If you’re short on time but have the capital to invest, a joint venture could be the perfect way to make your money work for you. Rather than spending your time researching properties, the market, working through the mountains of mortgage paperwork and overseeing the property, you can invest in real estate the “lazy” way.
Table of Contents - How to Invest in Real Estate the Lazy Way: Joint Ventures
Joint ventures make it easy for you to profit from real estate. As long as you find a reliable, reputable partner to contribute sweat equity, you’ll both benefit from the investment. They’ll get the opportunity to make investments that they may not be able to afford otherwise, and you’ll enjoy profits without the hassle of handling the entire investment yourself.
What is a joint venture?
Joint ventures are partnerships between people or companies to develop real estate. The parties agree to certain roles in exchange for a portion of the profits. Typically, someone with capital partners with someone who has experience developing and overseeing properties, whether that’s a fix-and-flip, commercial development, residential rentals or other real estate investment.
Joint ventures aren’t limited to two parties, although the more parties involved, the less profit everyone stands to gain. Each member of the joint venture is liable for the profits and losses associated with the property—but only those specific joint venture profits and losses. If one joint venture goes under, it won’t affect the rest of their business entities and investments.
Joint venture structures
To ensure that your joint venture goes off without a hitch, it’s important to define the structure upfront. Having a legally binding agreement helps protect all the parties involved—in other words, there’s recourse if someone tries to take a larger share of the profits than agreed upon, or even selling the property out from under you.
It’s always a smart idea to enlist the help of a real estate attorney to draw up these documents. While you can find legal boilerplate online (and your attorney may have some available for you to use), there’s no substitute for a contract specifically tailored to your individual investment, the circumstances and the parties involved. Whether you ask the attorney to draw up a new contract or simply review the agreement you’ve drafted, make sure that you get appropriate legal advice. As the financier, you stand to lose a significant amount of money, should your partner's bail on the project or try to bilk you out of your shares.
Your joint venture agreement should cover:
Your profit distribution doesn’t need to be equal. For example, the sweat equity partners may receive a larger portion of the profits due to the time and expertise they contribute. As long as the numbers add up to 100 percent, you can divide profits however you choose.
Management and control
This section covers the duties of each partner, as well as the exact structure of the partnership.
The agreement needs to cover who is responsible for capital contributions, and by which date they’re due.
Ending the joint venture is just as important as beginning one. How and when will the partnership end? Which circumstances will end the joint venture prematurely, and how will you handle the dissolution?
When it comes to structuring, the agreement may be all you need. Joint ventures can be incorporated, but that’s not necessarily the wisest idea. Some Canadian banks will refuse to give new corporations financing, while others refuse to finance residential projects. You may have to put up your own collateral to get around these restrictions. Generally, unless you’re involved in a large commercial project, incorporating is unnecessary.
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Perfect for the ‘lazy’ investor
As long as you have the capital, joint ventures are an easy, “lazy” way to invest. All you’ll need to do is draw up the agreement, review it with your attorney and keep an eye on the progress while your sweat equity partners oversee the day-to-day work of real estate investing. In return, your partners may get a larger share of the profits—an incentive to manage the property well and work for the best possible outcome.
They’re also a great way to build your real estate portfolio when you’re just starting out. The key to joint ventures is picking a partner (or partners) who can offer something you lack—in this case, time and effort. You’ll work together to accomplish your common goal, all while you can learn as much or as little about real estate investing as you choose.
Joint ventures can also provide an opportunity for you to invest somewhere that may not normally be feasible. For example, you can work with partners in other provinces who provide local expertise or create a joint venture to invest in foreign countries that wouldn’t normally allow Canadians to purchase property there.
What to watch out for
Joint ventures are not without risk, even when you act as a passive partner. Make sure that you are all on the same page about what to do if your investment doesn’t work out the way you had hoped. For example, the market could tank and you’re unable to rent out your units at a profitable rate—do you sell the property and take the loss, convert it to another use or wait until the market recovers? It is very common for joint venture partners to disagree on how to handle curveballs and disappointments, especially if someone is counting on those profits for a living.
Luckily, this and other potential pitfalls can be addressed within your joint venture agreement. Make sure that you discuss these situations before anyone signs on the dotted line, and you can rest assured that you’re fully informed about the risks, your desired strategies and how to get the most out of your capital investment…without doing all of the hard day-to-day work.
The Lazy Way to Invest in Real Estate
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