Being interested in the property market you will certainly have heard the term joint venture before. Are you sure what it means though and how it works?
And that is why we’ve written this blog; to explain exactly what a joint venture is, what are the benefits of signing up to one, and how we, here at Sourced, can help.
First though, it’s important to mention that joint ventures are extremely popular in the UK property market. It is often the only way small scale developments get built – especially if it involves a small construction company which is having difficulty getting funding from a high street lending institution. And, of course, since the recession of 2007, many have found it impossible to attain loans from high street lenders.
Property refurbishment projects, especially HMOs or standard buy to let, are also frequently funded along joint venture principles.
What is a joint venture?
A joint venture is where two or more individuals team up to execute a project. In the property market usually one or two people have the skills and contacts, while another individual or company provides the finance to make it happen. In other words, there is a shared mutual benefit.
It could be between a builder, architect and financier, for instance. On a larger scale it can involve a finance house, development company and building company in the creation of a block of flats or housing development.
In the case of the latter, this will often involve creating a temporary subsidiary company called a Special Purpose Vehicle (SPV).
The joint venture can last for any length of time, from three months to three years or longer, but it’s nearly always on a temporary basis.
Types of joint venture partnerships
There are two main types of joint venture partnerships – profit share (which is, by far, the most common) and fixed interest. Profit share is self-explanatory, ie you agree beforehand to split the profits a certain way, such as 50/50.
With a fixed interest joint venture partnership, it could be that one partner (the financier) agrees to pay the other a fixed rate of interest on the profit made.
Benefits of undertaking a joint venture in property
- Turning a vision into reality
Joint Ventures in property can allow a skilled builder to go ahead and construct those houses he’s been itching to get up for years now but couldn’t afford to finance himself. Or the architect who has always fancied building an eco-apartment but also can’t afford to fund it himself (at least not yet). In both cases someone else can provide the funding and the profits split.
- Security from property assets and land
When investing money in property you are signing up to an asset-backed deal so, even if the joint venture doesn’t work out, the land at least is always going to be there and can be sold so, no-one is going to be completely out of pocket.
- Return on investment real estate higher than savings.
If you are the funding partner then, you’ll get far more profit from a successful property joint venture project than you will by putting cash in the bank (interest rates being painfully low now and for the foreseeable future).
- Hands-off investment
Many investors like the idea of putting money into property but don’t want to ‘get their hands dirty.’ By financing a project, they can still enjoy the excitement of seeing a building or development come to fruition.
- Minimum investment opportunity
Joint ventures can attract more than one funding partners and, because investors are putting in a lower amount, which means that they can spread their wealth across a number of different projects. This diversification strategy mitigates risk i.e., if one project goes wrong there are others to make up the shortfall.
- Entry into new markets
A joint venture allows a financier to enter a new market with the confidence that the people he or she is working with know the sector well, have the skills to complete the project and the contacts to ensure it’s a success.
Disadvantages of a joint venture
- Fall out between partners
It’s crucial that everyone involved in the joint venture project gets along well and has the same aim, ie to get the project completed in line with the original aims.
- Cheaper to hire a tradesman
If you’re an investor or architect then, hiring a tradesman might be less expensive than signing up to a joint venture with a construction company.
Joint ventures at Sourced
At Sourced becoming a franchisee means having access joint ventures with Sourced. Our team regularly present JV opportunities to our network, which have been already assessed by our team of property experts. But that’s not all! Our peer-to-peer platform, Sourced Capital, also allows our franchisees to fund their own property projects. This means you can get on with your property project rather than spend your time looking for property investors. Better still, unlike the majority of funding models, profitable property projects presented by a franchisee can receive up to 100% funding, which can cover the purchase price and work costs.
Get in touch
To find out more about what the team here at Sourced can offer in terms of joint venture opportunities, then take a look at our Sourced Franchise website. For more detailed information on our Franchise opportunity download our prospectus today.