18 Feb Joint Ventures' Pros and Cons. Part 2 – Peter Koulizos
Joint Ventures on the surface seem like a good way to get into property either as a small operator or joining others in a large development. Peter Koulizos, from ThePropertyProfessor.com.au, takes us through the pros and cons of this type of investment and details the areas you need to be ware of before getting involved. This is the second part of our interview. You can list to the fist one here.
Kevin: Earlier in the show, I was talking to Peter Koulizos, the Property Professor, about the pros and cons of joint ventures, which has been prompted by an article in the latest Australian Property Investor magazine. We pick up on that conversation.
How dangerous would it be if two parties went into a joint venture who had no experience whatsoever in developing property and therefore didn’t know what problems are going to be emerging? Do joint ventures suit more the experienced developer?
Peter: Certainly do. I’d encourage people to do some of their own projects on their own and then look at joint ventures if you need to. Because when you do a joint venture, you add another risk, which is called business risk. There are many risks involved in property development, but when it comes time to do a project with somebody else, you are also exposed to business risk.
Kevin: I guess this is a fairly obvious question but maybe not necessarily an obvious answer – I’d hope not – but what are the benefits of a joint venture, Peter?
Peter: Firstly, you can make a lot of money in property development and a lot of people don’t have the money to do it on their own, so even if it’s just 50% of the total profit, 50% of something is better than 100% of nothing.
It allows you to get your foot in the door, so to speak, and if you’ve selected the right joint venture partner, you can gain experience and knowledge, and this is experience and knowledge that money can’t buy. You can read as many books and as many magazines as you like but nothing can buy you that experience.
Providing you have enough experience and knowledge, then a joint venture just might be a phase that you go through, and then when you have enough money yourself, you might decide to go back to doing it on your own, or if you find that the first joint venture works well between you and your partner, then you might go on to do bigger and better things.
But everyone is different, as there is a lot of risk involved in joint ventures, and some people are very risk averse.
Kevin: Tell me about some of the areas that we should be wary of. What are some of those risks, Peter?
Peter: Making sure, for example, the documentation is watertight, making sure that each person knows what they are entitled to, what each person’s responsibilities are, and there are exit clauses. As I said earlier, things happen in life that we don’t expect, but in the document, you have to try to include the unexpected.
For example, if you need to get out of the deal during the year – you might lose your job during the year, you can’t afford to keep making the payments – what is the option for yourself to get out of that joint venture agreement and still keep everything amicable?
Kevin: Yes, three basic areas, aren’t there? What do we each put in, what do we each get out, and how do we get out if we have to? They’re the three basic elements that you need to discuss with a solicitor.
In terms of what do we take out, is that always done on an equal basis, Peter?
Peter: No. It depends what each party brings to the table. Often, it will be 50/50, if each puts in 50% of the money and you agree that somebody’s project management skills are just as valuable as somebody else’s building skills. But really, it’s the money that you put in that most of the time will determine how much money you will take out of the project.
Let’s say, the project manager is a very experienced project manager and they might be asking for a greater share of the profit; one option is for the project manager to get a project management fee, which is separate to the sharing of the profits.
Kevin: Well, there’s a lot more information inside Australian Property Investor magazine in this article.
Peter, I appreciate your time in helping us understand a little more about it through this podcast, as well. Peter, thank you so much for your time.
Peter: My pleasure. Always a pleasure to chat with you.