Finding Joint Venture Partners
With the economy showing signs of tightening and banks already creeping interest rates up, it’s time to start thinking creatively when financing your property deals. Joint venturing and money partnering is often overlooked by property investors, normally due to the fear of the unknown and the inherent risks associated from working with other partners.
Let’s manage that fear by increasing confidence through building our knowledge base around this strategy. The first thing to get clarity on is why you might need a joint venture or money partner, and what resources that party could contribute.
To do that, we need to understand the four key components of a profitable property deal and which ones you might be missing. Take a look at my ACSS formula to get a better understanding of this:
- Ability – The ability to find a profitable property deal.
- Cash – Having cash in the bank, or accessible equity.
- Servicing – The ability to borrow money.
- Skill – The know-how to manage a project to achieve a profitable outcome.
Together, A+C+S+S equals access to a solid deal.
Most investors will lack at least one of the above four components, in fact, some may not have any of them, but the most common is points two and three being Cash and Servicing, respectively. No matter where you are in your property investing journey, having access to more cash and/or borrowing capacity will always provide more opportunity to leverage.
This is where joint venturing can transform your property investing journey and take it to a completely new level.
I’m here to tell you that there is a phenomenal amount of money sitting dormant just waiting to be put to good use. In fact, once I started looking, I couldn’t believe the amount of untapped private funds that were available.
However, it won’t just fall in your lap.
You’ll need to start doing as I did when I ran out of options to finance my projects, and that’s searching for suitable partners to team up with. Where do you start looking? Here are just a few ideas:
- Networking groups
- Past and present work colleagues
- Family and friends – tread carefully here
- Mentoring programs
- Professionals, like your accountant or solicitor, if you have a close relationship
The biggest risk in any joint venture scenario is the people involved, so don’t be looking to rush into anything when approaching a potential investing partner.
With this in mind, and thanks to the benefit of hindsight, when choosing my joint venture partners, I place more focus on the personality and risk profile of the person, rather than the resources being contributed.
So, how do you go about choosing the perfect joint venture partner?
How to Choose the Right Joint Venture Partner
Here are the 11 factors I like to keep in mind when assessing a potential joint venture partner:
1. Integrity – A quality that is always at the top of my list with any personal, business or investing venture.
2. Contribution – Personality and character are important, but without some sort of contribution to the deal, the joint venture is over before it even starts. Try to ascertain early on which of the four key elements your potential joint venture partner might bring to the deal that compliments your contribution.
3. Exit Strategy – I like to work with people who understand the value of being able to exit a deal efficiently. Evaluate your prospective partner’s past exits from business and personal relationships. This may reveal how they will behave if your joint venture ends abruptly.
4. Test the Waters – Is there an opportunity to do a small “one-off” project to see what it’s like working together before you jump into a larger project that has increased risk, time and stress?
Money partnering is often a good way to get the ball rolling in building a solid financial relationship. It can be a less complicated process to simply borrow or lend money at a set rate of return, rather than a convoluted profit share arrangement.
5. Desperation – Understanding the financial circumstance of the potential partner is critical, so make sure you take a holistic approach when gauging the suitability of this potential associate.
Are they reliant on the success of this deal to survive? Working with partners that are desperate to succeed can bring a negative impact on the outcome.
6. Realistic – Transparency and good communication is the key to any personal, business or investing relationship. It’s worth sitting down and having an open-hearted conversation about what can go bad in this deal.
What are some of the worst-case scenarios if we invest together? Get creative here, you never know what might happen so it’s better to discuss this upfront – most people don’t.
7. Stress – Property investing at all levels will have its ups and downs, which will often produce stress and needs to be dealt with effectively. Find out how your potential partner reacts in stressful situations.
Find out about some real-life examples to get better clarity on this by asking direct questions like, “Can you tell me about a time where you were under extreme pressure and how you dealt with the associated stress?”
8. Conflict – Conflicting opinions and attitudes are bound to be uncovered, so it’s important to have a management plan in place that anticipates this potential unpleasantness.
Find out how the potential partner deals with conflict. What clues are you able to uncover that reveal how you can really expect they’ll behave in emotionally tough moments?
9. Expectations – Inflated expectations can often lead to disappointment and resentment, whereas underestimating a project’s worth can produce a misaligned implementation of the strategy, which ultimately affects the productivity of the project.
Be direct with your prospect and ask honest questions like, “What are your expectations, financially and for the length of the project?” You can also ask: “What does success look like to you by being involved in this arrangement?”
10. Get It in Writing – All joint ventures and money partner agreements should be in writing and verified by an independent solicitor for all parties.
Ask questions like: “What experience has your potential joint venture had with the legal profession?” and “Are you open to sharing the upfront costs of creating legal documentation, such as a joint venture agreement?
This will provide insights into their own risk profile and the value they put on investing in risk mitigation.
11. Skill Level – Whether your prospective partner is bringing skill or financial resources to the table, each party needs to make their own financial decisions around investing structures, tax minimization and income distribution.
It’s advantageous if your potential joint venture partner has a fundamental level of comprehension so that you do not have to facilitate this learning, in addition to your own roles and responsibilities within the project.
Making the Decision
Ultimately, you can never be 100% sure if the partnership will work. A lot can change in a person when money is eventually put on the table. Likewise, personal circumstance can also play a part in the person’s approach to business.
I prefer to be joint venturing with those who have the same risk profile as me, coupled with a respectful, problem-solving nature that is open to change, should it be required. Those who are inflexible, pedantic or too detailed in their approach tend to be too rigid to work with successfully.
You’ll know you have the foundations of a successful joint venture relationship when all parties communicate effectively and are looking for win-win outcomes.
It’s never too early or too late to start incorporating more creative options to fund your property deals, so why not start today?