A joint venture in real estate allows multiple parties to combine resources and knowledge to complete deals otherwise outside of their means.
Real estate investing is often seen as a one-man (or woman) show. However, while there are plenty of successful solo investors, creating a joint venture in real estate can provide numerous benefits, allowing you to maximize your capital, increase your contacts, combine your collective industry knowledge, and secure deals that might otherwise have been beyond you.
However, for your joint venture to be successful, there are a few things you need to know, such as how they work, how to structure your JV, and what the potential downsides are.
Simply put, a joint venture in real estate is when two or more investors pool their resources and knowledge for a development project or investment. Each party maintains their own unique business identity while working together. As such, it differs slightly from a partnership.
A partnership is when two or more investors form a single entity to conduct business together. Whereas a joint venture (JV) is when each of the investors involved operates as its own entity and work together on specific deals.
Joint ventures are generally created when the investors involved are lacking something the other has. This could be any number of things such as cash, credit, experience, contacts, or assets.
As mentioned above, there are various reasons why you might get involved in a joint venture. The obvious example is to secure additional equity eg. one investor might have a great deal lined up and the experience to manage it, but lack the equity to complete the deal.
However, there are more reasons than just securing additional equity to form a joint partnership Below, we outline some of the more common examples of joint ventures in real estate.
An investor may hold a piece of land but lack the means to develop it. If the investor doesn’t want to sell the land to the developer, they might instead participate in the development by contributing the land. In this scenario, the original investor holds the land necessary for the venture to begin, and the partner brings the experience and equity to complete the development of the land. Each party has something the other needs so they form a joint venture.
An investor might come across a great development project that looks like a great real estate deal. However, they lack the expertise and experience to manage a construction project. They might, in this scenario, increase the likelihood of the success of the project by forming a joint venture with an experienced partner.
If we take the above example, the investor, not having the experience required to manage a large construction project, would likely find it hard to secure capital for the deal. So, the joint venture wouldn’t just help ensure the project’s success, but would actually be essential for getting investors on board and the project off the ground.
Real estate is still an industry that is very much about who you know. In order to find and secure great deals, you need connections.
Securing financing for your real estate investments will likely require you to have good credit. An investor in this scenario might have the cash available for the down-payment but be unable to secure a loan due to poor credit. In this scenario, they might create a joint venture with an investor or entity that does have the required credit to secure the necessary funding.
Joint ventures allow multiple parties to combine their resources and knowledge to complete a deal that might otherwise be outside of their means of them as individuals. They have benefits over partnerships as each party maintains a separate legal entity and can limit each parties involvement.
However, a joint venture also comes with negatives – and if you enter a joint venture with a partner that doesn’t fulfil their obligations, or you have disagreements with them, it can make a project much harder to complete successfully. Below are some of the advantages and disadvantages of forming a joint venture in real estate.
Joint ventures are distinctly different from partnerships because each of the partners remains independent operating under their own entity. The joint venture partners simply work together on specific deals or projects.
Joint ventures in real estate can take a variety of legal structures. However, no matter which structure they choose there will be a joint venture agreement that stipulates each party’s contributions, responsibilities and obligations as well as how the profits will be distributed.
A limited liability company or LLC is probably the most commonly used structure for a joint venture in real estate. These are relatively easy and inexpensive to set up. Under this structure, each party will be a member of the LLC, owning a certain percentage of the membership interest. The terms of the joint venture, such as obligations and profit split will be detailed in the LLC agreement. LLCs are also attractive because they offer additional liability protection for investors.
Corporations are harder and more expensive to set up than LLCs and are generally used for larger more complex deals where more money is involved. The corporation can be either a C corp or an S corp. Both of these offer liability protection.
Again, each investor will own a percentage of the corporation and the specifics of the joint venture agreement should be spelt out clearly in the corporation’s bylaws.
Whilst less commonly used for joint ventures in real estate, partnerships do have certain benefits. They are more flexible, as well as easier and less expensive to set up with less paperwork involved.
There are two types of partnerships that may be used for a joint venture. A limited partnership and a general partnership. In short, a limited partnership is when one of the parties is a passive investor, supplying capital but not involved in any way in the day to day operations. This structure provides liability protection for the passive investor (or limited partner). A general partnership is when both parties are actively involved in the investment.
Finding a good joint venture partner is important and unless you already know someone, it can be hard. A few tips for finding a joint venture partner for your next real estate project:
Even if none of these strategies yields results directly, they will likely at least give you a next step, another potential contact to reach out to, or another strategy to try that has worked for others.
When deciding on a joint venture partner(s) you’ll want to also vet them to ensure they have what you need and that you will be able to successfully work together on a potentially long term and stressful project.
Joint ventures in real estate are a great way to complete investment deals and projects that alone you may not be able to pull off. They can be one of the best ways to learn more about a different aspect of real estate investing and ultimately achieve your long term financial goals.
However, before you pursue this route you need to ensure you are aware of the risks, the disadvantages and that this is the right course of action for you and your real estate project. Be honest with yourself, if the risks aren’t worth the rewards, walk away.