Maybe you shared a seat on the school bus or a room in your college dorm. Maybe you’ve been friends forever or just met last month in the Greater Washington, DC area. Whatever brought you together, you formed a bond with this individual and the company they work for, too. You make a good team, and you’re ready to take a team approach to real estate investing. Together, you are ready to share the risk and reward of a joint venture (JV).
A Joint Venture Requires Collaboration
A joint venture is a deal between two or more parties to combine resources and collaborate on a real estate activity. The parties share responsibility, and in the end, share the profits (Yeah!) or incur the loses (Ouch!) that stem from the real estate investment. Whatever the outcome, JVs help investors develop their investment skills and grow their real estate portfolio.
Oftentimes, joint ventures are short-term relationships designed to turn a quick profit. Over time, JVs may transition into a more structured business arrangement. The parties might decide to form a limited liability company (LLC), corporation (S-Corp or C-Corp) or partnership. Each business structure has its own set of advantages and disadvantages. In this investment article, the focus is the pros and cons of joint ventures.
Pro – Combine Assets, Expertise, Resources
Obviously, one of the advantages of JVs is sharing resources. For example, Ivan the Investor wants to purchase a single-family home in the Greater Washington, DC area. He wants to fix and quickly resell it. However, he lacks the capital needed to purchase the home. So, he sets up a joint venture with his old college roommate. They sign a contract which outlines their operating arrangement, making it legally binding. A contract like this sets important ground rules and states how to handle any disputes.
Each party contributes its own assets, plus expertise and resources. The two investors combine their capital to make the purchase. Perhaps, based on their operating agreement, they share sweat equity in addition to capital equity. They remodel the property themselves, preparing it for market.
Con – Disagreements Hamper a Project
If things go well, they share control over the project in a fair, balanced way. Each party contributes the equity and efforts promised, and the project is completed quickly and efficiently. However, disagreements between the parties might risk the deal. Maybe one of the investors is apathetic – or domineering. One may try to take advantage of the other. Investors should be careful when they choose a partner in a joint venture. Additionally, they should meet with a business attorney to prepare an operating agreement that everyone understands and agrees to follow.
Pro & Con – Sharing Risk and Reward
Every real estate transaction comes with a certain amount of risk. A joint venture spreads this risk among several parties. Sometimes, circumstances negatively affect the profit of a home sale or real estate investment. In these circumstances, neither party bears the brunt of the disappointment and its effects. On the other hand, when the project prospers, investors split the profits. They make less money than if they were the sole investor, yet they still earn a reward on their initial investment.
Team Approach to Real Estate Investment
Joint ventures take a team approach to real estate investment. Two or more parties share their resources, risk, and reward. When one party can’t reach a deal alone, it makes sense to enlist others to participate. Together, they can develop a mutually beneficial deal. Each party brings its resources, expertise, and capital to the deal. One partner doesn’t bear all of the responsibility and risk associated with the real estate deal. Investors who choose their partners carefully, draft an operating agreement effectively, and invest wisely will find success in a joint venture.
Test Out a Joint Venture Scenario
Want to analyze the financial aspects of joint venture scenarios? You can use our hard money calculator to gain valuable insight. It’s like talking with one of our experienced underwriters in the Greater Washington, D.C. area.
Fore more information on managing joint ventures and real estate investment partnerships, read here.