Joint ventures in real estate investing
Do you want to start investing in real estate, but don’t have enough capital?
What if you’re struggling to access funding?
Or, maybe you want to invest money, but don’t really have time to commit to the project?
Not having enough cash and not having enough time are two of the biggest obstacles in real estate investing.
If this is the case, what should you do?
You may have spent time researching various strategies. There are lots to choose from, and lots of advice available. One option is joint ventures, which is a great way to overcome this problem and grow your portfolio.
If you do not have money to get into real estate then this is always my favorite way to jump in and accelerate the process. It is how I was able to buy 10 properties in 6 months.
If this is something you’re interested in, here’s a brief guide on using joint ventures in real estate investing.
What is a joint venture?
Joint ventures have been steadily gaining in popularity in recent years.
So, what is a joint venture?
A joint venture is a strategy that involves two or more parties pooling their resources for a real estate project. These resources could be financial, like capital or a loan. Or, it could be skills, such as locating a property, managing assets, or finding the best deals.
This allows people with experience and expertise in the business of managing real estate, but who have limited funding, to team up with capital investors who can fund projects, but may have limited time or skills.
For example, you might have a joint venture between two friends or family members with construction experience and financial resources, but limited time. Or, between a builder, an architect, and a financial contributor – each has different resources or skills to bring to the table.
Joint ventures can help you get started in real estate. Or, if you’re already an investor, you can grow your portfolio in a sustainable way.
It’s similar to any other business partnership. However, a joint real estate venture doesn’t necessarily involve an ongoing business relationship. It can be a single transaction and, in many cases, investors won’t have regular communication.
You can apply a joint venture approach to different types of investment strategies, including BRRRR, rent to own, fix and flips, student rentals, and more. You can also use it for multi-unit buildings. Most larger real estate projects are joint ventures.
How does it work?
Before entering a joint real estate venture, you need to ensure you’ve educated yourself on how they work and what your options are.
Then, you need to create a clear plan, including:
- Is this a long or short-term venture?
- A common goal or objective
- Decide on payments and time-frames
- What are the most suitable terms?
Here’s a quick step-by-step guide on how to get started:
Step 1: Do your research
In order to make money in this business, you need to know the market inside out!
This means carrying out plenty of research before you start.
You can do this, firstly, by speaking to professionals such as contractors, property managers, real estate agents, the city or township, and other investors. This will help you learn everything you need to know about investments.
Then, you need to look at trends, resales, rental rates, demographics, income for capita, types of homes, vacancy rates, what the competition is doing, planning and development news, and anything else that could affect the value of homes.
Once you start researching, speaking to professionals, and joining groups and networks, your sphere of knowledge really opens up. This is how you make money!
Step 2: Find a partner
The next step is to find a partner to invest.
If you’re looking for funding, there are plenty of individuals and businesses out there. The quickest way to find one is to speak to a real estate broker, as they probably know people in the industry and possible investors.
Off market deals are usually attractive to investors. However, these require more work and you need an amazing realtor with lots of contacts they can reach out to. It can be a hassle, but it’s a good way to reach out to more exclusive investors.
If you’re looking for financial investment, it’s important you’re an expert in your field.
What most financial investors lack is time.
With a joint venture, all you need to do is become really good at something and make yourself a valuable resource. It’s no different to any other business proposal. Once you have a product you know will be profitable, you can show your investor how you can give them solid returns.
When you gain knowledge and become an expert in something, this makes it easier to find someone who will back you financially.
Step 3: Work out the numbers
Next, you need to work out the numbers. The economic percentages for the venture will vary depending on the deal. It may be that the capital contributor gets 80% of the returns while the operating member gets 20%. In some cases, it may be 50% each.
Typically, the more capital a member contributes to the joint venture, the more negotiating power they have – and this means they are likely to get a higher percentage of profits, control, and protective rights in a contract. But, there are tons of different ways the returns can be split.
It just depends how much value you can bring!
For example, if you have the expertise to renovate the property and double its value, you’ve made yourself irreplaceable. You see, even if you don’t have any money, you can still trade your knowledge and time!
In addition, make sure you’re clued up on costs, and I’d advise you to learn everything you can about materials for the home. Once you’ve purchased these, you can then work out the cost per hour and how long it will take to finish the job.
If you’re going to buy properties to fix up, I’d advise sourcing a team of contractors. This can help your project be more profitable and run smoothly.
This is your money and time, so you want to maximize and scale.
You need to know all the numbers. For example, what’s your cost per sq foot? Look at the sales of similar homes – what are they selling for? What are the average rents you can get? What are the exit strategies?
Make sure you consider everything before jumping in. This way, you can be reasonably sure you won’t end up out of pocket!
Step 4: Finalize your plan
Lastly, you need to finalize your plan and sign a contract. Remember, you will require a legal agreement and joint venture proposal before entering a joint venture.
Your agreement should include roles and responsibilities, and it needs to be signed by all parties. We also highly recommend seeking expert advice during this process.
You should also think about exit strategies and back-up plans. This may be needed as, often, people’s priorities and needs will change over time. I usually favor a 10 year plan – as this is a good time to evaluate.
One person may unexpectedly need to take their money out, or the two partners may fall out about something – either related to the project or unrelated.
What are the benefits?
Some of the top reasons people get into joint ventures are:
- They don’t have the down payment but can be a working partner
- They own many properties and need a partner to scale
- It’s a good way to gain experience
- So the risk can be shared
- So they can gain a full cash partner
The reason most people get into joint ventures is, simply, they need access to what another person has. And, similarly, they might need access to what you have. If this wasn’t the case, there would be no reason for either party to participate.
But, many people are unable to invest as they simply don’t have the capital.
The great thing about a joint venture is that investors can share their strengths and resources, minimize risks, and give themselves a competitive advantage.
If you don’t have the cash or borrowing capacity, you can consider a venture where you find a cash investor who finances the project. Doing this means you can find a partner who has the money, but lacks the time or expertise needed to carry out the work.
The idea of a joint venture is, rather than having to go it alone, team up with someone else. This means pooling your resources, knowledge, and experience to reach your goal. This is a concept that’s been used in business for a long time – and it works in real estate, too!
A joint venture means faster growth. Rather than spending years, or even decades, strengthening your knowledge and building your assets alone, you can partner up with a person or company and get started a lot faster.
Lots of investors are attracted to real estate as an investment as it’s a low-risk way to multiply their money. With property appreciation rates being so consistent, it’s almost certain to make a profit.