By Property joint ventures, or JVs, can come in many different shapes and sizes. At the root of this dynamic however, is a relationship where multiple parties pool their resources to generate a greater profit from a project than they would have been able to achieve if operating alone.
Often one party will have the financial resources necessary, while another will have the time and experience. Whether this is for a simple investment in a buy-to-let property or a large scale investment in developing new properties, the combined support of different parties can potentially lead to some great results.
As an investor in a property JV, your risks can be reduced and your exposure limited compared to doing everything yourself. But before you go making any plans for 2019 joint ventures, here are some important considerations that all property investors should take into account before entering into a joint venture of their own.
Who are joint ventures suitable for?
Motivation is one thing but capacity is another. It’s all too common that individuals hit a wall when it comes to finance, and therefore need the help of others to fund the project. In these situations, bank loans may be unappealing, and the sum needed would be too much to borrow from family or friends, so a joint venture provides a practical alternative that allows these investment projects to continue.
For others, the support from another person is the most important benefit of a JV. For instance, capital may not be an issue but lack of knowledge, or indeed confidence, in carrying out a project alone could be a restriction.
Also, the scale and nature of a project may be difficult to manage alone, requiring support form a partner who can share the load. This is especially the case when developing larger properties such as blocks of flats or renovating a hotel, which could spread yourself too thinly if you were to take up the task alone.
How will profit be divided?
This is crucial to a successful JV. Setting out how the deal will be structured will be fundamental to running the project smoothly from start to end and avoiding any resentment when it has been completed.
A 50/50 profit share may be the best option in some cases, especially if one party puts in all the time and the other puts in all the capital. However, not all situations are as simple as this, and alternative structures will have to be used. Fixed interest models for instance would be useful in certain situations.
There is no one correct way to structure a JV and the most important thing is arranging an agreement that both parties are happy with from the start. It’s also good practice to discuss any future eventualities should the project not go according to plan.
This could involve delays, changes to costs or the plans for what happens when a project is completed. Talking about these situations and agreeing on terms, with certain guarantees put into place, will help you achieve success with your JV. Finally, get all these details down in writing and drawn up by a solicitor.
Who shouldn’t enter into a joint venture?
Some people enjoy working with others and generate the best results in such situations. However, others like to have full control, and find it difficult to answer to others. Obviously this will affect whether a JV will be suited to you and your project.
These aspects should be covered from the outset of course, but one party may later argue that the property should be held for a longer time in order to generate rental income and long-term growth. Similarly, one party may want a short-term exit in order to use the capital elsewhere.
If you foresee any of these factors being a problem to you, then a joint venture may not be the best investment structure. Or at the very least, a strict framework must be put in place from the beginning to avoid confusion or conflict later on.
How to find a joint venture
There are many ways to find a partner for a joint venture. For some it’s simply a case of announcing your intention to your family and close friends, and seeing if anyone is interested in joining you. This may be advantageous for those who are new to JVs as there will be less pressure to meet targets or deadlines in the project.
You might also be lucky enough to know people who are involved in the property sector or who have already conducted similar investments in the past. If not, you can also meet property professionals at networking events where likeminded individuals go to match up skills and resources for specific investment purposes.
Having said this, it’s wise to understand what you’re getting into before you go searching for potential ‘money bags’ – if you’re the party who is looking for investment. Make sure you research the potential deals, how much things will cost and have an idea about the timeline before you start requesting funding for your investment goals.
Putting plans into action
If you think joint ventures might work for you, start the process by researching and planning how this will work before you enter into any arrangements. Whether it’s securing the capital or the time; make sure you have everything in place before you make any promises to your future partners.
Setting up the essentials before you find and invest in the property deal that you want will help you build the framework for a successful JV, and hopefully support healthy profits when it has reached completion.
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