Joint venture (JV) is a phrase used to describe a partnership when it’s not practical to have formal partnership papers drawn up and filed with the state. Often, joint ventures are used for a single project or when the partnership will be short term. It’s a great vehicle for raising real estate investment money.
This strategy works well for partnering with people that want to invest in real estate but either don’t have the time or don’t have the skills needed to succeed. In those scenarios, they bring the money or credit to the table and you bring the time and know-how.
Your JV Agreement
Just like a formal partnership, you need to be sure a JV partner is compatible to your investing strategy. Before drawing up a JV agreement, you need to establish both your purchasing criteria and your exit strategy. Once that is in place, you find a property meeting the criteria and draw up a JV agreement specific to the investment criteria.
Issues you want to evaluate about a potential JV partner ahead of time include, business acumen, expected return on investment, their ability to make logical business decisions, and their reaction to business set backs. The list is longer than this but answering these questions is a good start.
When you think you have found the right investment property, JV partner, and have an exit strategy, you still need a JV agreement. It doesn’t need to be recorded with the state the way formal partnerships are. However, it does need to be legally binding in court.
There are important issues to address in the JV agreement. One is how profits will be divided in the end. Will they be divided 50%-50% with your work being given equal equity in the property as your JV partner’s financing? Or will you be compensated separately for your work and receive less of the profit?What if the investment results in a loss? Will you be expected to repay part of the money or is the risk fully assumed by the investor? What happens if there is a fallout of the meeting of the minds? How will it be resolved? In a court of law or by a third party arbitrator? How is the arbitrator selected? These and other issues must be included in the JV agreement to protect both you and your partner.
Always Have an Written Agreement
Without a written agreement, the old axiom “he who has the most gold wins” is likely to apply. That makes the agreement a necessity to protect your interests. Don’t go into a joint venture when the money partner says to skip the legal agreement to save costs. When they have the money, they are taking away your legal right to the profits.
Finally, although it happens all of the time, it’s never a good idea to partner with family members. Too frequently, this is done without a formal agreement, making it even worst than having a fallout with nonfamily partners. When there is a fallout with a nonfamily member, your can pick yourself up, dust yourself off, and move on. When it involves a family member, you may not have anywhere to spend the holidays for years to come. It’s not worth it.
Much of this may sound too negative to make a JV worthwhile. Try not to look at it that way. Joint ventures are used all of the time and are a great way to raise money for highly profitable real estate investments. Most of them go exactly according to plan. A written agreement just makes sure everyone is on the same page from the beginning.
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Author bio: Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years. He also draws upon 25 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest in the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.