1 ON 1 – What is wrong with JV deals and Investment Holding Company

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Yesterday, did a 1 on 1 session and I had to advice this guy who is in a situation where his JV deal went wrong.

As you know Im not in favor of JV deals and setting up IHC with strangers as there are too many risk involved.

– This guy that came for 1on1 used to make RM6000 in monthly salary.

– He has purchased 2 properties on his own, both under RM250,000 each. Safe buys with prospects of positive cashflow.

– He then JVed with a few friends to buy another 2 properties that he isn’t familiar with, priced at close to 600k each from developer.

– The 2 properties that he did JV purchase with a few friends, completed early this year. They spend quite a fair bit to furnish and renovate the place for rental. But they made the wrong projections and unfortunately until today both properties now still untenanted.

– They have been bleeding for a few months, and have decided to sell the property now as their reserves will deplete soon.

– Unfortunately they are trying to sell an expensive property in a slow market today, so they won’t make much.

– This guy became extremely demotivated after these 2 failed JV purchase.

– Potentially loose his friendship with his JV partners they fail to sell or rent out the property.

My advice to him :

1. Consider selling at cost and exit the JV ASAP. Once this is done, its a fresh start with no more huge liability weighing on his shoulders.

2. The problem only started when he started buying things beyond his personal affordability and his investment expertise.

I told him to focus in max 2 types and become expert in those before venturing to a new asset type.

3. Be extremely careful when doing JVs as need to evaluate skill set, knowledge and holding power of all parties.

3 average investor combined, doesn’t make the JV team world class.

The problem with his JV is that everyone was young and quite new to properties. To make things worst, they don’t have sufficient cash reserves to hold the property during downturn.

In summary, JVs have a high chance of succeeding if the JV actually buy excellent properties and it makes money.

When the JV buys mediocre/horrible properties, and started losing money, all problems will arise. So please make sure JV or not, the investment-grade of the property that you are buying is high.

That way, we minimise our downside and the possibility of the JV going wrong.

p/s : lets hope he has a good ending to this JV story soon…

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