Why joint venture?
Joint ventures are a popular form of property funding that have achieved near mythical status in certain circles: find a wealthy partner to fund your deals, and never be held captive by the whims of a faceless bank again!
Joint ventures in property can actually be a lot wider than that, and be mutually beneficial in a whole range of situations – but if rushed into when you're not fully informed, they're also a fantastic way to lose money, friends and sanity all in one go.
What is a joint venture?
Simply put, a joint venture is any situation where two or more people combine resources or skills to execute a project.
So, you can easily imagine joint ventures between:
- A father with money and a son with construction experience
- An architect, a builder and a finance guy
- Two friends with similar resources or skills, but little time
Or just about any other combination you can think of.
Why joint venture?
The obvious reason for doing a joint venture is that you need access to what the other person has. And of course, they’ll also need access to what you have – or there’s no motivation for them to participate.
Access to finance
It’s very common for people to start looking at JVs because they’ve hit a cash constraint: there are deals they want to do, but bank finance is either unappealing or inappropriate.
Example 1: You’ve spotted a house that you think you can refurb and flip for a profit. You’ve got the time and skills to make it happen, but don’t have any money to buy the property and pay for the refurb.
You can use bridging finance to cover most of the purchase price, but you still need more funds. So you find a JV partner to cover the rest of the costs, you do the work, and you split the profits after selling.
Example 2: You want to buy a house, refurbish it, then remortgage for a higher value. (Read my detailed article about this strategy.)
Rather than using bridging finance, you find a JV partner with funds you can use to initially purchase the property. Once the refurb is complete, you take out a mortgage – and use the proceeds of the mortgage to pay your partner back.
Access to knowledge or skills
Even if money’s not a problem, you might want someone else to get involved in a project to compensate for skills or experience that you’re lacking.
Example 1: You identify an opportunity to convert a small hotel into flats – which is a bigger project than anything you’ve done before. You could employ an architect and a builder, but you decide to structure the project as a JV so you can get the benefit of their experience throughout and your interests are aligned.
Example 2: You’re a builder looking for your next project, but you’re struggling to find anything suitable at a price that makes sense. So you team up with a local investor who knows all the local agents and is a great negotiator, allowing her to find the project and you to work on it.
Types of property joint venture
There are endless variations on how to structure a joint venture, but there are two broad categories: profit share, and fixed interest.
Profit share JVs
This is probably what comes to mind when most people think about a joint venture: a project is executed, a profit is made, and that profit is split in pre-agreed shares.
For example, a deal is structured like this:
- Mr A finds the project and manages the construction
- Ms B pays for everything
- A 50/50 profit split is agreed
Then, the project takes place:
- Purchase price: £100,000
- Refurb cost: £20,000
- Fees and taxes: £10,000
Total cost: £130,000
The property is then sold for £160,000. The total profit is £30,000, so Mr A and Ms B each make £15,000.
Fixed interest JVs
If a JV is structured where one party is putting in the money and the other is doing the work – which as I said earlier, is very common – their partner could agree to pay them a fixed rate of interest rather than a percentage split.
- Mr C finds the project and manages the construction
- Ms D pays for everything
- Mr C promises to give Ms D a 10% annual rate of interest on her money
Then we re-run the same project:
Then, the project takes place:
- Purchase price: £100,000
- Refurb cost: £20,000
- Fees and taxes: £10,000
Again, the total cost is £130,000 and the property is sold for £160,000. For simplicity, let’s say that the project takes a year from start to finish.
Ms D put in £130,000, so when the property is sold:
- Ms D gets interest of £13,000
- Mr C makes a profit of £17,000 (the £30,000 gross profit minus the interest cost)
Why not joint venture?
Joint ventures can be fantastic, but they're not always suitable. These are only my rules, so feel free to ignore them – but in my opinion, there are four situations in which you should steer clear...
If it’s your first project
There’s nothing stopping you from joint venturing on your first project if you want to, but I don’t think it’s a good idea: if you’re bringing someone else in on something, you should have tested that the model works.
This is particularly the case if you’re looking for someone else to put in money. You might understand how to do everything in theory, but reality can be very different – and if you’re going to make mistakes, you shouldn’t make those mistakes on someone else’s dime.
Joint ventures work best when one partner has a proven model, and the other brings something to the party that allows them to execute that model better, cheaper or more frequently. They can be used for something more experimental, but there’s a higher probability of something going wrong and at least one person being unhappy.
