After the recession, Joint Ventures were hotter than documentaries about corruption at investment banks. If you’ve been in real estate investing since then, you’ve probably entered into one at some point.
These tasty commodities were attractive because they gave loan-to-value ratios as high as 70%. Not many real estate investors like to gamble with those kinds of numbers, at least not alone. However, get a pack of lemmings together and they’ll pretty much gamble on anything, up to and including jumping off of a cliff.
A JV agreement is a contract between two or more parties that divides up the investment, the responsibilities, and the profits or losses. You know, an agreement. It’s for those entering into a one-time deal. You aren’t wining and dining here. You’re in and out fast for a quick and tidy profit.
Parties usually form a new company to own and operate an investment if it is a long-term deal. For short-term investments, a Joint Venture does have some great benefits.
This is a common JV Agreement scenario for real estate investors. My friend Randy purchased a property with his LLC that he intended to restore and then sell for a profit. Then he hired a contractor, our buddy Johnny.
Together, they agreed that Randy would reimburse Johnny his expenses and they would share the profits from the sale, in accordance with the terms of the JV agreement they’ve drafted.
By the way, you can add a contractor to your S Corporation or LLC in order to share profits, but that can be a bad idea. If you don’t want to give up a permanent piece of your company (and there are a lot or reasons why you might not want to do that) a JV agreement will bridge can bridge the gap without giving away your firstborn. It is a collaborative contract between companies, rather than a permanent marriage.
By creating a venture-specific LLC, all of the parties acquire some much-needed liability protection.
If you find that the arrangement is worth keeping to explore new opportunities, there is no reason why you can’t modify the terms.
Who knows? Maybe this short-term fling will become the real thing.
Your new LLC will also isolate the JV’s capital and resources in the event of litigation. Your other companies are safe from being liable for this new one.
As in so many things finance related, your decision really depends on the size of the deal. If you are pushing millions around, the added liability protection of an LLC is essential. If you’re just puttering around with tens of thousands of dollars, as was often the case between Randy and Johnny, that JV agreement is the cheaper option.
JVs work well where the goal is quick cash and in cases where the partners do not qualify for financing. They also let you partner with companies that have different skills than you. The investor/contractor arrangement like Randy and Johnny’s is a perfect match for quick flips on real estate.
In the end, no matter how short-term a deal is, you’re going to have to work with the person you go into business with for longer than you think. Whether starting a new company or signing a Joint Venture, find people who you trust and who you like to work with. Make sure you understand Joint Venture liability. Forge business relationships that have potential for growth and leave the door open for more collaboration. A good deal is an awful thing to waste.
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Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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