Bringing on a joint venture (JV) partner for a real estate investor is a major decision.
Partners can infuse capital and help take your business to the next level. In fact, many investors believe that creating a partnership is the best business decision they ever made.
However, investors who want to maximize the value of a partnership also need to be ready to manage the JV partners. In this article we’ll help you decide if you should find a JV partner or keep going it alone.
What is a joint venture partnership in real estate?
A JV partnership in real estate investing occurs when two or more people or entities join forces to buy and sell, lease and manage, or develop real estate.
For all practical purposes, joint venture partners can be formed under a variety of legal structures. Joint ventures can be partnerships of course, but corporations, LLCs, and other legal entities allowed by state law can also be used to create a JV.
How to manage joint venture partners
A written joint venture agreement outlines the terms and conditions that each JV partner will be bound by. JV agreements cover important items such as the structure and objectives of the partnership, financial and non-financial contributions, dispute resolution, and property management and control.
Investors who bring on JV partners need to be prepared to manage the individual partners and the partnership as a whole. That’s why Stessa created Portfolio Collaborators.
The collaborator feature allows investors to share some of their Stessa data with key people by giving them read-only or full access to property details such as rent roll, pro forma expenses, and transaction details.
Using Stessa’s Portfolio Collaborators is the perfect way to share information openly with JV partners. Other tips for managing partnerships include:
- Communication to build strong relationships
- Establish clear performance indicators or KPIs for the partnership
- Flexible relationship to overcome obstacles that may arise
- Resolving problems and disputes with a win-win approach
Advantages of JV partners in real estate
Every real estate transaction is unique, so there can be a countless number of reasons why investors have JV partners. However, the advantages of having JV partners fall into three main categories:
Having one or more JV partners who contribute capital allows investors to pursue bigger deals than they’d be able to transact on their own.
For example, let’s assume you’ve got your eye on a small multifamily property with a fair market value of $400,000. Using conservative financing, the down payment would be $100,000. Even if you have the available cash, it may not make good business sense to put so much of your own capital into one deal.
By bringing on a JV partner, each could contribute $50,000 to the down payment, leaving you with available funds for other investments.
JV partners in real estate also help investors mitigate risk in a couple of different ways.
First, because each partner has less personal capital invested, JVs can reduce the pressure of trying to go it alone and soften the blow if a deal doesn’t quite go as planned.
Second, joint ventures also allow investors to mitigate risk through portfolio diversification. Having more capital for bigger investments allows owners to scale up from single-family rentals to smaller multifamily, or from multifamily up into larger apartment buildings.
Sharing skills, talent, and expertise is the third reason why investors look for JV partners.
Earlier we used the example of each partner contributing an equal $50,000 to the down payment. But joint venture partnerships can be about more than just contributing money.
There are a lot of people in the market today who would like to invest in real estate. They have plenty of money available, but they don’t have the time or market knowledge.
An experienced real estate investor could form a 50-50 JV partnership where one partner contributes 100% of the capital and the investor contributes 100% of the expertise. Then, each partner shares evenly in the recurring income and profits when the property is sold.
How to find partners for JV deals
Word of mouth is the best form of advertising and promotion. But until you develop a proven track record and reputation in the marketplace, capital partners won’t come to you. Instead, you’ll need to seek them out.
Some of the best places to find partners for joint venture deals include:
- Public records to see who is buying what in your market
- MLS listings sold to contact the buyer and seller agents involved in the transaction
- Investor forums such as BiggerPockets, REIClub, and the Stessa Community
- Lenders including hard-money and private equity lenders often have clients with capital to invest
- Real estate investor and personal websites of people looking for JV partners
- Local real estate investment groups and your circle of friends and business contacts
- Property owners may also be willing to joint venture instead of selling outright
Tips for creating a solid JV partnership
Oftentimes beginning real estate investors bring on JV partners without really thinking things through. They assume that the more people there are involved, the bigger and better the deals will be, and the more money will be made.
But that isn’t always the case. In fact, choosing the wrong partners for the right reasons, or vice versa, can be worse than having no partners at all.
Here are five tips for choosing the right real estate partners before entering into a partnership:
- Conduct thorough due diligence on each JV partner
- Define the role of each partner and individual performance expectations
- Set specific terms for how profits and losses are shared, including what happens if additional capital is needed
- Use an attorney to write the agreement using terms and language that each general partner can understand
- Protect your real estate asset by using a corporation or limited liability company (LLC), describe how a partner may be “bought out”, and how the JV partnership is dissolved
A JV partner can help grow your real estate investment business grow exponentially by getting a real estate deal done more quickly and profitably. However, creating a partnership also means having to manage your partners.
Things to think about when deciding whether bring on a JV partner or go it alone include:
- JV partners can be people, corporations, or LLCs
- Communicating and sharing information are two ways to make a JV partnership successful
- Three advantages of having a JV partner are reduced cost, risk mitigation, and partner expertise
- Hard money lenders and investor forums are two places to find potential JV partners
- Ways to find the right JV partner include conducting thorough due diligence and defining the specific roles of each partner