A JV capital structure worth studying: first time operator, six units, out at 22 months
This case is worth walking through because it shows how a JV structure holds up under real friction rather than on paper. Say a capital partner puts $185k into a six unit brick property with a first time operator, a contractor with no prior ownership deals but a solid track record on other people's projects. Purchase price $640k in a second ring suburb, rents about 22% under market because the prior owner hadn't touched the property since 2011. Total capital in is $265k including $71k of renovation, with the operator funding $80k and the capital partner funding $185k. A structure that tends to hold up looks like this: a 9% preferred return to the capital partner, current pay to the extent of cash flow with simple accrual on any shortfall; return of capital next, then a 50/50 split; capital calls pro rata, with a provision that if either partner doesn't fund, the funding partner can elect a member loan at 12% that repays before either pref, or convert at a defined dilution multiple; major decision consent rights held by the capital partner over sale, refinance, additional debt, any single capital expenditure above a set threshold, and changing the property manager; and no acquisition fee to a first time operator, with a modest construction supervision fee during renovation only and market rate property management through a third party rather than the operator themselves. A common stress point is a renovation running over budget, say $71k to $94k because two units had cast iron drain stacks that failed pressure test, and the operator unable to fund their share of the overage. That's the moment a deal like this can break. The right move is usually the member loan option rather than forcing dilution, since a diluted partner who feels punished mid-project tends to stop engaging, and that costs more than the interest on a short loan. If rents come in above underwriting and a refinance around month 18 to 19 returns most of the original capital while the partners retain equity and cash flow, the parts worth keeping are no acquisition fee to a first time operator, third party property management, and a member loan option written into the agreement before it's needed. The one adjustment worth making is raising the consent threshold on capital expenditures, since a low threshold means getting pulled into decisions that slow the operator's crews without changing the outcome.