If you don’t have to
It should work out cheaper if you can hire in the skills you need rather than set up a joint venture.
For example, say you want to JV with a builder on a property you’ve found. If you can afford to pay the builder his normal rate, it should always be cheaper than entering into a joint venture with him. (If he stands to make less from a joint venture, he’d never agree to it!)
If you can’t afford to pay him upfront and can only pay from a share of profits, it’s still better than not doing the project at all – but the JV is the less attractive option. The same goes for any other skill or expertise you might need access to.
The same also goes for accessing cash. Bridging finance at 12% might sound expensive, but work out how much profit you’re expecting to make on the project: you might find that it works out cheaper than the percentage you’d need to give away to your partner.
If you don’t like working that way
Some people thrive in collaborative work. Others like to have full control, and don’t like being answerable to anyone else.
There’s no right or wrong: the important thing is to know yourself and understand how you prefer to work.
If you hate the idea of having to run decisions past someone else, or get their approval for your plans at the outset, or provide them with regular updates…you won’t enjoy the experience of a joint venture, however much financial sense it makes.
If there’s no clear exit for the partnership
All the examples I’ve given are situations where the partnership comes to a clearly defined end: either the property is sold, or there’s a refinancing event where one partner can be bought out.
But what about situations where there is no short-term exit – for example, you both buy a property and just hold it for rental income and long-term growth?
You can still joint venture for the long term, but I’m not convinced it’s a good idea – because individuals’ priorities and needs can change a lot over a period of years.
- You get three years in and one person unexpectedly needs their money out
- One person gets disillusioned with the whole project, leaving the other person to do all the work
- The partners can’t agree on whether it’s the right time to sell
- The partners have a falling out about something related or unrelated to the project
Because there are so many unknowns, I see a joint venture as making sense primarily for short-term projects (say 18 months or less) where there’s a clear exit agreed in advance.
A partial exception to this would be joint ventures with family members or very close friends. This is still something to be extremely cautious about because introducing money is an excellent way to ruin a friendship or make for an awkward Christmas dinner. Still though, you at least know each other well – and can have reasonable confidence that either your priorities won’t change, or you’ll find a way to deal with it if they do.
How to find a joint venture partner
The skills, money or experience you need are out there somewhere – but how do you find that right person, and persuade them to work with you?
The routes to finding a joint venture partner are fairly obvious:
- Family and friends
- Property professionals you already know
- Your extended network (friends of friends)
- Networking events
That’s roughly in order of how long it’s likely to take to set a relationship up. Networking events can be great for finding likeminded people, but not specifically to find a partner: the intention should be to move them into the first two categories (friends and investors/professionals you know) before a joint venture is ever mentioned.
If you’re the partner looking for money…
If you’re in the position of looking with a partner to put funds into the project, the best way to get someone to give you money is…not to ask them for money.
Instead, just make it a point of talking to everyone you meet about what you’re up to and the deals you’re doing. You’ll find that in time, certain people will start to show more of an interest – and either suggest a JV to you, or provide a very clear opening for you to do so.
You’d be surprised by how often this happens. I’ve even heard of someone’s financial advisor offering a JV when he saw how much money he was making!
Whatever you do, don’t be that guy who roams local networking events cornering anyone who looks like they might have two five pound notes to rub together. Like in dating, desperation is a huge turn-off – and the kind of person silly enough to partner with someone they’ve just met isn’t someone you want to be working with anyway.
If you’re the partner looking for skills…
If the boot is on the other foot and you have cash you’re looking to invest in someone else’s project, the method is largely the same – except it might be more appropriate for you to make the first move, otherwise nobody will ever say anything!
Focus on building your network first, and show an interest in the projects that others are working on. Then, when it seems appropriate, mention that you’d potentially be willing to help out with funds if required.
(Of course, it can be the case that both parties are contributing both money and time/knowledge – the same rules still apply.
How to structure a JV agreement
So you understand joint ventures, you've found a potential partner, and there's an opportunity where you think you'd benefit from working together. Now, it's time to set the arrangement up so it has the best chance of success...
Get to know your partner well
It might sound like I’m labouring this point, but it’s important: get to know a potential JV partner well before doing business with them.
