Your Investment Property Investor of the Year Kate Moloney explains how joint ventures can rapidly build your portfolio and how to make them work
Too often, investors shy away from even looking at a joint venture because they want to do the entire deal on their own. My husband and I don’t believe that.
Thanks to joint venture partners, we’ve accelerated the growth of our portfolio and have achieved our goals much sooner than we would have on our own.
We’ve engaged joint venture partners for a number of reasons, but mostly because at various times we’ve lacked borrowing capacity or a sizeable deposit to do our next property deal.
We’ve also found that a joint venture enables you to get into a bigger deal. There have been times where on our own we could only afford to build a single house on a block, but by doing a JV we have been able to build duplexes instead. At the end, we’ve ended up with a lot more profit.
Of course, there are other advantages, along with disadvantages:
1. JV partners bring a different perspective
If they are committing their time into the deal alongside yours, they can be a second set of eyes looking over the details. They might also have knowledge or experience in an area that you are unfamiliar with.
2. You create a win-win for both parties
Individually, both parties can't move forward, but together they can create wealth. There is nothing more satisfying than doing a deal together and knowing you’ve helped each other make money. The skills you gain from JV's – team work, communication and people skills – will ultimately make you better property investors.
1. Joint Ventures can be more time consuming
Whenever you’re dealing with another party, inevitably, it will require more time. Even having a silent partner will require a lot of your time because of all the negotiation that tends to surround the establishment of a JV agreement.
But here’s something to think about. While more time might need to be invested, having a property deal is better than having no property deal. Fifty per cent of something is better than 100% of nothing, so bear in mind that this is just something that is part of the process.
2. Situations can change
You or your partner could each go through a divorce, bankruptcy or death. This can change how the joint venture works. These issues really need to be addressed in a joint venture agreement before you enter into a deal (more on that later) so that you both know how these situations would be handled.
3. You could get involved with the wrong person
We have been fortunate to only have fantastic partners, but we’ve also heard our share of doom and gloom stories out there. I have heard tales of people falling into financial disaster for taking on the wrong person. There are bad people out there and that’s a risk you need to prepare for.
How to find JV partners
We’ve tended to find our best joint venture partners from mentoring programs we’ve attended. We always like to have known them for a while and to know that they are like-minded.
Before entering into a deal together, we spend time with our potential JV partners communicating what both parties needs are. We also discuss the idea with a mentor to get feedback.
If all goes well here we start drafting up a JV agreement or MOU (memorandum of understanding). This process can take a while and we see it as a "trial run" of what the person is like to do business with.
At this stage, if things aren't running smoothly or the deal isn't going to benefit both parties, we walk away. It’s not too late because no formal agreement or property deal has been entered into.
Negotiating the deal
Everything and anything is negotiable. It will all depend on where you and your partner are at and what suits. Negotiating will also depend on what each party can bring to the table. Either of you could be a:
- Money Partner: provides cash/equity for a stake in the deal or an agreed interest rate
- Loan Partner: responsible for the bank loan and paying the interest
- Project Manager: contributes their time, generally finds and manages the deal
- Vendor JV: not as common, but investors can team up with a vendor, providing time/borrowing capacity or cash to complete the deal
Arrangements will also depend on what the underlying strategy of the project is. How you split the profits and who pays for what, when and how, will largely depending on whether you are aiming to:
- Long-term buy and hold
- Develop multiple units, strata and split titles
- Long term buy and hold, one partner buy out the other partner
- Sell and split the profits
Making the JV a success
Communication really is the key. You need to communicate, ideally in written form first, and ensure that your JV partner fully understands what is going on.
You also need to create a trusting relationship with your partner and you need to look at things from their perspective. Be flexible. A joint venture is like a marriage – you need to give and take a little. You’re trying to create a win-win situation. If both parties think like this the JV will run smoothly.
Your best bet is to find a partner before the property deal is on the table. Write down all your needs, goals and timeframes and try to agree on a framework for your ideal deal. Write down who is responsible for what and put this in a MOU (memorandum of understanding).
In terms of splitting the deal, it really comes down to what both parties agree to as being fair. There will need to be some give and take, but if you find the right partner this process will be easy. All of our JV's have been different, and it all comes down to the deal and the person. Put yourself in their shoes. Think about how the deal will affect them. If you were them, would the proposed be fair to you?
Once you are on the same page and have drafted a JV agreement among yourselves, talk to an accountant and solicitor about purchasing structures and JV agreements. As a bare minimum, you should have a purchasing entity and a draft JV document completed before you both go looking for property deals.
Generally, what we do is have a draft JV agreement completed and then as we sign a conditional contract to buy a property we go through the process of legalising the agreement.
- The agreement will need to list:
- Responsibilities of each party
- Exit strategy: when will the JV end, if ever?
- Buffers and back up strategies that the JV will have in place (for example, will hold a set amount as a buffer)
- How profits and equity will be split
- How and when the profits will be paid out
- Who is responsible for making decisions if there is a disagreement
- Sale of assets: how will this be handled?
- How to deal with death, divorce or illness
- What if the property makes a loss? Who will fund that?
- How tax will be dealt with
- Accounting: what entity will the JV be structured in?