Real estate investment is often viewed as a one-person operation, especially flipping houses.
But while there are plenty of successful solo flippers out there, creating a real estate Joint Venture (JV) can provide a lot of benefits, allowing you to take on bigger projects and scale.
Sounds simple, right? Well, yes and no. For your investment crew to be successful, you need a good knowledge of how joint ventures work and how to structure a joint venture real estate deal. Thankfully, we’re here to help. We’ll cover all this and more in this guide to joint ventures. Let’s get into it.
What is a Joint Venture in Real Estate?
A joint venture in real estate is when two or more investors combine their resources for a property development or investment. Despite working together, each party maintains their own unique business identity while working together on a deal. Therefore, even though a joint venture sounds like a partnership, it’s a little bit different.
To avoid any confusion, let’s compare the two:
- Partnership – Multiple people form one entity in which to conduct business alongside each other.
- Joint Venture (JV) – Each party works under its own entity. JV partners only work together on a specific deal or project.
Who does what in a joint venture is decided on a project-by-project basis. Furthermore, the share of the profits is also agreed upon by the parties involved.
When Might a Joint Venture be Used?
Joint ventures are typically struck up when two or more investors need something the other has to get a deal done.
That could be a number of things, such as:
What Are the Most Common Real Estate Joint Venture Structures?
Joint ventures can be in a variety of legal structures. The one you chose to go with is all dependent on the type of property you’re investing in. However, whatever structure you decide upon, always ensure you consult with an attorney on any legal agreements made.
That being said, whatever avenue you and any other party decide to go down, you’ll first need to put together a joint venture agreement that specifics:
- Each party’s contributions
- Your individual responsibilities
- How profits will be distributed
Here are the structures most commonly used in a real estate joint venture.
Limited Liability Company (LLC)
This is the most popular real estate joint venture structure. As any experienced investor will tell you, setting up an LLC is not only relatively straightforward, it’s also inexpensive. The average fee for setting up an LLC is $132.
The joint venture agreement terms – as mentioned before – are included in the LLC’s operating agreement. Furthermore, each party will be a member of the LLC.
LLC’s are also popular because they provide everyone involved with liability protection. This is extremely important, otherwise, it’s your responsibility if something goes wrong.
Corporations are usually used for larger investments and more complex scenarios. In real estate, this could be a large-scale multifamily property investment, not for a one-time fix and flip deal.
There are two types of corporations: C Corporations and S Corporations. Like an LLC, they both offer liability protection for JV members.
The specific structure of the Joint Venture agreement will be spelled out in your corporation’s bylaws. Furthermore, Each partner in the joint venture will own shares in the new corporation.
The Alternative: Partnerships
As mentioned before, partnerships are not joint ventures. However, they are still used from time to time. This is usually because they are more flexible and require less expense and paperwork.
There are two types of partnerships: general and limited. General is used if both parties are involved in the investment. Limited is used when one, or more, are passive investors. This means they only contribute capital and don’t play an active role in the project.
The downside of partnerships is that all the parties involved take on personal liability, for the actions of themselves are the other partners.
As any investment carries an element of risk, including real estate, it’s advisable to protect yourself by setting up either an LLC or a Corporation. In fact, we never release funds to investors who don’t set up one or the other.
How to Find a Joint Venture Partner for Real Estate?
This can be tricky. Unless you already have a partner in mind, chances are you’ll have to go out and find a joint venture partner(s).
Here are some general tips you can take to begin your search for a joint venture partner:
- Ask within your personal network
- Network on local property investment forums
- Use LinkedIn to find investors near you, join some property investment groups and start making connections
Depending on how long you have to find your JV partner(s), you’ll also want to vet them to see if they’re a good fit. Here are some of the things you should be looking for in a prospective party:
- Complementary skill set and temperament
- Similar work habits
- The same vision
- You get along with one another!
There may be a few more factors that are important to you but we know from experience that these are the four that can make or break a successful joint venture team.
The Bottom Line
A joint venture real estate team can be a great option if you’re unable to invest in a property alone or need to team up in order to scale your operation.
In order for a real estate joint venture to be successful, ensure you have liability protection, you both complement one another’s strengths and weaknesses, and you both have the same goals.
Contact us today if you want to secure funding for your dream real estate investment property.