Whether it’s someone you’ve met at an event or a friend of a friend you’ve been introduced to, have at least a couple of meetings with them and get to know each other. You don’t need to be best buds, but you do need to get on.
Gut feel counts for a lot. If they seem to be saying all the right things but you feel uncomfortable for some reason, don’t do it.
Decide which structure to use
Is a profit share or fixed interest model more appropriate? Sometimes it’s obvious – but if not, decide between you how you’d prefer to make it work.
Get clear on who will do what
It could be the case that one person is putting the money and the other is doing everything else – if so, fine.
If you’re both expecting to commit time to the project, agree on who will take responsibility for each part of the project: like dealing with legals, project managing, negotiating the sale, and so on. You can guarantee that if there’s any aspect that isn’t discussed, you’ll each be assuming that the other person will do it!
You don’t want resentment to creep in later, so decide on areas of responsibility before moving on to discuss the touchy topic of money…
Agree on the percentage split or interest rate
This is where I get lots of questions from readers: “We’ve agreed to do X…what percentage should we each get?”
Unfortunately for my correspondents, there’s no right answer to this: the right deal is one you’re both happy with.
In the straightforward case of a profit split with one person putting in all the money and the other putting in all the time, a 50/50 split is common – but there’s no reason it has to be this way. For a similar arrangement with fixed interest, about 6-12% seems to be the range – but again, it doesn’t have to be.
Don’t agree to anything that you’re going to resent later, and similarly don’t use a position of strength to drive a bargain that your partner is going to be unhappy about. You want both sides to be happy so the project goes well, and you can do lots more together in future – so even if it takes a few conversations, explore all the options and come to whatever seems appropriate for your situation.
Discuss everything that could go wrong
It’s easy to have conversations about how great everything’s going to be, and how much money you’ll make. It’s not so easy to talk about what could go wrong – which is why most people don’t do it, and it causes them problems later.
Schedule one conversation where you commit to only talk about worst-case scenarios – and agree to what will happen in each situation. For example:
- What’s the rock bottom price you’ll accept for the property?
- If the property is slow to sell, what action will you take?
- If you can’t sell the property at all, will you rent it out instead? If you do, who will take responsibility and how will the costs and income be split?
- If the project goes over budget, who will contribute?
In a fixed interest arrangement, the answers will usually be obvious: the partner who’s taking an active role will deal with everything. But you should still have the conversation, so the partner putting in the money can be confident that everything’s been thought through.
Agree on how it will be secured
You’ll need to work out what security each party will have: other than a handshake, what guarantees their interest in the property?
There are three main options:
- One person buys the property, and the other takes a legal charge over it
- Both parters buy it in join names
- Form a company/SPV with both partners as shareholders, and have the company buy the property
Within each option are endless variations, and it’s impossible to say which is “best” because it depends on the project, the tax situation of each individual, and so much more. If you’re not sure, get input from an accountant and a solicitor.
Alternatively, it’s possible that one partner will be completely unsecured – they won’t have any legal right over the property. This exposes that person to more risk, but if there’s a good reason for it and they’re comfortable with the situation that’s fine.
Get an agreement drawn up by a solicitor
Once you’re completely clear on every detail of how the joint venture should work, get it all down in writing – then give that document to a solicitor to convert it from English to legalese.
By doing all this thinking and having the conversations you’ve had so far, the document you end up with will be similar to what a solicitor would call “heads of terms”: an outline of the most important deal points. A solicitor can’t do this for you: only you can decide how you want things to work.
What a solicitor can do is then take that simple agreement and “make it legal”. If you both just draw up a document and sign it, it’s every bit as legally binding as a contract drawn up by a professional – but a solicitor will define terms using their precise legal meaning, and add standard terms that you wouldn’t have thought of. They can also suggest anything you might not have thought of.
This shouldn’t be an expensive or time-consuming piece of work for them to do – and once you’ve got it, you can use it for any future deals that are identical in structure.
(Don’t be tempted to find a contract on the internet, or just use one that a friend has sent you. It creates false certainty, and unless you’ve got a law degree you might find out later that it says something completely different from what you thought it would!)
You should now know everything you need to add joint ventures to your collection of property financing options.
If you think joint ventures might work for you, start working on them well before you think you’ll need them. If you find a property deal that would make for a perfect JV opportunity, it’ll be too late to build the right connections and have the right conversations.