As mortgage brokers we have written hundreds of joint venture loans. As lending policies change due to Royal Commission and changing market we are seeing more and more clients coming to us wanting to find out about this option.
In this article we will define a joint venture, give examples and consider advantages and disadvantages.
*For those of you that prefer to tap into our Joint Venture in Property Investing podcast, click here
What is a joint venture in property investing?
A joint venture in property investing is two or more entities coming together to achieve a common goal or transaction. Simply put, it is two or more people pulling in their resources to borrow money to purchase a property.
An example of a joint venture in property investing
For example, siblings, friends or business partners may decide to buy a property together. Forming a joint venture may help to strengthen their borrowing ability. Either party can use cash or equity to complete the transaction.
Three things you must consider before going ahead
One of the most important ingredients you need is trust between all partners involved.
So before you rush off to your mortgage broker with your sibling/business partner/friend/neighbour to get a loan, it is imperative to take a balanced view.
Sit around the table and brain storm as many “what ifs” as possible. Remember, there is no silly scenario here, everything needs to be tabled.
3. Know your exit strategy
Furthermore, the biggest consideration is your exit strategy. If personal circumstances change (and we all know that life brings many unexpected changes) how will this affect the joint venture project? We see this situation happen all the time and it can really test people’s relationships.
For example, two brothers start off investing in a property together while they are still living at home. Some years later, one of the brothers gets married and wants to sell his share of the property so that he can purchase a home with his wife. The other brother is still single and was looking to hang onto the joint venture property for 10 years. Sounds messy already, doesn’t it?
Therefore, it is incredibly important to be clear with your goals way before you enter into agreement. Your joint venture needs to be in-line with your personal future goals.
Let’s now consider some pros and cons.
Advantages of joint ventures in property investing
1. It increases your borrowing capacity
This means that you might now be able to consider deals that you could not afford on your own. For example, properties with sub division potential and commercial properties may now be an option for you.
2. You have reached your serviceability ceiling, i.e. you cannot borrow any more money on your own. With a joint venture set up you have more cash to invest
Disadvantages of joint ventures in property investing
1. It can sour relationships
If all parties’ exit strategies, goals and expectations are not clearly communicated, it can sour relationships quickly. Unfortunately, we have seen this happen many times over.
Therefore, we cannot highlight enough the importance of trust, barnstorming and having a firm exit strategy.
2. How banks treat your join venture debt
Some banks will look at the debt as entirely yours. For example, you might have 50% responsibility on the debt but the bank will look at it as 100% debt to you. In addition to that they will only consider ½ of the rental income. This can significantly limit your personal borrowing.
Important side note: there is a number of lenders that use “Common debt reduction” which means they will assess the loan based on 50% liability and 50% income. This is an exception that some lenders use. Ask your mortgage broker to find out more.
So should I get involved in a joint venture or not?
As a sum up, joint venture in property investing can be a very profitable way to invest in property. The major points to take away here are to have a water tight exit strategy, be completely transparent to the people you are going into a joint venture with, consider how the joint venture might impact your personal goals and have unwavering trust with your joint venture partners.
We’d love to help you set up your joint venture. Call us on 9687 1833 and ask to speak to one of experienced mortgage brokers.
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