How A Joint Venture Partner Accelerates Investment Opportunities

In the world of property investment, the options of where to invest are vast. The complexities of navigating local markets can be daunting, especially for investors operating from afar or even overseas. One effective strategy to mitigate these challenges is forming a local joint venture partner. This collaboration can provide invaluable local expertise, enhance investment opportunities, and streamline operations with “eyes on the ground.”

However, like any business arrangement, it comes with its own set of advantages and disadvantages. In this blog, we will explore the benefits and potential drawbacks of investing with the help of a joint venture partner. Moreover, how to structure deals and the types of property investments that suit this approach.

Understanding how to use a Joint Venture partner in Property Investment

A joint venture partner in property investment involves two or more parties coming together to pool resources. Whether that’s money, knowledge, or time, they come together to share risks and leverage each other’s strengths for a specific project. This partnership can take various forms. From passive long-term investments or to carrying out shorter-term value creation through refurbishment or development projects.

The goals, expertise, and project will dictate how best to structure the joint venture. The overarching reason people use joint venture partnerships is to access higher barrier to entry property opportunities to reduce competition. Firstly, through affordability, pooling funds together gets to a higher price point. Secondly, combining complementary knowledge and experience can give confidence to go after more diverse opportunities.

For example, a 1 or 2 bed flat has first-time buyers, buy to let investors, downsizers, and second home buyers all in the market to purchase. Whereas a commercial unit or a building of multiple apartments has just investors looking to purchase. As there’s less competition in purchasing an asset, you have a better chance of getting the price you want for the deal.

Advantages of Working with a Local Joint Venture Partner

Reduced Operational Risk: Local partners can manage day-to-day operations and navigate local admin tasks, reducing the risk of compliance issues or operational missteps or delays. This is especially important for expats investing in the UK.

3. Increased Affordability and Access to High-Barrier Properties

 Pooling Resources: By partnering with a joint venture partner, you can combine financial resources, enabling you to access properties that would otherwise be out of reach on your own. This is especially vital in large cities where entry costs are significant, such as London.

 Reduced Competition: Joint ventures can help you target high-barrier to entry properties that attract fewer competitors. When fewer investors are vying for these opportunities, you are more likely to negotiate a favourable purchase price. Thus, enhancing your potential return on investment (ROI).

 Better Negotiation Power: With a joint venture partner, you can increase your bargaining power in negotiations. This is through leveraging additional track record, financial power, speed, knowledge, and network. This provides a better chase of better terms and conditions on your investments. This collaborative strength can be instrumental in securing properties at prices that align with your financial goals.

4. Value Creation

 Synergy in Skills: The combination of different skill sets can lead to innovative solutions and value-added strategies. For instance, a local partner might excel in property management while the other party focusses on financing.

 Joint Development Projects: In the case of development projects, local partners can bring valuable construction and planning expertise, enhancing the overall value of the project and enabling you to take on projects that you wouldn’t originally consider.

Disadvantages of a Local Joint Venture Partner

1. Complexity in Management

Potential for Conflicts: Disagreements regarding project direction, profit sharing, or operational decisions can arise, leading to conflicts between people involved.

Diverse Goals: Partners may have differing investment goals or exit strategies, complicating collaboration. You should agree on goals from the start, but property is a long-term investment and situations can change.

2. Dependency on Local Partner

Limited Control: Investors may find themselves relying heavily on their local partner for critical decisions, which can lead to misalignment in vision or strategy. Involving a partner creates reduced control, and so you must have a diplomatic approach compared to owning investments 100%.

Risk of Partner’s Reputation: If the local partner has or generates a poor reputation or operational issues, it can reflect negatively on the overall project and investment.

3. Profit Sharing

 Cashflow sharing: While joint ventures can create more opportunities, they also mean splitting the yearly cashflow, which, depending on the roles each partner plays, can reduce the overall return on investment compared to sole ownership. For instance, an overseas investor with capital (Financial Equity Partner) joins forces with a local partner who runs all the local operations (Sweat Equity Partner). If the financial equity partner runs the project completely on their own, they would get a much better return. Although they can’t because they live abroad or don’t have time, they must share the return in a predetermined split with the sweat equity partner.

