Joint Ventures: Basic Principles
Joint ventures are well known in the business world, but many are a little unsure about what joint ventures involve when it comes to property investing. Today I am going to outline some basic principles of joint ventures in property, including what makes a joint venture successful and how to cover all eventualities.
In the property market, a joint venture is a temporary but formalised partnership of two or more individuals, which contract with each other for a particular development project, such as a buy-to-sell project, often through the creation of a temporary subsidiary company called a Special Purpose Vehicle (SPV).
Creating a joint venture partnership for a specific property project can be a great way to work with other professionals or investors in the industry. Joint ventures, in our opinion, work best when two (or more) parties come together to work on a project where their skills complement each other. The way we like to think of it is: you don’t want two (or more) investors working on the same project with little experience of project managing, and likewise, you don’t want two hands-on individuals coming together with no way of funding the project.
A successful joint venture partnership works well in property when the individuals involved have skills that complement each other. This could be where one individual organises the funding for the project and oversees payments, while the other finds the project and manages the refurbishment from start to finish. Alternatively, it could be a partnership between an individual who can oversee the project and fund it, partnering with a builder or other tradesperson who will complete the refurbishment.
Not only can joint partnerships work well with two parties coming together with complementary skills to one another, but joint ventures can work well with more than two parties. We have met professionals in the industry that have multiple parties involved in a property project, where skills and expertise are brought from a wide range of professionals like architects, accountants, quantity surveyors and engineers.
You might be thinking “this all sounds great, but why would we consider joint venturing”. Let me explain some of the benefits.
For many individuals who want to invest in property, joint ventures can be a great way to get involved in a renovation project without going it alone. You can keep up to date with progress, be as hands-on or hands-off as you like depending on your workload and geographical location, and gain experience of what’s involved in a renovation project while working alongside someone with more expertise (and time) than yourself.
For property professionals, working in a joint venture partnership can be a way to expand their knowledge of different aspects of property, and allow working with new professionals in the industry. In certain circumstances, it can be a great way to work with an investor who can fully fund the renovation to get a project off the ground.
Depending on the joint venture partnership agreement, investors can often achieve higher returns on their investment than loaning money to a property company for a fixed return. At Nichol Smith Investments, we believe that joint venture partnerships are where each partner is equal. With this in mind, previous joint venture partnerships we have worked on with investors or other property professionals have resulted in a 50/50 split of profits. This allows us to work on more projects throughout the year while achieving great returns for our investors. And of course, having fun at the same time.
We hope this blog has helped explain the basic principles of what a joint venture partnership can involve in property, and why they can be a great way to gain experience in property and achieve good returns at the same time. Last week we touched on the recent changes the Financial Conduct Authority made to investors working in property. If you missed this article, it’s well worth a read if you’re considering joint ventures in property.
Next week we are continuing the theme of joint ventures, and we will take a more in-depth look into what a joint venture agreement should include.
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