When investing in real estate, you can purchase properties on your own or partner with other investors to create joint ventures (JVs). A JV offers many advantages, such as access to more contacts, collective industry knowledge, and more capital. This real estate investment structure might allow you to secure larger deals that would otherwise be impossible to qualify for.
To achieve large-scale projects, collaboration is crucial. If you wish to enter a JV, make sure you partner with people who have similar ideas on how to manage investments. Before you create a JV, keep in mind that there are some differences between this structure and a partnership.
A joint venture is a somewhat time-limited deal that’s set up for a specific purpose. Real-estate partnerships involve long-term goals among multiple parties. You can eventually convert a JV into a partnership. The following is a comprehensive guide on real estate joint ventures and how you can use them to expand your portfolio.
What Is a Real Estate Joint Venture
A joint venture is a type of real estate structure that involves multiple investors pooling their knowledge and resources to invest in a property or development project. During the joint venture, each party retains its own business identity.
In comparison, a partnership occurs when multiple investors create a single entity to buy properties. A JV is usually made when investors lack anything from experience to cash. A JV can also be formed to combine credit, assets, or contacts.
Types of Joint Ventures in Real Estate
There are many reasons why a JV might be made, the primary of which is for one investor to secure the equity they need to buy a property. If this investor has experience in managing real estate investments, a JV might be the right solution if they lack equity. Some additional reasons for this structure are detailed below.
Land Contribution
It’s possible that an investor holds land but doesn’t know how to develop it. The landowner might not want to sell the property to a developer. In this scenario, they can create a JV with the developer, which means that the investor will continue to hold the property until the partner completes development. When leveraging land ownership for development, the profits from the eventual sale are often split 50/50 between the partners.
Construction Management
An investor may find a development project that seems like it will be successful. If they don’t have the experience necessary to manage the project, they could form a joint venture with someone who has that expertise.
Credibility
This type of venture can also be put together to add credibility to a project. Let’s say that an investor wants to complete a major construction project. Without experience, they’d have a difficult time obtaining capital for the deal. A JV with a partner who has construction experience increases the chances of the project’s success while also enhancing appeal to other possible investors.
Connections
A JV also allows you to use networks to secure deals. Investing in real estate often requires having connections with other investors and real estate professionals. A JV should make it easier to secure fantastic deals.
Credit
Consider creating a JV if you need a financing solution for a real estate investment. Obtaining financing from a lender often requires having excellent credit. If you already have the cash for the deal but don’t have a high credit score, you can make a JV with an entity or investor who has a more positive credit situation.
Key Players in a Real Estate Joint Venture
In most cases, joint ventures consist of a capital member and an operating member. The capital member typically provides the funds to secure some or all of the project. Operating members are usually the experts in real estate investments. They might manage the project and handle the daily operations.
An operating member is often an experienced professional in the real estate industry who knows how to effectively identify, purchase, develop, and manage a project. Keep in mind that all members in a JV are liable for the losses and profits that occur when acquiring and managing real estate. This liability doesn’t extend beyond the JV.
Advantages of Joint Ventures
Joint ventures offer many advantages to investors. For example, these partnerships allow two or more parties to combine their knowledge and resources to complete larger deals. Unlike a partnership, each party is a separate legal entity, which offers ample protection. The other benefits of a JV include the following:
- Improved credibility, which helps to secure investors
- Less risk because of shared responsibilities
- Shared capital and resources
Disadvantages and Risks of Joint Ventures
While joint ventures can be used to purchase real estate that you otherwise wouldn’t have access to, there are also some disadvantages and risks that you should consider. For example, there’s a possibility that disagreements will arise between partners. When disagreements occur, it can become much more difficult to complete a project and earn profits on an investment. Below are some of the issues associated with joint ventures:
- Partners might not fulfill their obligations
- Shared profits
- Equity reduction
- Lack of control over the decision-making process
Common Legal Structures for Joint Ventures
As mentioned previously, joint ventures differ from partnerships because every entity will operate independently. The purpose of a JV is to work together on various projects and deals. In the real estate sector, a JV can take many different forms.
Limited Liability Company (LLC)
A limited liability company (LLC) is the most common HV structure because of its low costs and easy setup process. Any partner who joins the LLC will own a specific percentage of the membership.
The LLC agreement should contain all important terms of the JV, such as the profit split and obligations for each member. Keep in mind that LLCs provide liability protection for investors. Any liabilities or debts associated with the JV will be incurred by the LLC, which means that your personal finances won’t be used to pay these debts.
Corporation
A corporation is a more complex structure that’s often used for larger real estate deals. When a project involves a considerable sum of money, it might be a better idea to set up a corporation.
The corporation can be an S corp or C corp, both of which provide liability protection. Every investor will receive a share of the corporation. The company’s bylaws should outline the terms of the joint venture agreement.
Partnerships
While partnerships aren’t common in real estate investments, they offer some advantages. For example, this structure provides more flexibility. It’s also less expensive and can be created with minimal paperwork. When setting up a partnership, there are two options at your disposal. You can create a general partnership or a limited partnership.
A general partnership occurs when both parties have active involvement in the investment. In comparison, a limited partnership is when one party serves as the passive investor. For real estate, the investor will provide capital but won’t be involved in managing the property. The passive investor will receive liability protection.
How to Find the Right Joint Venture Partner
Finding the right JV partner can be challenging unless you know someone who’s been involved in these partnerships before. Use the following recommendations to find a JV partner:
- Join real estate investor Facebook groups
- Build networks on investing forums
- Inquire about possible partners through your existing network
- Find investors through LinkedIn by joining groups or starting a direct conversation
Once you find someone who might be a good partner, vet them. It’s important that they provide complementary skills and experience to ensure you can successfully invest in real estate and development projects. If you already have property management experience, don’t partner with someone who has the same qualifications.
The partner you take on should provide resources for investments. Make sure the partner you choose has a shared vision and compatible work style. As touched upon previously, disagreements can delay or stall a project, which is why both partners should want the same thing from an investment.
Conclusion
Joint ventures allow you to complete large-scale projects and investment deals if you don’t have the funding or experience to do so on your own. Creating this venture means that you can properly explore unique real estate investing strategies that might grow your portfolio. While joint ventures can help you reach your long-term investment goals, carefully weigh the risks and rewards before creating one. Consider if a JV aligns with your real estate goals.