As conditions in Australia’s property market continue to tighten, many would-be buyers are looking to joint ventures to get their foot on the ladder. Teaming up with another buyer can be rewarding for all types of investors, when done properly. Chloe Taylor reports.
A self-professed “big fan” of joint ventures (JVs), Helen Collier-Kogtevs, managing director of Real Wealth Australia, is all for investors exploring property partnerships.
“I would rather see people entering the market with a JV than not at all. However big or small your share, it can be leveraged later down the track.”
Also in favour of the joint venture is Rich Harvey, CEO of Propertybuyer, who argues that it could be the right move for those looking to invest in tough market conditions.
“The banks are restricting their lending capacity,” he explains. “With a JV, you’re manufacturing capital growth rather than waiting for it.”
Most people don’t enter a joint venture as their ﬁrst choice: if you can invest on your own, it gives you more control over your investment and strategy. However, if you don’t have enough of a deposit or borrowing capacity to invest solo, JVs can give you greater buying capacity.
“You might be equity rich but lack serviceability,” Harvey says.
“Having one partner with a strong income and one with more equity usually leads to success, as many investors are able to buy a more expensive property through a JV than they could on their own.”
So, how do you get the ball rolling on your own JV project?
Collier-Kogtevs advises any joint investor to have their agreement drafted into a document by a solicitor.
“It doesn’t need to be anything too complex, but a document needs to exist,” she says.
“When you don’t have some sort of document, it can be very difficult to remember what you said three years ago. If there are any issues, you can refer back to it.”
The following are four core aspects of a JV that need to be outlined in the legal document.
“Start off with a meeting about who’s going to contribute what,” Collier-Kogtevs says. “Your document should state whether you’ll be paying half of the costs, or the whole deposit, or if you’ll be getting a loan. That clarity is vital.”
Once all of the parties have agreed on ﬁnancial contributions, they need to discuss hands-on responsibilities. “Identify the responsibilities involved and who will manage each of them,” Collier-Kogtevs suggests. “These might include mortgage repayments or project management. You don’t want any confusion later down the track.”
TIPS FOR JOINT VENTURE SUCCESS
See a lawyer
Seeking independent legal aid is crucial. Don’t make the mistake of going into the partnership on a handshake.
Who will pay the bills month-to-month? Who will be responsible for property management and handle correspondence?
Have clear time frames
Will you own the investment for a few years? Ten years? Longer? What happens if someone wants out?
Know your end goal
An exit strategy is crucial, as you ideally want to use your joint venture as a stepping stone into your own investments.
3 Long-term plan
“The third thing you need to do is decide what you’re going to do with the property in the long term. You need an exit strategy; this will involve deciding on areas such as how long you’ll keep the property; whether you’re going to sell it or if it’s going to be a solid ‘set and forget’; and whether you’ll rent it out for 52 weeks a year.”
4 Ground rules
Collier-Kogtevs also advises JV partners to set ground rules should any personal difficulties arise. “In my personal JVs, I always make sure there are rules that state that whatever happens in life – for example, relationship breakdowns or job losses – the property can’t be sold prior to an agreed time frame, such as three years. If life gets in the way, there needs to be an amount set aside as a buffer to sustain the mortgage and keep payments going. This saves the other party from a huge amount of stress.”
“Joint ventures can be a great learning curve for the less experienced partner – and learning is everything in this market”
Risks of joint ventures
While there are plenty of upsides to investing in property in partnership with someone else, there are also risks to be aware of.
One of the biggest risks is the ﬁnance risk, explains Todd Hunter, founder of wHeregroup, who says you can wind up being held liable for your partner’s circumstances.
“A joint venture has the potential to be the catalyst that gets you into the market, and joint ventures can be a great learning curve for the less experienced partner – and learning is everything in this market. However, there are ﬁnance risks to be aware of,” Hunter says.
“If you’re granted a loan of $300,000, [you might] split that down the middle and you each pay your share. But if one of you stops making repayments, you’re both liable for the full amount. So, if you decide to divide a loan in that way, make sure you have the documentation to prove it. The bank will chase you if your partner falls through, and you need to be in a position where you can make up the shortfall for a while, if that becomes a necessity.”
If you purchase a property as a JV, it can affect the way some lenders ﬁnance your investment, adds Collier-Kogtevs.
If two people buy a $500,000 property together, with the agreement that they’ll each pay half of the deposit and borrow half of the remaining costs, lenders will burden both borrowers with the entire property’s debt – but they will only consider their half of the income from rent.
“The bank will look at Investor A and calculate all of the debt against them, so they will be assessed on their ability to repay $500,000,” says Collier-Kogtevs.
“However, they’ll only consider 50% of the income generated by rent. Then they’ll look at Investor B, and consider the full $500,000 debt – but again, they’ll only consider half of the rent. This can limit your investments moving forward.”
In some cases, investors can work around this: for instance, Investor A might pay the entire deposit, while Investor B might borrow the remaining funds.
“They can have separate agreements to protect themselves,” she says. “It’s a little more complex, but that shouldn’t stop you – often a little more effort pays dividends in the long run.”
It’s also important to consider that a JV could affect the type of loan you are granted.
“Depending whose names are on the loan, your finance may move from a standard residential loan to a commercial loan,” Harvey says.
“If that happens, the maximum finance available to you will be 60–70% of the property’s value, meaning you’ll have to make up the remaining 30% yourself. If people aren’t aware of that it can really hamstring the project.”
“With a joint venture, you’re manufacturing capital growth rather than waiting for it”
Markers of success
Although there are no guarantees of success, there are some ways to minimise the risks involved and maximise your chances of a great result.
First and foremost, you need to go in with a clear plan: what is your end goal and your ideal time frame?
You also need to consider your strategy. There are two ways you can go into a JV: through joint ownership of an existing property as an ongoing ‘buy and hold’ investment, or using a build and sell strategy, which sees you owning the joint assets for a shorter period of time.
“The second option is definitely not something for the ‘fresh’ investor,” Harvey warns.
“There’s often conflict, as well as delays and unexpected circumstances, which can cause panic and worry if you’re not a seasoned investor.”
Having a professional team on board to help you make swift decisions will help those embarking on a build strategy, Harvey adds.
“Ideally, that means a town planner, a professional project manager and so on,” he says. “Getting a good builder – one who has the right insurances and will get the project completed on time and to budget – is vital. Even if you’re an expert, it’s still important to have that professional help.”
And at all times, keep your eye on the ultimate prize: your end goal, which will hopefully see you enjoy a strong profit to be leveraged into future investments of your own. But until then, as Collier-Kogtevs says, “owning 50% of something is better than owning 100% of nothing”.
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Originally published as: http://www.yourinvestmentpropertymag.com.au/strategy/how-to-make-a-success-of-a-property-joint-venture-240684.aspx