. 10:32 Arbitration sucks. 10:34 If you want to know what to expect, even if your contract says that the prevailing party gets their legal fees covered by the losing party, it's often not enforced. 10:42 you typically are going to spend at least $100,000 to go all the way through an arbitration and legal fees with discovery with court dates with it gets ludicrous. 10:52 You want to avoid this like the plague. 10:54 Unless you guys are arguing over millions and millions of dollars, you are going to lose way more money going to an arbitration than you're going to win in actually winning the 11:03 negotiation or the arbitration with your partner. 11:06 That is the last and it has to be proceeded. 11:10 by all of the other steps, including mediation. 11:12 I wanna make sure that we have exhausted all options before we get into an actual legal battle with one of our partners. 11:19 Now with all these things in mind, joint ventures are usually fantastic. 11:22 I have done about 20 of them and 19 of them have gone very, very well. 11:26 While I had one that went sour, I'll leave you guys with a final thought. 11:30 The only one that ever went sour was the only time I ever invested with a personal friend who I was not previously in business with. 11:38 There's one thing I know for sure. 11:39 Money will change relationships. 11:40 I've seen it make them stronger and better when people go into business together. 11:44 I've seen it make them worse and partnerships and relationships fall apart. 11:48 Like what happened to me. 11:49 But the fact is, money will change the relationship you have. 11:52 So, if you want to keep this simple, you want to move forward and you want the minimum amount of drama, don't introduce money into a relationship that you're not willing to 12:00 change. 12:01 Because if it changes negatively, it really can be quite devastating. 12:04 Outside of that, partner with great people, partner with people whose pieces move you forward, who you know, like, and trust. 12:11 And don't be shy about using the joint venture to expand beyond your current. 12:16 economic situation. 12:18 If your goals in real estate are larger than the money in your bank account today, the joint venture is the simplest contract with the least moving parts and the least expenses 12:25 that you can possibly use to take out a ton of real estate. 12:30 Remember, just keep it to five or less total partners in the LLC. 12:33 Make sure everyone has an active role. 12:36 Don't partner with your friends or family, and you should be good to go. 12:40 As always, do me a favor, you've already watched this whole video. 12:43 Go ahead and hit that like and subscribe button. 12:45 We share a lot more tips than just how to use the perfect joint venture. 12:48 We talk about creative finance, we talk about deal structure, we talk about different partnership structures. 12:52 You wanna keep learning how to play the game with the highest level, multifamily strategy. 12:56 I'll see you on the next episode.
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