Joint Ventures: A basic guide to JV's and Property Investment

Joint Venture or JV: A joint venture involves several investors pooling resources and capital to invest in a property collectively. This method can effectively distribute risk and allow for larger projects. Typically, it’s advised for experienced investors, funds, or companies. It can also be ideal for investors that might have the capital for investment but no experience or the time to deal with a particular property investment, partnering with a more experienced property investor.  

With more capital it allows for completion of a project in a quicker time frame compared to a single investor, and also means a better ROI.  Any losses are spread across the partners, rather than a single investor, and although no one wants to think of projects hitting problems, with any kind of investing, you have to factor in worst-case scenarios.  This in turn, should help to lessen the stress across the partnership, however this can also be a potential negative, especially if one of the two partners is not ‘pulling their weight’, putting more work on the other investor.  

Going into a joint venture opens you up to more potential ‘deals’ and partnerships, as you share in each others contacts.  There is flexibility with a joint venture, you are not tied to the partnership forever, allowing flexibility to add more investors in time, or leave the project.

We have briefly mentioned a negative of joint venture partnerships when the other partner doesn’t do his/her fair share of the work involved, and this leads us to the negatives of joint venture, the main one being disagreements between the two partners.  Before entering into a joint venture, ensure you know as much as you can about your proposed partner, have they got a proven track record in investing?  Do they share similar goals to you?  

Try and avoid partnering with a family member or friend as they rarely go smoothly, resulting in a breakdown of the relationship.

When you want to leave a JV, it can potentially lead to a large capital gains demand when you want to sell your share of the property.

It is also difficult obtaining a mortgage for JV projects in some cases, as lenders prefer assigning mortgages to a single individual rather than two partners, making it harder to find a deal with a decent interest rate, and may take some shopping around.

At the beginning make sure you speak to your partner and draw up each persons ‘role’ in the project, as well as the monetary shares, and agree on the ultimate goal for the project.  As much as a 50:50 split sounds fair, what happens if you disagree on something halfway through the project, resulting in deadlock.  It is advisable that provision is made for this eventuality in the agreement.  

Speak to a lawyer to draw up a JV partnership agreement.

So to recap, check the following before entering into a JV:

• How will the project be financed? 

• How will the JV be structured, as in a standard agreement, or will you have an SPV (see terms and abbreviations) or an LLP?

• Agree on the shares each partner will have, ie 50:50 or a different split

• Who will project manage,  and  how will decisions be made?

• Speak to a tax advisor

• Agree on all exit strategies, including early exit strategies (if one party wants to leave before completion)

Depending on the size of the project it might be advisable to appoint a project manager.

Our FREE comprehensive guide to property investing talks about joint ventures and other property investment strategies, with over 80 pages of information, click here to download your copy now