Those who invest in property market will at some point no doubt have considered one or more investment partners to create property joint ventures. There are a number of pros and cons with regards to property joint ventures although on the whole, if managed correctly, the pros certainly outweigh the cons.
Pros of property joint ventures
Each property joint venture will be different in structure and ultimate long-term returns. However, some of the common pros for property joint ventures include:
• Bringing together partners with expertise in different fields
• Spreading the risk
• Two heads are better than one when it comes to considering deals
• Use of two different contact pools
These are just some of the more common positives for property joint ventures which ultimately revolve around spreading the risk and having a partner you can talk to about both positive and difficult situations. Even the most experienced of investors will benefit from a sounding board, somebody else with finances at risk and the ability to discuss different methods and different routes as situations arise.
Cons of property joint ventures
As we touched on above, on the whole the positives of property joint ventures do outweigh the negatives although there are still a number of factors to take into consideration.
• Depending on another individual injects a degree of risk
• Each individual needs a specifically defined role so there are no disagreements
• Exit strategies can prove difficult if investment partners have different goals
• Any profits would obviously be split between the partners on a predetermined basis
There are many other areas to consider with regards to property joint ventures which, if not structured correctly, could be perceived negatively. In reality, the structure of any joint venture needs to be predetermined in minute detail. This will involve the role of each partner, what they bring to the joint venture and perhaps more importantly, how profits are split and predetermined exit routes.
Mixing friends and business
The property market is littered with individuals who started as friends but ultimately ended up as enemies. The idea that working with friends effectively negates the need for a legal agreement with regards to individual roles, what they bring to the venture and exit routes, is naive to say the least. In many ways, working with friends and potentially family would further enhance the need for such a legal agreement to avoid any controversy.
At some point, one investor will wish to continue in the longer term while another may be looking towards retirement and liquidating their investments. As a consequence, rather than bringing in an outside party (which is always an option), there should be some form of buyout clause giving the remaining investor first refusal on any sale of a share in their joint venture. Without a buyout clause in some ways it can be more difficult to sell a share in a joint venture because a new investor would have to work with another party they are probably unfamiliar with. In reality a share in any investment is only worth what a buyer is willing to pay but where property assets are involved this is slightly different.
If you have been working with a joint venture partner who was looking to sell up then the value of their part of the venture should relate to the company’s net asset value. This takes into account the current value of assets and offsets them against liabilities. The net asset value of a company gives a great basis from which to begin negotiations because ultimately if a deal cannot be agreed then the shareholding can be offered to any third party at the market price. A low market price, maybe through lack of interest/difficult property markets, would in effect reduce the value of the other partners share. Tricky times indeed……