I have been investing in real estate for almost two decades, and one of my favorite words is "50% of something is better than 100% of nothing", especially when it # 39; s joint ventures.
A joint venture (JV) is a commercial agreement between two or more parties. The parties combine their resources to purchase property. Generally speaking, joint ventures are usually between two parties, because that simplifies things; however, you may have more parts depending on the size of the purchase of the property or its object.
What Are the Benefits of a Joint Venture?
Joint ventures have many advantages. For example, it allows you to spread your risk by owning a percentage of a property rather than 100% of it, so if something were to happen, you would have your JV "business partner" to support things at short term.
If you are new to the real estate market and find it difficult to save for a full deposit, let alone additional settlement costs like stamp duty, etc., a JV business partner could help you with this. contributing to the deposit. This would mean that you could enter the market earlier and benefit from the capital growth of a property, rather than taking the time to try to save for a full deposit.
By combining your income with that of your business partner in a joint venture in order to borrow from a lender, you may also be able to buy a better property, closer to amenities, and who sees more demand from tenants and / or gives you more cash or capital growth.
Going it alone could make you lose the market price or start with a lower property. However, like all good things in life, there are risks associated with joint ventures, especially if you can't point to your i's and cross your t's.
What are the risks of a joint venture?
The biggest mistake that investors make with joint ventures is not to pay attention to the fine print. This means that many fail to have a legal agreement in place to protect all parties involved. I like to advise investors to set up a joint venture agreement once they have decided to make a joint venture. It is as simple as writing the roles and responsibilities of each party so that everyone knows who will do what and when.
Next, it is also important to include a delay, for example how long will the joint venture be in place before selling the property or before any of the parts can be purchased? What will you do if "life gets in the way" and one party can no longer honor the agreement?
You should also take into account your exit strategy and your buffers, and what you will do if the market falls or if you cannot find a tenant.
When hiring a JV business partner, make sure you are clear from the start what your exit strategy will be. You need to know if your JV business partner will be happy to keep the property for a number of years or if they want to withdraw from the agreement in 12 months.
It is preferable to resolve these problems in the cold light of day, when everyone is optimistic about the partnership, and to put contingencies in place. Failure to document the above increases your chances of disagreement and misunderstanding as it will be difficult to remember who said what and when. Your next step is to get professional advice from a lawyer, who can guide you on the best JV deal for your situation.
What types of joint ventures can you use?
When it is a joint venture, you are only limited by your imagination. You can set up a joint venture in which one party provides the equity / deposit (20% plus costs), and the other party borrows the 80%. You can also split the 50/50 transaction in the middle, each party having half the deposit and jointly borrowing the money from the lender.
Joint ventures work best when two parties can come together to leverage each other's strengths and minimize the other's weaknesses. For example, you can enter into an agreement with a friend or family member in which each partner contributes to the deposit and / or management costs of the property investment. This allows you to not only spread the costs in a way that works for both parties, but also share the risks.
In terms of our own joint ventures, we used a stock partner. This is how we bought two of our properties. We found an equity partner who wanted to invest but who did not have the capacity to borrow, while we had the capacity to borrow but who lacked equity. They paid the deposit plus fees and we borrowed the balance from the bank. It was a perfect arrangement – so much so that we did it again.
Our third joint venture was split 50/50: the two parties paid 50% of the deposit plus fees and the two parties borrowed the money jointly.
Example of joint venture partnership
I understand that some investors prefer to buy a smaller investment property in order to enter the market. However, if buying the property limits your ability to build your wealth, it may be better to find a JV partner and buy a larger property together.
For example, if your deposit is too small, consider a JV partner who can contribute and increase the overall deposit. Your combined borrowing power can also allow you to borrow more and buy a better performing investment property.
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If you are determined to buy an investment property on your own, be sure to consider its size. An investor bought a very small studio and she struggled to get financing for it. The end result was a LVR of 60%. If the apartment had been 20 m² larger, the LVR would have been larger.
Remember that lender policies and criteria are constantly changing in response to market conditions and pressures. It is always best to take a conservative approach and stick to the types of properties that you know are the least risky – and for which banks will be most comfortable financing. That way, it is unlikely that you will be caught off guard and unable to get a loan if you are tightening your belt. Ask your accountant and lawyer for advice on whether joint ventures are a good buying strategy for you.
Buying a property in a joint venture can give you the opportunity to get more out of the investment than if you bought a smaller property on your own. As I said, I have embarked on many successful joint ventures throughout my years of real estate investing, for a multitude of reasons, particularly in the early stages of building our portfolio.
How to Find the Right Joint Venture Partner
Finding a JV partner may not be as difficult as you think. You can always start by discussing your intentions with like-minded friends, colleagues, and family members and see what kind of reaction you get.
Investment programs and investor groups are also great places to meet similar, goal-oriented investors with whom you may be able to partner. It is essential that you select a JV partner who has a strategy that aligns with yours, otherwise you may find that their program is not in line with yours or beneficial to you.
When you have found the right person and are ready to embark on a joint venture, it is important that you discuss all of your goals and the proposed outcome with your partner from the start, as this helps minimize further complications. late.
I have successfully launched many joint ventures throughout my years of real estate investing … especially early
Many successful joint ventures establish a minimum period to which each party must commit, such as five years, by which date each party can enter into negotiations to acquire or extend the joint venture partnership.
Whatever your plans, it is important to have a legal contract outlining the rules and responsibilities of each party. It is also important to decide what will happen if an unexpected situation occurs, such as illness, divorce or death.
This is vital, even if you invest with someone you really trust, like a close family member, because situations can and do change, so it is better to be prepared for it. ;advanced.
In addition, if you don't feel comfortable discussing these types of situations initially with your JV partner, how will you cope if and when an unexpected situation arises?
How to structure your investment in a joint venture?
Joint ventures can be structured in two ways: as "joint ownership" or as "joint tenants".
In a condominium, ownership of the property passed to the other owners on the death of one of the partners. In a structure of “ joint tenants '', the property can be owned in equal or unequal shares (for example, John 50%, Mary 25% and Jenny 25%), and at the death of & # 39; 39; a person, their property is passed on to their heirs in accordance with their will.
Joint venture structures can get complicated, so it's important to resolve these issues from the start and seek legal advice.
Can joint ventures be used in the current market?
Absolutely, especially in areas like Sydney where real estate prices are high. A joint venture could allow you to buy in Sydney and reap the benefits of the next takeover.
The other point to consider, however, is finance. You have to keep in mind that a joint venture, from a financial point of view, could hold you back.
Indeed, when you buy a property, whether you are alone or in tandem with someone else, you are considered responsible for the entire debt.
You must consider your exit strategy and your buffers, and what you will do if the market falls or if you cannot find a tenant
Let's say that you are investing in a property with a JV partner and that the loan is $ 500,000. You could decide that you are responsible for $ 250,000 each. The risk here is that when you, as an investor, choose another loan from a lender, for example another investment property or to buy your own house, most lenders calculate the The entire debt owed to you (all of the $ 500,000), but they can only take into account half of the rental income.
This is something that many investors do not think about and it can prevent them from moving forward. There are a few lenders who don't, so it's essential that, to find the right lender, investors talk to an experienced mortgage broker who works regularly with investors.
To summarize, when it comes to investing in real estate, it is always important to consider a joint venture, as it can allow you to access the real estate market. or continue building your portfolio, when done right.
Make sure your chosen JV business partner is on the same wavelength as you, with common goals, and always seek legal advice when setting up your agreement.
Helen Collier-Kogtevs is a successful author and the founder and director of Real Wealth Australia