 Disposal of interests: Joint venture partnerships don’t last forever, and so you need to establish exit procedures within the agreement. This can become complex, particularly in longer-term investment partnerships or development projects. We cover this in more detail below.

Structuring Joint Venture Deals

When entering into a joint venture, it’s crucial to clearly define the roles, responsibilities, and profit-sharing arrangements of each party involved. Here are some common structures for joint ventures in property investment:

1. Active Joint Ventures for Development/Refurbishment Projects

In active joint ventures, often focus on strategies like the **BRRR** (Buy, Rehab, Rent, Refinance) method or flipping the property back onto the market. Here’s how it works:

Roles: One partner might handle the rehabilitation and management of the property, while the other oversees financing and investor relations.

Profit Splits: After refinancing out as much of the original capital in the deal back to the financiers/investors. The ongoing profits from rental income and property appreciation would be split as originally agreed.

For flips, the split is simple; you split the final proceeds for the sale in the agreed percentage.

Financers can also be paid not as a split of profits but through a fixed interest rate for the period of time until their money is repaid.

Contingencies: If the plan doesn’t unfold as expected and the refinance does not return all the original capital to the finance partner, the agreement must outline contingencies for repaying any surplus during the hold period. This repayment can occur by granting the finance partner the first right to cash flow until the remaining balance is settled or by giving them the first right to the funds released during a future remortgage. This arrangement can include or exclude interest.

2. Passive Joint Ventures for Long-Term Holds

For partnerships looking for a more hands-off approach, passive joint ventures can be an attractive option. Investors looking to benefit from long-term appreciation and cash flow overtime without any development risk. In these scenarios:

Investment Structure: One party provides capital, while the local partner manages the property and operations, or both parties put in capital and the management of the property is outsourced to a 3^rd party agency.

Profit Allocation: Rental income and appreciation are typically split based on the initial investment size. Cashflow, refinance proceeds, and sale money are split to this pre-agreed split. 

Stability: This structure is well-suited for long-term investments in cash-flowing assets.

Types of Property Investments Suited for a Joint Venture partner

Joint ventures can be applied to various property sectors; the main advantage is that they enable people to access properties that previously would provide a barrier to them. That barrier could be price, knowledge, location, network, or confidence.

Residential Investments: You may only have access to a single-family home or apartment, and with a JV partner, houses in multiple occupations (HMOs) and apartment buildings are within reach. These commonly provide greater yields, lower voids, and lower risk as you have multiple tenants paying your mortgage. This is in comparison to just one, which you have with a single apartment.

Commercial Investments: For commercial properties, on your own, your knowledge, network, and confidence might not enable you to invest in commercial real estate. Moreover, your capital might only get you second-rate opportunities. Through partners providing opportunities and knowledge, your capital could enable you to get a slice of the pie for quality industrial, office, or retail properties. Providing long-term contracted income and growth.

Value-Add Strategies: Joint ventures are ideal for BRRR strategies, flips, or new build development. Enables the pooling of resources for larger, more complex projects to reduce the competition. There are a whole host of opportunities available across the residential and commercial sectors for this type of work when you have the finance and knowledge.

How to exit a joint venture deal

This very much depends on the nature of the deal and the strategy, but you need to start with the end in mind and have a predetermined way partners can exit the deal. Here are a couple of exit ideas:

1. You have a set hold period from the outset, and at the end of the period, the asset is sold, and you split proceeds and go your own way.
2. You have a mechanism whereby you can sell your share on the open market with the approval of the other partners.
3. The other partners have the first right to purchase your share at a certain value if you want to sell. This can be market value at the time, a predetermined yield to apply to the cashflow at the time, a market value established by an impartial 3^rd party, or another metric that suits the investment.
4. If over 50% of interest in the asset wants to sell, the whole asset needs to be sold together.

Conclusion

Working with a local joint venture partner can significantly enhance property investment success. Particularly for investors operating from afar or overseas. The combination of local expertise, shared risk, and access to unique opportunities creates a powerful platform for achieving investment goals and spreading risk.

Additionally, joint ventures increase access to high-barrier properties with less competition, improving the chances of securing favourable deals. However, it’s essential to navigate the potential challenges and complexities involved, ensuring that both parties align on objectives and expectations. By structuring deals thoughtfully and choosing the right partners, investors can unlock the full potential of joint ventures in the dynamic property market.