Your Guide To Joint Venture Real Estate

5 minute read

What if you have a great business idea in real estate but need more expertise or resources from another individual or company? You may want to consider entering into a real estate joint venture.

There are many benefits to creating a real estate joint venture. For example, real estate joint ventures allow you to scale up and take on bigger projects that would be outside of your means as an individual. As a result, you’re able to maximize your capital.

Most joint ventures have a capital member and an operating member. The capital member is usually responsible for financing the real estate project while the operating member is responsible for the daily operations and management of the real estate.

There are a few things to keep in mind to have a successful joint venture:

What is Joint Venture Real Estate?

A real estate joint venture is when two or more investors take on a real estate project together, combine their resources, and accomplish a business goal. Even though members combine their resources, each investor maintains their own unique business identity within the project. Each investor usually brings their own skill set to the table: where one member may be skilled at finances, another may interact with contractors.

Joint ventures are usually temporary and dissolve once the goal is completed.

What Are Benefits of Entering Joint Venture Real Estate?

There are many reasons why one may become involved in a joint venture. The most common reason is to secure more equity but there are other reasons as well such as:

  • Access to new markets;
  • Combining resources to scale up;
  • Gain an edge over competitors; and
  • Tap into each other's skill sets to accomplish a goal that would ordinarily be out of reach.

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What is a Joint Venture Agreement in Real Estate?

A joint venture agreement is a contract that divides up the responsibilities, investment, profits, and losses. It’s important to always have a joint venture agreement drawn up that specifies four key pieces of information. These include what each party is contributing, each individual’s responsibilities, how the profits will be distributed, and how the company will be dissolved.

How Does a Joint Venture Work in Real Estate?

There are generally a handful of steps involved in forming a joint venture with associated subtasks. Here are the five main stages to developing joint venture work in real estate:

  1. Find a partner you can work with who has compatible business goals;
  2. Structure your joint venture (see next section);
  3. Draft a joint venture agreement with all of the details on how the business will be run, as previously listed; and
  4. Pay taxes. All joint ventures must pay taxes; how much you pay is determined by the business structure. Follow all local, state, and federal regulations.

How to Structure a Joint Venture Real Estate Deal

The legal structure of your joint venture depends on the type of property that you have invested in. The following are some of the most common structures used in real estate joint ventures:

Limited Liability Company (LLC)

LLCs are easy to set up, inexpensive, and one of the most popular structures used for real estate joint ventures. The agreement terms are included in the operating agreement and each investor is listed as a member of the LLC providing both parties with liability protection, which is one of its biggest advantages.

Corporation

Corporations are typically used for a multi-family property complex or for larger investments. Corporations include C corporations and S corporations which provide liability protection for its members. The structure of the agreement is included in the corporation’s bylaws and each member owns shares in the joint venture.

Partnership

Partnerships are used less frequently than LLCs or corporations. There are two types of partnerships: a general partnership is used when both members are actively involved with the investment and a limited partnership is when at least one member is a passive investor. A passive investor is someone who contributes financially, but doesn’t participate in day-to-day decisions or management of the joint venture. The primary disadvantage of a partnership is that there is no protection from personal liability.

What Are the Tax Implications of a Joint Venture?

Taxation of the joint venture depends on how the business is structured. Separate legal entities are taxed based on the entity type. C corporations pay a flat tax rate on profits and shareholders pay taxes on dividends. LLCs are taxed as pass-throughs where business income and losses pass through the owner’s return. Partnerships are taxed based on the individuals’ portion of profit since the venture itself cannot file taxes on the funds that flow through it. Income and losses also pass through the individual for unincorporated ventures.

What Are the Benefits of a Joint Venture?

  • Affords each member access to each other's resources, which makes expansion more feasible by combining industry expertise;
  • Each member maintains their own identity, so when the joint venture is dissolved, members can return to their normal business operations;
  • You can scale your business aspirations while reducing the total cost per member and spreading out the risk and liabilities that come with the joint business;
  • Your business can gain access to new markets; and
  • Your business can gain access to more capital.

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