Joint ventures are a way to build your property portfolio as co-owners of a property. Think of it as a team investment. If you don’t have the financial means to purchase a property alone, you might consider pooling your financial resources together to form a joint venture. Of course, in any joint venture partnership, you are sharing the risk and the initial outlay, therefore sharing the profit. In theory, it’s a harmonious financial connection between parties with a similar goal in mind.
Well, that may sound easy but finding the right partner is just the first step. You have to delve into the detail to ensure you give the partnership the best chance to succeed.
You can be forgiven for thinking that joint ventures are fraught with danger. There are a lot of negative stories out there. So, to help you plan a successful joint venture and approach it with your eyes wide open, we have put together some practical advice.
Tip # 1 Research Potential Partners – The number one reason joint ventures fail is because people have not done their homework – big mistake. As you would carry out due diligence for a property, you should also do this for a potential partner. After all, this is a business agreement carrying financial risk. You must ensure you understand that person’s goals so you’re able to assess your joint venture compatibility.
Tip # 2 Management Plan – Define the role of each party, their involvement level and responsibility. Clearly outlining this at the beginning will avoid issues down the track. Who will act as the property manager or will this be a shared role? In the event of something going wrong, who will handle the issue?
Tip # 3 Have a Contingency Plan – Consider all possibilities and worst case scenarios. For instance, people losing their jobs and not being able to hold up their financial end of the venture. In cases where a partner cannot fulfil the agreement there may be an option included where the other partners are given the first right to purchase that share of the property. Also, include an exit strategy in case a partner changes their mind or wants to opt out for whatever reason. If this were to eventuate, work out the process to follow to ensure a smooth exit. Consider how you will determine a fair market value for the property.
Tip # 4 Establish a Timeframe and Budget – Set a timeframe for a minimum time to hold the property as well as a maximum. This may be dependent on the property market or your own financial situation. If you are planning renovations, determine if these will be structural or cosmetic to help you set a budget. Even with a budget in place you will need to consider steps taken in the event of over spending. Where would the additional funds come from?
Tip # 5 Put It in Writing – An agreement should be drawn up by a legal professional with an understanding of joint ventures, but it is equally important to have terms and conditions that you are comfortable with and that you understand. It should outline the contributions of each party and what they hope to gain from the venture. If you are already on the same wavelength as your joint venture partners it is just a matter of getting it all on paper. Do not leave anything to chance, clearly state the reasons for the purchase and the future plans for the property so everyone involved knows the boundaries. Without all the issues clearly stipulated in the agreement you leave yourself open to potential clashes with your team.
Tip #6 Consult Your Accountant – Determine the best financial structure for your particular circumstances. Depending on your strategies and expectations, you will need to consider whether a company, trust or sole trader structure is most suitable. Each investor must speak with their own accountant to ensure that the financial planning is most appropriate for them in each arrangement. Giving consideration to income, profits, losses and taxation, a sound business decision is needed to proceed with any Joint Venture.
Additionally, it is critical if you are appointing a Project Manager as a JV partner that you conduct proper research on them, including asking for testimonials. Ask for details of past projects and view them in person if possible.
Hopefully these tips have given you some inspiration and a new perspective on joint ventures and their potential to help build your property portfolio. Good luck.
DISCLAIMER – Alleura recommends each individual seek the services of a qualified service provider before undertaking any financial investment. The information provided here is for general information purposes only. It is not intended as financial or investment advice.