Investment goals that cannot be brought to fruition alone, face better odds of success when done in a strategic partnership.
After all, each party is working towards a common goal – otherwise the entire plan can fall through.
There are many benefits that draw people to a joint venture. Profits and losses are equally shared, there is a pooling of extra resources, projects that can’t be achieved alone are made possible, the arrangement is temporary, and there is opportunity for larger scale financial growth.
The first step to understanding property joint ventures is finding out when you might benefit from one.
The right time
The crux of a property joint venture rests in finding someone who possesses something you don’t already have; a lacking, financial or otherwise, which impacts your ability to enter the market or secure a property. The specific person you have found may hold the financial means, expertise, knowledge, skills, contacts, or even time – one or some assets you need to merge with if you are to reach your investment goal.
So, you can approach this person with your investment proposal, but only if you are prepared to split everything in half with them – responsibilities, profits, losses and risks.
You may know an ideal location to build a commercial strip, and you happen to have valuable contacts and resources to get the project rolling, such as experienced builders, lawyers and architects, but you lack the equity, or you’re unable to save for a bond. In this instance, you seek someone who does have the financial capacity.
Another example is that you are a first-time buyer wanting to get your foot into the property market, but you only have some money saved, an amount that wouldn’t see much return. However, you also know of a friend or family member in the same position, so you approach them with the idea to pool your equity together and purchase a large development to renovate and split into two townhouses. You may both agree to live in these, sell them on, or rent them out.
In most instances the person initially providing the deposit and buying into the development will be recognised as the ‘first investor’ and the person managing the expansion or renovation of the development will be called the ‘second investor’. The ‘second investor’ will be responsible for preparing the property and paying for all costs of the upgrade or extension, while the first investor covers the deposit. They then take 50% each of the profit when the venture closes.
However, joint ventures can take many different forms, so arrangements can vary depending on the nature of the project and what each person is prepared to give. Working with the last example, the ‘first investor’ may be prepared to fund the entire project, but doesn’t have the skills and time, and so they team with someone who does, not expecting them to pull out of pocket.
A property joint venture is a big commitment, because you are not only buying into the market – a means to generate profit – but also simultaneously entering into the risk of experiencing a loss, although this is also equally shared. It begs the next question; who should you trust?
Looking for ‘the one’
A property joint venture is ideally done with someone you can trust. Therefore, it’s advised to choose someone you have known for some time and have built a stable relationship with.
Whilst doing a project solo bestows you with the power to make every decision autonomously and only rely on yourself, finding a partner allows you to enter into larger scale developments, which are usually admired for bringing higher return.
In saying this, it’s best to engage with someone who has a track record of being reliable, driven, punctual and level-headed – all crucial traits to consider when doing business with someone.
The formal process
After informal discussions pass, it’s advised to hire a lawyer to draft the specifics of the joint venture into a legal document, ensuring common goals are reached and the expectations of each party are met.
This document will usually detail the finance each party will contribute (inclusive of deposit and loan repayment), the responsibilities of each party, timeframe of the venture, deadlines to be met, conditions for early exit, whether to sell or rent the property at the close of the venture, how bills will be paid, a forward plan on any unexpected occurrences that can arise, and if a pool of money should be put away for security.
It’s also wise to consider signing a confidentiality agreement for added privacy, and to refrain any unclear discussions spreading amongst friends, or family ties, especially if a partnership was created from any of these circles.
Risks to consider
Entering into a joint venture with someone, friend, family, or neither, should always be considered from all angles – including the risks involved.
While you have better chance at entering the market and generating a split profit, you also open yourself up to the potential for a shared loss. This can creep up throughout the timeframe of the joint venture, meaning that if one party is unable to make loan payments, the other party will be considered just as liable for the consequences, and be chased by the bank to make up the missed payment.
Responsibilities are shared also, and there is always a chance that one party may not be pulling their weight or meeting deadlines at a given time, overall impacting the end result of the project and its ability to stay afloat.
It’s also worth noting that the type of loan the bank decides to grant you may vary from a standard residential loan to a commercial loan, depending on the scale and nature of the venture. The type of loan will then affect the maximum amount the bank will approve you for, and it may not reach the maximum you require.
Property joint ventures have been of benefit to a range of property enthusiasts, whether they’re a first-time buyer, looking to build an investment portfolio, or are simply orientated towards generating a profit.
While there are rewarding benefits and appealing returns – there are also risks to consider – including the factors that come into play when going into business partnerships. It’s advised to seek the opinion of a solicitor to guide you through the expected process and answer any queries or areas of concern you may have prior to starting a joint venture.
Also read: What banks expect when you buy with others