is a Joint Venture Agreement?
Where property investment is concerned, a Joint Venture occurs where
two or more parties associate themselves for the purchase of real
estate. The JVA, or JV contract, defines the ownership rights and
obligations of each party to the contract.
example, a JVA could comprise two parties:
purchasing a property, a lender will generally require a minimum 20%
cash deposit in order to finance the property without LMI, or a 10%
deposit (5% for owner occupiers) with LMI (Lender's Mortgage
investors, this can restrict our ability to grow a property portfolio
as we are limited in the amount of cash that we can use for deposits,
as well as being restricted by the amount that we can borrow without
exceeding our DSR (Debt Service Ratio).
are several ways around this, such as the use of vendor
funds, but both
problems can also be overcome through the use of JVA's. Let's use the
example of a JVA comprising two parties:
Equity Partner, who is responsible for putting up the initial
Debt Partner, who is responsible for borrowing the 80% balance
from a financier
this situation, the Debt Partner could be entitled to
all the rental revenue from the property as well as being responsible
for all of the loan
repayments, property maintenance and management costs.
JVA contract would include trigger clauses. For example, it might
state that 5 years from the date of purchase either party has the
right to trigger a sale of the property, but that in that case, the other party
to the contract legally has the first option to buy. The sale
price could be agreed upon to be the median of three independent
valuations. Once the property is sold, each partner would be entitled
to 50% of the appreciation in value (capital growth) of the property
since the purchase date.
The variables are entirely up to the parties to agree upon prior to
their entering into a JVA together.
they be used?
purchasing property on a "No Money Down" basis
financiers shy away from providing primary finance where second
mortgage monies are involved. An alternative is to set up a JVA with
an Equity partner.
The Equity partner may be the vendor of the property, or it may be
another investor with spare cash. Either way, they put up the 20%
equity required for you to obtain an 80% loan from a financier.
In this case, if you are using a JVA to purchase property on a
"No Money Down" basis, you become the Debt partner. The
advantage to you is that you won't have to come up with any deposit
money. The number of properties that you can buy is only limited by
the number of equity partners that you can find and by your borrowing
If you wish to be the debt partner, it shouldn't be hard to find
equity partners. You need only offer the vendor of the property that
interests you the option of being the equity partner and offer him his
full asking price. The vendor has nothing to lose. He gets 80% of his
money now, plus a share of the future capital growth when you later
sell or buy him out.
purchasing property without incurring any debt
you have set-up a deal, but do not wish to carry any debt for it, you
could seek out a debt partner to do the deal with you. Letís look at
an example where you are the equity partner.
youíve made a $260K offer to purchase a $300K property, which the
vendor has agreed to. You want to benefit from the capital
growth of the property, but do not wish to carry the debt or any
negative cashflow for the property. If you didnít know anyone with
whom you could partner, you could advertise in the newspaper for an
investor. A high income earner could easily obtain a 90% LVR loan
($270K) which would be sufficient to entirely cover the purchase price
($260K) as well as the stamp duty & legals ($10K-$15K).
Admittedly, the debt partner would still need to find a financier who
will lend based upon the valuation and not the contract price.
Alternatively, you could kick in the 10% deposit yourself.
attraction for the debt partner is that he would be able to make an investment property
purchase with 100% finance (i.e. No Money Down out of his
pocket). He would receive all of the rent, claim all of the
depreciations and building allowance, and will have to service all of
the expenses. If it were a new property and your debt partner was a
high income earner, he may even be positively geared after claiming
the allowable deductions. In return for his involvement, he would be
entitled to percentage (say 50%) of any capital growth on the property
above the $300K initial valuation.
You would set a specified period in the JVA (i.e. 10 yrs) whereby
either partner could trigger the sale to realise the capital gain,
providing the other partner has the option of buying them out first of
selling property whilst retaining a right to future capital growth
is my personal favourite. You
may already have a negatively geared property portfolio and be tired
of supporting the negative cashflow? Maybe you're just a little bit
nervous about all the debt you are holding or are planning to stop
working soon. You would like to get some of your cash out, but want to
retain a stake in the future capital growth of your portfolio.
of selling outright, sell your portfolio, or individual properties
within it, to a number of debt partners. This will allow you to:
rid of all your property portfolio debt;
rid of all your negative gearing;
80% to 90% of the value of your portfolio now, and still share in
50% of the future capital growth
the cash you have left over after clearing all your loans
that for a deal? Sounds attractive to me..
an equity partner, allows you to realise the benefit of capital
growth without assuming any risk, negative cashflow or debt
a debt partner, allows you to obtain 100% finance quite easily
and to get in on deals with no money down!
from accessing the capital gains until the trigger date defined
in the JVA (unless you achieve mutual agreement with your
partner to sell before the trigger date)
unreliable debt partner could cause problems as the debt partner
is responsible for servicing the loan and covering all property
expenses. Get your solicitor to thoroughly check out your
prospective partner. Include caveats, charge clauses, and
personal guarantees into the JVA and on the property title. The
caveat will ensure your partner canít sell without your
explore further the possibilities of using JVA's, find and speak to a solicitor
with experience in this area.