Should I Invest As A Joint Venture Partner?

So, you’ve looked at syndications already and decided that they are not for you. Maybe you want more control, or you don’t want to have too many different parties involved in the transaction. Whatever your reason, you decided this wasn’t the right investment vehicle for you.

You have also thought about doing a deal by yourself, but you lack some of the resources or skills to get the deal done by yourself.

It seems like you are stuck.

What now?

Do you sit on the side lines and watch opportunity pass by or do you just give up on your real estate investing dreams all together?

I’ve got some good news for you:

There is another option!

Joint ventures allow you to partner with others but avoid the multiples of partners that would be involved in the deal if you chose the syndication route.

What Is A Joint Venture Partnership?

For the purpose of this article we will be defining joint ventures as a temporary partnership for a designated or series of designated transactions where all partners are active members of the partnership and there are no limited/silent partners. This partnership would be formed to complete a specific transaction such as the purchase, management and eventual sale of a real estate investment. Said differently, everyone in the partnership is putting in work and potentially also money as part of their involvement in the deal.

So now that we all are on the same page as to what a joint venture is let us discuss why anyone would even be interested in using this as a means for their investment vehicle.

What Are The Benefits And Advantages Of A Joint Venture?

Joint ventures can be cost effective when compared to real estate syndications. In a joint venture, as all partners are going to be general partners and there are no limited partners involved in the deal, the investor can avoid the rigorous requirements of the U.S. Securities and Exchange Commission. When limited partners only invest in a deal to provide equity and do none of the active work a security is created. This limited partner has essentially purchased a share (i.e. a security) in the company that owns the investment property and is benefiting off the active work of others. This is effectively a syndication and the Securities and Exchange Commission require that all securities to be registered and specific paperwork be filed. The cost of getting this paper work done by a lawyer can range from $15,000 to over $100,000. In a joint venture you can skip this cost.

There are less people involved in joint ventures when compared to syndications. Due to the requirement that all individuals in a joint venture take an active part in the deal there is a natural restrictive nature to the quantity of individuals that can be involved in a joint venture. Think about it this way – if everyone needs to be involved in on-going management and decision making of a company what is more practical, having 5 decision makers or having 100 decision makers? To be legally confirming, the probability is that the number of members involved in the transaction will be on the lower end of that spectrum.

Joint ventures can be agile and time efficient. Due to the small number of people involved, the expected experience of the members of the joint venture and reduced administrative start up cost of a joint venture, they can be formed quickly. While it is important to vet your joint venture partner and have clear outline as to what the purpose of the joint venture is and what partnership roles are, you will need to communicate with less people and have less parties to appease to get the transaction from idea to consummation.

Joint ventures allow access to additional resources and skills. As good of a real estate investor as you are, you will eventually reach a time where you do not have enough money, or you don’t have the right expertise to take down a deal. This is where joint ventures can come in handy. Your joint venture partner will be able to fill in the missing gaps that will complement your skill set providing the additional capital and or skill that you need to succeed. This can help speed up learning curves for newer investors as you have an experienced team mate working right along side you.

You get to share your risks and costs with your joint venture partner. Two of the metrics real estate investors are always focused on are risks and costs. If you are doing a deal by yourself, you will have to shoulder 100% of the risks and costs associated with the deal. Having a skilled joint venture partner reduces your risk because there are now more parties sharing the load additionally there is an increased collective expertise and resource pool that the joint venture partner brings to the table. Additionally, you will be splitting the costs with that joint venture partner allowing you to have more capital to use in other investments or allocate to other efforts needed to make your investment succeed.

What Are The Negatives And Disadvantages Of a Joint Venture?

When you do a joint venture, you are giving up control. Many people shy away from partnerships for the sole reason that they want to have all the control over the life cycle of an investment. While there are typically less partners in a joint venture than a syndication, you still must give up some level of control to have a functioning joint venture. If you are not a fan of the idea of sharing decision making rights, then joint ventures may not be for you.

Joint ventures can be limiting. When you are in a joint venture partnership you will have to get the approval of the other partners in the joint venture prior to making any major decisions connected to the investment. This is one reason why it is important to make sure that the individual that you complete the joint venture with is someone that has a similar vision, integrity and work ethic as you. You may find yourself with a great idea but because of a disagreement with the joint venture partner your hands are tied, and you can’t do anything.

You can end up with a bad business partner. As we just mentioned, when you form a joint venture you want to make sure that you are familiar with the individual/entity that you will joint venture with. You may come into the agreement with great intentions, but the other individual may not have the same level of work ethic, enthusiasm, vision and goals as you have. This could create an imbalanced partnership where expectations of the partnership do not meet the reality of the execution of the project. A few signs of a bad partnership can show itself as an inequality in distribution of work, expenses, income, pro-activeness of the other partner and conflicts of interest to name a few.

It may be hard or costly to leave a joint venture. Due to the small number or partners in a joint venture and the selective nature of choosing joint venture partners the joint venture agreement may have many stipulations around how and when you can leave a joint venture. It is very important that this is clearly spelled out in the joint venture agreement and each member of the joint venture understands the risks that they are taking on.

When you invest with a joint venture partner you must give up profit. I’m not sure there is anyone that is excited to give away hard earned money. As part of investing in a joint venture you will have to split a portion of the proceeds between you and the other joint venture partner(s). This split of revenue would be based on some contractually agreed amount. Some people are allergic to this idea of splitting profit, but each investor must look at their relative return; i.e. based on the amount you invested in the deal is your percentage return on investment the same as if you invested on your own? Also, on the flip side, you should consider the scenario if you did not have that joint venture partner would it have been possible to make the same amount of profit or any profit at all?

The benefits and advantages of investing in real estate joint ventures are:

  1. Joint ventures can be cost effective when compared to real estate syndications.

  2. There are less people involved in joint ventures when compared to syndications.

  3. Joint ventures can be agile and time efficient.

  4. Joint ventures allow access to additional resources and skills.