Property joint ventures can be a good way to fast-track your portfolio, but they can also be risky.
If someone had suggested to me to enter into a Joint Venture Agreement for any of my early investments, I would have run a mile. So I don’t blame you if you feel like skipping over this information as being too complex. But I want you to just stop a moment and really consider what I’m about to share.
There could be many occasions where you have the desire to invest in property, but for one reason or another, you don’t currently have either the funds or the equity to make it happen using the regular strategies often talked about.
This is the situation I’ve been in recently.
My existing portfolio has been acquired over the past years based on a negative gearing strategy. It had reached the stage where the banks in their wisdom, decided that I did not meet serviceability requirements. In other words, they wouldn’t loan me any more money. The thing is, I also knew that I needed to keep acquiring investments that would return me a good positive cash flow to balance out my property portfolio. Choosing future investments that return positive cash flow will also allow me to move more quickly towards my passive income goals.
So, with no money to invest but the knowledge and desire to continue forward – entering into a joint venture agreement made absolute sense. Just because it made sense, didn’t mean it didn’t scare me a little (ok, a lot) too.
What Is A Joint Venture Agreement?
The formal definition is this: A joint venture (JV) is a business agreement in which the parties agree to develop, for a finite time, a new entity and new assets by contributing equity. They exercise control over the enterprise and consequently share revenues, expenses and assets.
Let me simplify that for you a bit….
Creating a successful joint venture partnership is simply about marrying up two or more parties that have things each other needs.
Property Joint Venture Agreement – Why Would You Use One?
This type of agreement is great when two or more people want to come together to carry out a particular project or deal. The people who form the joint venture agreement generally come together because they have different skill sets to offer. Both parties are invested in the project in terms of time, money and effort. The level of commitment or responsibility does not have to be equal though.
Here’s how our property joint venture has worked….
My JV partner had a high income, but no savings or accessible cash funds.
I did not have an income to service a loan, but I had access a lump sum of money that could be used as a deposit.
Jointly, we had a deposit and serviceability to be able to obtain a bank loan. Voila! A perfect match.
The project we have undertaken is an existing block of land with house. The existing house will be demolished. The block of land will be sub-divided. Two new houses will be constructed. A granny flat will be built on one of the new blocks. Expected cost of the whole project is $1.8K. The profit split is 30/70 on equity increase and a 50/50 on rental income.
(I’ll keep you updated as the project progresses.)
A joint venture allows both parties to share the burden of the project, as well as the resulting profits.
What To Include In A Property Joint Venture Agreement
Golden Rule** Get a highly recommended legal team to create your agreement! This is money well spent and your legal advisors will make sure both parties are protected.
There is a long and essential checklist of inclusions for any JV agreement. Your legal team should take care of all of them. Some a few of these inclusions are:
- The terms of the agreement – who is responsible and for what, during the term of the agreement?
- The project goals or objectives clearly defined – the JV is generally dissolved when that goal is reached. If not, what is the exit strategy for either party?
- How the profits will be distributed – after all, you ARE in this to make money – right?
- The split of profits – profit splits don’t have to be 50/50.
- Withdrawal of one party or disagreements: all sorts of contingencies can arise and these should be addressed within your joint venture agreement. The clearer your agreement is and the more risks it covers, the smoother the process and the happier the project outcome will be.
Take the time to have discussions with your potential JV partner and ensure you are both happy with the terms of the agreement. Better to have any disagreements or disputes before you enter into the formal agreement rather than spending time, money and energy to unwind something later on.
Is a Joint Venture Agreement Right For You?
While joint ventures are generally small projects, major corporations such as Sony Ericsson also use this method in order to diversify. I’ve used a buy and hold strategy for most of my investing. Investing into a development project is certainly diversification as well as stretching me out of my comfort zone!
A joint venture can ensure the success of small projects for those that are just starting out or for more established investors wanting to tackle bigger deals. Renovations, buy and hold and property development deals can all be accomplished using joint ventures.
Since money is involved in a joint venture, it is necessary to have a strategic plan in place even before you have the formal Joint Venture Agreement written up. Both parties must be committed to focusing on the future of the partnership, rather than just the immediate returns. After all, your first JV could be just the beginning of a long, beautiful business relationship that earns you big profits deal after deal. So you can achieve this success, honesty, integrity, and communication within the joint venture is necessary.
It’s Time To Move Forward!
There are so many strategies available for you to invest in property. I hope you are seeing now that you don’t have to be stuck, or ‘sit tight’ just because you don’t have equity, money or serviceability right now.
Do you have the time, money or expertise that could be matched up with someone else who is lacking in that area? Mentoring groups, forums and investment workshops are all great places to begin to make connections with potential JV partners.
I’m excited to be doing a property development with my joint venture partner. Perhaps its time to create your very own property joint venture agreement and create some more wealth!
Here’s to your success!
p.s. Leave me a comment below…. I’d love to hear what your experience is with joint ventures (or what scares you most!).
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