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Pros and Cons of Joint Venture Partnerships in Property

By December 4, 2020No Comments

Joint venture partnerships involve going into business with another individual (or individuals). It often works well when one of the partners has the money, but not the skills or time to carry out a refurbishment project and vice versa.

Then again, it could be that both partners have the money and the time and skills to make their property dream happen. In which case, they will have double the capital to spend and should get the refurbishment completed in half the time. The result is a better return on your investment (ROI).

Other pros of a joint venture partnership in property

Loss is less. No-one wants to think of their project as going ‘belly up’ – but if it does, at least with two people financing the costs, any financial loss is spread between you. And this should mean less stress too (provided your partner does their share of the ‘winding up’ too).

Tax benefits. You’ll only pay tax on your own share of the property, rather than the building as a whole.

Bigger contact pool. Your contacts will double overnight, meaning you should be introduced to better deals and more people who can sort out any problems you might stumble across during the project.

Brilliant sounding board. No one understands the joy, sweat and tears of your business better than your partner does. And that’s why he or she can be a brilliant sounding board and brainstormer of ideas with you.

Flexibility. You can introduce new investors, leave the partnership at any time or sell up (under agreement with your partner). In other words, once you sign a Joint Venture Agreement, it may be binding legally, but you’re not tied to it forever.

But very rarely is anything in business either black or white. There is, of course, another side to Joint Venture Partnerships, which we will go on to list here:

Potential cons of a property joint venture partnership

Disagreements with partner. Partnerships can go wrong as well as right. The partnerships most likely to survive are those where those involved knew each other first – where they share a common goal and means of getting there. Try and avoid a partnership with a close friend or family member – these rarely go smoothly and can result in irreparable relationships afterwards.

Lengthy leaving process. Yes, you can leave the Joint Venture at any time, but it often requires notifying your partner in writing well in advance and getting their approval. And, if your exit strategies don’t align, it could certainly lead to a fair amount of animosity.

Capital gains tax. Leaving a partnership could result in a big capital gains bill when you sell your share of the property.

Mortgage difficulties. Yes, you’ll have a bigger deposit, but many lenders prefer to give a mortgage to just one person rather than a partnership, so it may take some time to secure a mortgage with an acceptable interest rate.

Reliance on partner. You’ve put a large share of your future financial prospects into the hands of another individual. That can be quite scary wondering if you can rely on them to do what they say they will.

On the whole, Joint Ventures do tend to turn out well (for all of the ‘pro’ reasons above). Prior to embarking on one though, each partner’s role should be clearly defined, as should the profit-sharing structure and exit strategies agreed.

Chris Kirkwood

Chris Kirkwood

Development Director, Sourced.