Joint ventures in Real estate are increasingly becoming popular in Europe, Africa and other parts of the world. A rapid and efficient mechanism for growth, such corporate ventures have enabled simple access to new skills, markets, and technologies, and have proved to come with a mint of opportunities and advantages. Not just companies, but individuals are finding refuge in joint ventures (JV) and partnerships as a way of achieving their objectives.
A real estate joint venture refers to the coming together of multiple parties with an aim of compiling resources to grow a real estate project. Many JVs are made up of two separate parties: the capital member and the operating member. Typically, the capital member takes care of the financing for a larger portion of the project, if not the entire scheme. The operating member, usually a real estate expert, is responsible for the day to day operations and administration of the scheme. However, this isn’t to say that the capital member cannot also play the role of an operating member or vice versa.
Structure of a Joint Venture in real estate
In most cases, the joint venture participants will set up the real estate scheme as a Limited Liability Company (LLC). The joint venture agreement is signed by all parties, and details the terms of the venture such as its goal, the contribution of each member, financing for the project, the splitting of the profits, delegation of management duties for the project, management and control, exit mechanisms, etc.
All the same, a joint venture in real estate is not limited to a limited liability company. Partnerships, corporations, and several other business structures can all be employed to set up this form of partnership.
Distribution of profits
This is one of the most important distinctions to make when outlining the terms for a joint venture. It is important to understand that compensation does not have to be equally distributed. More active members, or those that have poured a larger investment into the project may get a better compensation than passive members. You may call this profit sharing.
Equity sharing, on the other hand provides for a share of real long-term ownership in the real estate project through stock, membership shares, stock options, and other equity vehicles. An equity sharing scheme often only applies to founders, upper management, and executive level employees.
Joint Venture Capital
On to the key theme of the article, funding is the one thing that real estate joint ventures need more than anything else. Raising money for real estate JVs is of the utmost significance and can be argued as the foundation of each deal. It’s worth noting, all the same, that raising JV capital need not be as hard as most investors may make it out to be.
While there are many ways to secure capital, we’ve put together some four sources that you should definitely pursue morethan any others.
Raising joint venture capital in real estate- sources
- Private and hard money lenders
These are among the easiest and most straightforward source of JV real estate funding. Hard money lenders are licensed semi-institutionalized lenders who lend cash to those in need. Contrarily, private money lenders are individual parties with access to money and an inclination towards investing it. Private and hard money lenders have no association whatsoever with institutionalized banks, and will in return for their services, ask for about 12-15% in interest.
- Private placement memorandums
An often misunderstood strategy, private placement memorandums are not that different from private offerings. They award real estate Joint Venture entrepreneurs with the capacity to raise capital through the sale of securities to other investors.
Wholesaling is yet another means that you can use to obtain capital for your real estate project, and at that, a quick one. Although not a traditional source of financing, wholesaling enables you to flip a small share of properties and invest the revenue in a refurb. To pull this off, however, you’ll need to have good mastery of the industry, a reassuring subject property, and a reliable buyer’s list.
- Self-directed accounts
Did you know that a retirement account can serve as an incredibly dependable source of funding for most of today’s real estate joint ventures? Indeed, the Internal Revenue Service lets account holders that have met qualifications, to direct their savings into property investments without an early withdrawal penalty. Even so, any of the profits gained must be returned to their original account.
Securing Joint Venture capital in real estate
The single next most important thing for joint venture investors to do after knowing where to acquire funding is to secure it. Today, there are countless lenders merely waiting to lend their money to investors. It’s up to you to prove that you are worth the investment.
Nothing instills confidence in your financiers than experience. It creates a piece of mind that cannot be underestimated. If you’re a new investor, you can always make up for your lack of experience with knowledge, preparation, and a keen attention to detail.
Real estate has always been a people business. There’s no putting limits on what a competent team led by the right person can accomplish. Raising Joint Venture real estate capital begins with your team composition. Before you even think of asking for funding, ensure that your team exhibits these qualities; passion, flexibility, tenacity, commitment, teamwork, knowledge, and “coach-ability.”
At this point, you already know that one of the best ways to woo financiers is to create value for them. Tell them the amount that you’re seeking to raise, and their potential returns on their investment in your JV real estate project. Remember, any smart money lender will want to mitigate his/her risk to as much of an extent as possible. It’s best not to leave any stone un-turned.
Where to find real estate investor partners
- Networking- Attending local events where your people of interest conjugate is one way you can get in touch with potential venture partners; your local area chamber of Commerce perhaps, a BNI group, gyms in wealthy areas of town, even fundraiser events for charities. Don’t forget to be professional.
- Social Media- Social media has completely turned around the nature of how people with the same interests interact. Facebook and LinkedIn groups, together with Twitter,have made it easy to approach strange people without appearing creepy or like you’re trying to sell them something.
- Real estate agents- Real estate agents and property managers deal with all types of participants in the real estate industry and know who is selling a property and who is in search of investment partners. This makes them a huge resource to bring you together with other interested parties.
- Friends and family- Who’s to say you’re not already associated with someone with investments in real estate? Or at least they’ve got the funds to do so and have taken interest in it. Well, you’re never going to know unless you start asking around. Get word out of your search for serious real estate partners and wait.
- Investment clubs- Investment clubs teach about investing and networking and are a hotspot for investors that you can get into partnership with as well as learn and grow from them.
- Other areas that you can meet real estate investor partners include: Business Angel Networks, Property & Business Networking Events, property membership sites, and launches, functions and openings.
Raising Joint Venture capital in real estate is an integral step in every project. Note that the most successful lenders/ financiers have learned how to pick out the best investors based on how they handle their cash and give it back with interest. Do you and your partner want to appear next on the financiers’ radar? Be sure to implement everything in this article on a daily basis. Best of luck!