Time for some joint ventures
As per the words from the great Bob Dylan: “The times they are changing”.
It’s widely known that the property market is pretty crazy and has been for some time now. Up until this point though, its been the Reserve Bank who have been concerned enough to place restrictions on banks lending ability in an attempt to slow the market. These haven’t really worked, apart from an early Christmas market slump that came following last years October changes. This really only lasted until February though, and since then it’s taken off again.
With the prices continually on the rise and banks tightening lending criteria, joint ventures are now becoming a common scenario that I see coming across my desk with friends and/or family coming together in order to increase borrowing power, or simply get a foot in the door.
With this in mind, it’s important to look at what considerations need to be made before jumping into a JV property deal. Firstly, what is a JV?
For the purpose of property, a joint venture is a structure by which two or more people combine to purchase property together without the formality and commitment involved in forming a partnership or other similar entity. The proportion which each partner contributes can be 50% each, or it can be in unequal amounts, with one contributor providing a majority of the resources for the formation and initial operation of the venture. The area of contribution is a good place to start. What is each person coming to the party with? In most scenarios I have seen, there has been two – or more - people with different strengths, one bringing the equity (deposit) and the other bringing the servicing (income). It could also be that one party brings renovation experience, or even the time needed to actually manage the project and ensure it gets complete. This can work really well, but which has a greater impact on the final outcome and therefore who has the bigger piece of the pie?
Working this out at the start is important to prevent any arguments about profit distribution down the path. These questions should be answered within a joint venture agreement, and this should be done before any money is spent. This document simply outlines all agreements at the start in a few pages and would be referred back to in the future should any disputes arise. You can easily google some templates and complete these yourself without spending money on lawyers.
Finally, what happens if it all goes wrong? What is the exit strategy? If it is a property trade, then at what point is the property sold? Do you use an agent or sell it privately? And what happens if the market turns mid-project and you have to end up holding the property (this is an important one in the current market). If the renovation goes over budget, or it all becomes unprofitable and starts costing more money than expected, then how do you get out? If it is a buy and hold property from the start, then what happens if one person wants to get out but the other wants to stay in? This is very common given that life can change and along with it, people’s priorities.
This article may not answer questions, but should create some if you are thinking of getting into a joint venture. I actually really like the idea of bringing peoples strengths together for a greater objective but like any relationship – they can be easy to get into, and hard to get out of. So do the work at the start to minimise the risks later on.