As capable as you are, some investment projects are too large, too risky, or too far out of your wheelhouse to get involved with on your own. That’s where joint ventures in real estate investing come in.
Joint ventures bring together multiple investors, project managers, landlords, and other parties to work together to manage a new investment project. From commercial rentals to large residential properties, working with other businesses to complete your dream project balances risk and reward.
Are you missing out on great opportunities because you’re not working with other parties? Bringing in complementary skills to balance out your expertise, or investors to back your ideas, is a great way to enhance your investment portfolio and complete your next project.
What is a joint venture in real estate, and how will joining in JV investing change the future of your portfolio? Learn more in our explanatory guide today.
A Table Of Contents On Real Estate Joint Ventures
Looking for a new type of investment as you continue to grow your expertise in the real estate world? Learn more about joint ventures to determine if this is a good choice for you:
- What Is A Joint Venture In Real Estate?
- Why Investors Seek Joint Ventures In Real Estate
- Planning For The Future: JV Agreement Terms
- FAQs On Joint Venture Real Estate
- What Can A Joint Venture In Real Estate Do For You?
What Is A Joint Venture In Real Estate?
Joint ventures are investment projects and developments managed by two or more investors. These investors bring together their resources, expertise, and connections to ensure the successful completion of the project. Rather than officially incorporating into one business, both parties remain unique entities. They are working together, but they are not becoming one partnership.
In a partnership, on the other hand, investors join to form a single entity that then does business together. Joint ventures (JVs) operate independently but work together according to the terms of their joint venture agreement.
Typically, joint ventures are created to fill needs symbiotically. Investors lacking cash, experience, or local contacts may connect with another investor to get these things while contributing their own expertise and management experience to complete a project.
Large development projects, such as commercial rentals or large residential apartment buildings, are typically managed by joint ventures. These projects are often the result of an experienced real estate operator (landlords, project managers, property managers, etc.) obtaining financial support from real estate capital investors.
Common JV Structures
Joint ventures are not one-size-fits-all. There are many different structures used to operate a joint venture. The joint venture agreement determines the exact structure and depends on the parties involved in the project.
These are some of the most common structures used in joint ventures.
Limited Liability Company
LLCs, or limited liability companies, are incredibly common in joint venture investing. LLCs are easy and inexpensive to set up. Every member of an LLC owns a specific percentage, all of which is determined when the LLC is set up. The terms of the joint venture are listed within the LLC agreement.
Corporation
Corporations are more complex than LLCs and cost more to set up. Still, joint ventures structured as corporations appear with complex deals. The more money involved in a joint venture, the more likely it is to have an associated C-corp or S-corp set up to offer projects and structure to the investment project.
The bylaws in the corporation’s agreements detail the structure, pricing, fees, obligations, and other essential aspects of the joint venture operation.
Partnerships
This is the least common type of structure used in joint ventures. As partnerships are simple and flexible, quick venture deals may be done as a partnership.
Though general partnerships are also used, most JVs use limited partnerships. Limited partnerships provide liability protection for passive investors not involved in the daily operations of the venture project.
Why Investors Seek Joint Ventures In Real Estate
Why do real estate investors enter joint ventures as they expand their projects?
Some might believe that staying solo ensures the biggest profits but forget that it also brings the biggest risks. There are many reasons to get involved with joint ventures as an investor; here are some of the most common ones.
Credibility
If an investor is interested in a project but lacks experience in the sector, capital investors are unlikely to feel confident getting involved. However, a joint venture including a project manager or construction manager with ample expertise would be more likely to get funded to successful completion.
Land
Investors who own land but don’t have the capital, experience, or if time to develop it may set up a joint venture—joining a venture with someone with the expertise to develop the land benefits both parties.
Construction And Project Management
Real estate projects that need to be started from the ground up are often outside the wheelhouse of the common real estate investor. Setting up a joint venture with a construction or project management group ensures that the development is successful from start to finish.
Lacking Expertise
Just as you wouldn’t consider hiring an inexperienced property manager, investors aren’t likely to consider investing in a project lacking experienced partners.
The bottom line is that joint ventures are sought by individuals lacking the expertise necessary for successful development. Whether they lack local knowledge, construction management experience, connections, or something else, joint ventures provide complementary skill sets for a more robust overall project.
Planning For The Future: JV Agreement Terms
To successfully plan a joint venture, the JV agreement must cover essential factors like structure, responsibilities, and profit distribution. Getting into your first joint venture can be overwhelming; review the following list to ensure you don’t forget any key aspects when putting together your first JV agreement.
Profit Distribution
How will the profits be distributed? When will they be distributed? Compensation doesn’t necessarily need to be split equally among all parties, so joint venture agreements must clearly express how this distribution will occur.
