Joint Ventures: Pooling Resources for Property Investment

What is a Property Joint Venture?

A property joint venture (JV) is an arrangement where two or more parties combine their resources to invest in property together. Each party contributes something, whether that is capital, borrowing capacity, expertise, time, or connections, and shares in the profits (or losses) according to their agreement.

JVs can range from informal arrangements between friends or family to sophisticated structures involving multiple investors and professional management.

Why Consider a Joint Venture?

Types of Contributions

JV partners can contribute different things to the venture. Common contributions include:

• Capital: Cash for deposit, purchase costs, or renovations
• Borrowing capacity: Ability to secure mortgage finance
• Expertise: Property finding, renovation, or management skills
• Time: Managing the property, overseeing renovations, dealing with tenants
• Connections: Access to off-market deals, tradespeople, or other resources

The contributions do not need to be equal, and the profit-sharing arrangement can reflect the different values each party brings. What matters is that everyone agrees upfront on what each person is contributing and what they will receive in return.

Common JV Structures

1. Co-Ownership (Tenants in Common)

The simplest structure is for all parties to be registered on the property title as tenants in common, with ownership percentages reflecting their contributions. Each owner can deal with their share independently, including selling it or leaving it in their will.

This structure is straightforward but offers no liability protection. If one owner gets into financial trouble or is sued, their share of the property could be at risk.

2. Partnership

A formal partnership can be established, governed by a partnership agreement. Partnerships are relatively simple to set up but have significant downsides: each partner is jointly and severally liable for partnership debts, meaning you could be responsible for your partners' mistakes.

3. Look-Through Company (LTC)

An LTC provides liability protection while allowing profits and losses to flow through to shareholders at their personal tax rates. This can be ideal for smaller JVs with up to five shareholders who are all NZ tax residents.

Related: Company, Trust, or Personal Name: Ownership Structures

4. Limited Partnership

Limited partnerships have general partners (who manage the venture and have unlimited liability) and limited partners (who contribute capital and have limited liability). This structure is often used for larger syndicated investments.

5. Company

A standard company can hold the property, with shareholders owning shares in proportion to their contributions. This provides good liability protection but the company pays tax at 28%, and losses cannot be passed through to shareholders.

The Joint Venture Agreement

Regardless of the legal structure, a clear written agreement is essential. This document should cover:

Never enter a JV on a handshake, even with family or close friends. The process of creating a formal agreement forces you to discuss and agree on important issues before they become problems. A lawyer experienced in property investment can draft an appropriate agreement.

Financing Joint Ventures

Getting finance for JV properties can be more complex than for individual purchases. Key considerations include:

• Personal guarantees: Banks typically require all parties to personally guarantee the mortgage
• Servicing: All parties' incomes and existing debts will be assessed
• Security: The property serves as security, but banks may require additional security
• Complexity: Some banks are less comfortable with company or trust borrowers

Talk to your mortgage broker early about how your proposed structure will affect financing options. The most tax-efficient structure is not always the easiest to finance.

Common JV Pitfalls

Choosing the Right Partner

The success of a JV often depends more on the relationship between partners than on the property itself. Consider:

• Shared vision: Do you have the same investment strategy and timeline?
• Financial stability: Can they meet their obligations, even if things go wrong?
• Communication style: Can you discuss difficult topics openly?
• Track record: Have they successfully completed similar ventures?
• Values alignment: Do they share your approach to ethics and risk?

Consider starting with a smaller project to test the partnership before committing to larger deals.

Exit Strategies

Every JV should have clear exit provisions. Common exit triggers include:

• Achieving a target return or holding period
• One partner wanting to cash out
• Disagreement between partners
• Death or incapacity of a partner
• Relationship breakdown (if partners are a couple)

Your agreement should specify how the property will be valued, whether other partners have first right to buy out a departing partner, and how proceeds will be divided.

Related: Buying Investment Property with a Partner

Is a Joint Venture Right for You?

JVs can be an excellent way to get started in property investment or to scale your portfolio faster. However, they add complexity and require you to share control and profits with others.

Consider a JV if you lack the resources to invest alone, want to spread risk, or can access better deals by partnering with others. Avoid JVs if you prefer full control, are not comfortable with the legal complexity, or do not have a suitable partner.

Whatever you decide, get professional advice before committing. A well-structured JV can be highly rewarding; a poorly structured one can be financially and personally devastating.