According to Investopedia, the definition of a Joint Venture ("JV") is "The cooperation of two or more individuals or businesses in which each agrees to share profit, loss and control in a specific enterprise."
JV's have long been used in the business world and the real estate industry as they allow individuals to work together and bring their respective skill sets and/or assets to the table which in turns makes the whole greater than the sum of the parts. Typically, one party brings capital to the table and the other brings their skill set and real estate experience to the table.
The ideal candidate to participate in a JV is someone who is employed, has a good credit score, has access to capital, has a basic understanding of real estate but lacks the time and/or experience to invest on their own.
Why Use a JV Partner?
JV's can be a great option for those that want to participate in the wealth creation that real estate can offer but don't have the experience to select the right investment property and lack the time and / or skills to manage it effectively. North Americans are in an enviable position as our real estate sector still offers opportunities for positive cash flow and appreciation as long as you know where to look and how to structure the deal.
On its face, buying an investment property may seem like a simple proposition. You find an investment property, make an offer, close on it and then collect rent cheques. It seems simple enough, however, mistakes made anywhere throughout the various phases can be detrimental and could lead to negative cash flow, large capital expenditures, legal issues and even a forced sale.
A good JV partner will be able to successfully navigate the partnership through the four phases involved in purchasing an investment property as outlined below.
- Property Selection
- Closing on the Property
- Managing the Property
- Exit Strategy
1. Property Selection
The single most important phase of purchasing an investment property is property selection. Before you even submit an offer of Purchase and Sale, you should know upfront whether your investment property will be a successful investment.
A good JV partner will be able to list criteria they are using to explain why they are purchasing a particular property, and it goes well beyond simple cash flow. Factors that need to be examined include the economic health of the city/region which includes metrics such as GDP growth, unemployment, population growth, vacancy rates, rental rates and anticipated developments/projects or closures. Other factors that need to be considered are cap rates, cash flow, financing, leverage and any potential capital expenditures required.
2. Closing on the Property
Closing on an investment property can be a stressful time as you need to be able to successfully manage the purchase and finance process, both of which, if not managed properly, can instantly kill a deal. When you are dealing with a multi-unit residential property there will likely be a lot of back forth between the buyer, seller, real estate agents, lawyers and the financial institution. With larger properties your financial institution will also likely require a Building Condition Assessment, Phase I (and maybe Phase II) Environmental Report and Appraisal which means managing even more people/projects. Typically there will be a blizzard of documents flying back and forth between all parties and it can be a time consuming process that needs to be managed in a timely and organized fashion.
A good JV partner will not only be able to manage the closing process, but will be able to leverage their team of relationships and contacts to bring the best financing terms to the table along with their supporting team of lawyers, appraisers, real estate agents, financiers and engineers to help make the closing process seamless.
3. Managing the Property
Effective management of an investment property goes well beyond simply collecting rent cheques. An investment property is a business which means that you need to either be increasing revenues or decreasing expenses. A seasoned JV partner will know from the outset how they are going to add value to the investment property even before they begin to manage it.
Managing the property is a multi-faceted discipline which requires knowledge of leasing, eviction, spotting inefficiencies, abiltiy to spot revenue opportunties, regular and preventative maintenance, provinical legislation, tenant screening, and a multitude of other things which go into effectively running a successful investment property.
4. Exit Strategy
Many investors tend to buy investment properties without having a real game plan. A good JV partner should be able to tell you from the outset what your options will be for potential exit strategies. This type of certainty will give you peace of mind and let you plan your financial future more confidently.
JV Partner as a Catalyst
Odds are that if you are reading this article that you have contemplated purchasing an investment property at some point but haven't actually done anything about it. There is always a reason why you shouldn't invest now or you get fired up and then just as quickly become disinterested. In my investing career I've come across many individuals who are prime candidates to purchase investment properties either on their own or with a JV partner, but more often then not, the result is always the same, they end up doing nothing.
A good JV partner will serve as a catalyst to actually get you motivated and help you to overcome the psychological barriers that are thrown up when one contemplates investing in real estate. Almost like a personal trainer helps to get you physically fit, a good JV partner can help you on the investment front.
Finding the Right JV Partner
You've gotten this far and think that a JV partnership may be for you. Before going off half-cocked, make sure you know what to look for in a good JV partner.
The proof is in the pudding, so your starting point should be to check past performance, references and testimonials. Ask them about their background and experience, what criteria they use for property selection, how they plan to add value to the property, what their exit stategy is, what anticipated returns will look like, what type of funds you need to provide, get them to outline your involvement in the process, what type of reporting and accountability will be implemented and get details of their investment team. Make sure to request a sample JV agreement and ask them for a tour of their existing JV properties so you can get a feel for the quality of their investments. Always make sure you receive independent legal advice before entering any new venture to make sure everything is on the up and up and that your rights are legally protected.
In closing, if you find the right JV partner, your income property investment should be a completely secure, successful, passive and headache-free investment.
Author: Paul Kondakos, BA, LL.B, MBA - Professional Real Estate Investor