Management And Decision-Making
All joint venture agreements specify the exact responsibilities of each JV party. From daily management to decision-making, the precise terms of who will do what must be agreed upon. If this section doesn’t have enough clarity, it is very easy for disagreements and roadblocks to arise.
Contributions
How much capital will each joint venture member contribute?
Joint venture agreements should cover how much capital each party will contribute, when that will be contributed, and what terms are connected to that contribution. These terms vary wildly from contract to contract, only making it even more important to be as transparent as possible.
Exits And Dissolution
Joint ventures aren’t meant to be permanent partnerships. All JV agreements should cover how and when the JV will end. The dissolutions can be set up to occur at a specific point in time. Still, there should be terms included for premature dissolution should one or more parties no longer be able to participate in the venture.
These terms should be as detailed as possible and cover all potential situations that you can think of. It’s always possible for things to go sour or in an unexpected direction while dealing with a joint venture, so all parties should have ample protections written into this part of the agreement.
Rental Essentials: Invest In The Basics
No matter how you proceed with acquiring your next rental properties, it’s important to remember that the basics remain incredibly important. From selecting the right tenants to choosing the right team members to support your vision, there are many tasks to keep on top of. Tenant screening is one of them.
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FAQs On Joint Venture Real Estate
Ready to dive into the world of joint ventures in real estate? Review the answers to commonly asked questions as you get your footing.
Can a joint venture purchase property?
Yes, joint ventures can purchase properties. The agreement in place between the members of the joint venture sets them up as a temporary entity that can pool resources to purchase real estate. The exact terms of how the property will be bought and titled will depend on each joint venture contract.
What are the benefits of joint ventures in real estate?
Joint ventures make it possible to combine complementary assets and knowledge to build a stronger investment. Instead of limiting your project size due to a lack of capital or management power, joint ventures allow you to maximize your investments.
Joint venture parties share both resources and risks. This appeals to participants as it reduces the overall stress of growing their investment portfolio.
Many individuals also find joint ventures appealing when looking to work on a project outside their usual market. Learning how to invest in a new market is easier with an experienced local entity on your side. They bring better access, connections, and knowledge to the project.
How can I find joint venture partners?
There’s no simple step-by-step guide for finding venture partners. Working with someone in a joint venture requires a high degree of trust and confidence, which can be hard to find without first building up a strong relationship.
Still, that doesn’t make finding a suitable joint venture partner impossible. Here are some ways to get started in your search:
- Ask reliable friends if they know anyone looking to expand into a joint venture.
- Join investing groups and forums to build connections with similar-minded individuals.
- Let your clients and current business networks know you want to expand with a joint venture; you never know who may be interested.
The goal is to ensure that the right people find out you’re interested in working with investors and experienced project managers to create your next project. Your chances of meeting the right joint venture partner expand exponentially by talking in forums and expanding your network.
Are partnerships and joint ventures the same thing?
In most situations, partnerships and joint ventures are not the same. Joint ventures bring together multiple parties, as separate entities, to work together on a project. These parties may be involved in numerous projects together or just one.
Partnerships, on the other hand, are business entities formed by multiple people. These individuals are doing business together as a single entity. This differs from joint ventures, where each party is its own entity and only works together for specific projects.
Who owns property in joint ventures?
All parties involved in a joint venture have some ownership over the venture’s assets, but the exact allotment depends on the terms of the JV agreement. If the project is set up with a 50/50 split, both parties share the ownership rights equally. An agreement may also specify which parties own which assets, but this is less common than a straight split.
Are joint ventures always divided 50/50?
In most situations, joint venture splits are either 50/50 or 60/40. Many joint ventures are built on the sharing of resources in a relatively equal way, and this leads to these equal or nearly equal splits.
The exact allocation of profits, resources, ownership, and control in joint venture projects is decided by the actual agreements put in place by involved parties. If one party has a larger share in the split, they may also have more influence on decision-making.
What Can A Joint Venture In Real Estate Do For You?
Joint ventures offer a unique opportunity to expand into new projects without taking on the entirety of the risk alone. When you’re interested in an investment beyond your means or expertise, consider starting a joint venture to handle the work without more support.
Keep the following in mind as you set up your joint venture agreements:
- Only enter a JV agreement with a trusted party who provides complementary support to the project.
- Ensure that compensation, investment costs, fees, management division, and other structural elements are all clearly addressed in the agreement.
- Don’t forget to include clear instructions on how to exit the partnership and how shared assets will be dissolved and distributed.
Every joint venture is different, so you must structure yours with the suitable projects in place. The flexibility of JV agreements is also part of their draw: You and your future venture partners all get what they need in the project. You can determine what exactly this means for your investment group.
What will joint ventures in real estate do for you?