How To Do Your Due Diligence When Working With A Joint Venture Partner

How To Do Your Due Diligence When Working With A Joint Venture Partner

Posted by Nello Team

A good rule оf thumb, ассоrdіng tо landlord аnd rental rеsеаrсh, іs tо charge nо lеss than 1.1 percent оf thе home’s vаluе uр tо аbоut 100,000 (1,100), 1 percent uр tо аbоut 125,000 (1,250), аnd а slіghtlу smaller percentage аs уоu climb thе home-value ladder. For example, homes valued аt 150,000 tо 175,000 usuаllу rent fоr 0.9 percent оf the vаluе (150,000 х 0.009) оr 1,350 tо 1,575, whіlе you’d оnlу gеt, аt аn average, аbоut 0.75 percent (3,000) fоr а 400,000 hоmе (400,000 х 0.0075).

  • Pool resources and profit from other people’s strengths
  • Have access to properties that you might not otherwise be able to afford
  • Make the profit you would otherwise miss

However, if such a partnership goes wrong, as the JV partner you could be left holding the can. The way to mitigate the risk for better upside is to carry out due diligence before you join the partnership.

What is a Joint Venture (JV)?

The idea behind a joint venture is that it acts as a partnership where the JV partners share both the risk and reward. It can be straightforward to set up a joint venture: you partner with someone and decide how much reward each JV partner will receive from the property investment.

Another JV partnership might see one party supplying the cash in return for a fixed percentage return (interest), replacing the need for the second party to source the loans required to get the property investment off the ground.

No matter how the JV partnership is structured, you’ll need to make sure that the agreement between you and your JV partner(s) is watertight, and that your interest in the property is protected. Common ways of doing this include owning the property jointly (as tenants in common) or for one partner to own the property while the other has a first charge on it, so it cannot be sold or refinanced without their permission.

Stay secure in a JV Partnership

While holding a first charge on a property is the most obvious way to provide security of your status as a JV partner, there are other methods of doing so:

  • Hold a legal charge on an alternative asset (especially valid if there is little or no equity in the investment property)
  • Ensure there are proper loan agreements and personal guarantees in place
  • Be comfortable with the risks by having a great relationship with your JV partner

If you are the one putting up the finances, make sure that you understand how the amount loans will be paid back to you.

The risk side of joint ventures is centred predominantly on the people side of the venture: and this is where specific due diligence is needed.

What due diligence is needed if you’re thinking of joining a JV partner?

Due diligence is, in its simplest form, answering a series of questions. In respect of JV partnerships, these are the questions you should ask and have answered satisfactorily before you enter a joint venture:

  • Are you completely comfortable with your partners? Do you trust them, and will you be able to have a good working relationship with them?
  • Do you share a common vision, and do you hold the same values?
  • Does your partner have the complimentary skills or resources that are required?
  • Have you set the responsibilities of each JV partner?
  • What are the exit strategies: how will you get your money back or receive profits or income from the property investment?
  • What are your contingency plans should things go wrong?

Tips for formalising a JV partnership

Having answered all the due diligence questions, you’ll need to formalise your agreement:

  • Put everything in writing
  • Instigate a trust deed which stipulates ownership and profit percentages
  • Consider single ownership of the investment property and, if building a property portfolio as a joint venture, alternate property ownership
  • If the JV is structured like a company, ensure shares are owned in appropriate percentages

Remember, while joint ventures offer many benefits, always protect yourself as a JV partner and landlord by carrying out adequate due diligence before you sign on the dotted line.