Ep 268 – Why the Best JV Partner Is Not a Stranger With Money

Introduction

Hello and welcome to the Property Mastermind Podcast, episode 268. Today we are talking about joint ventures, and why the best joint venture partner is not always a stranger with the money. So many joint ventures happen around us all the time, and most of our students do them, so you will find this one really useful.

Hilary: We have talked about joint ventures a lot over the years, on episodes 66, 73, 106, 132, 147, 177, 199 and 232, and now 268. We keep coming back to them because they happen a lot and we use them all the time. Here is the big one, Bob. The most expensive thing in a joint venture is not always the money. It is a partner who does not understand property development.

Bob: That can be a real hassle. So today we are talking about what makes a great joint venture partner, why the wrong money can cost you more than you would think, and where the best partnerships we have ever seen get formed.

Why joint ventures matter

Bob: A joint venture is a great way to get into development when you do not have enough money, and that is exactly how I did my first two deals. Property has gone up so much that a site you might have bought ten years ago for 800,000 could be a million and a half now, so you need more dollars. If I had waited to save up enough equity to do a project on my own, I might still be saving.

Hilary: And this is where people get stuck. A lot of them want to do it on their own, they do not quite have enough money, and because they have decided they do not want a joint venture, they just do not move forward. But moving forward is progress. While you put it off, the price of land keeps rising faster than your savings.

Equity partner or loan partner?

Bob: People often say money partner, but that does not really describe it. There are two basic types. An equity partner is an investor who comes in with you right at the beginning. You form a structure together, you both own the land, borrow the money, do the development, sell, and share the profit. They are in it boots and all. A loan partner is different. They simply lend money from the outside for an interest return. They are not part of the structure, they do not own the land, and they are not on the development finance. Either way you get the equity you need, but the loan partner sits outside the deal.

The joint venture with a landowner

Bob: Then there is the joint venture with a landowner, where the equity is not cash, it is the land. Land with little or no debt is worth about 70 percent of its value as equity, because financiers do not lend the full amount. So a debt free block worth a million dollars is roughly the equivalent of 700,000 in cash. The developer runs the project, the landowner puts in the land, and the profit is usually shared, often around 50 50.

Hilary: So on a two million dollar block?

Bob: They would get their two million back for the land, and often somewhere around a million more in profit share. It is well worth the wait for a lot of landowners.

The numbers behind it

Bob: The land component is often about 35 percent of all your costs on townhouses or a subdivision, so if you own the land you often have more than enough equity, even with a little debt on it. Apartments are different, because building is expensive per square metre, so the land is only around 22 to 23 percent, and owning it outright might not be quite enough. It is all numbers, which is what property development is all about.

Finance is the best JV partner you will ever have

Bob: On a lot of smaller projects a financier will fund up to about 80 percent of your costs, so you put in 20. They put in most of the money and all they want is an interest rate, not a share of your profit. That is the best joint venture partner you will ever find.

Not a compromise, an accelerator

Hilary: So to sum up that part, a joint venture is not a compromise, even though a lot of people think it is. It is an accelerator. You really are just one joint venture partner away from your next deal, or your first, or your second.

The cost of the wrong partner

Hilary: Where it gets hard is a partner who does not understand development. They can get nervous for no real reason, or ask demanding questions when the honest answer is that you are simply waiting on council.

Bob: And you are with this person for 18 to 24 months, especially an equity partner who is in it boots and all. It needs to be a good experience, not just a nice payday at the end. The less someone knows about development, the more you end up over communicating, and it becomes a burden.

Good traits of an equity partner

Bob: Ideally they have some basic property or business knowledge. Even if they have never developed, if they have run a business they understand that processes take time, that things sometimes go slower and sometimes faster, but you follow the process and you get there. Someone who has only ever had a job and been paid every Friday may not understand that development is a business.

One boss, one project manager

Bob: Every project needs one boss, one project manager who makes the final call. You cannot have two people pulling in different directions.

Hilary: Like the time it took six weeks to decide on a tile because it went to a group decision.

Bob: Exactly. It can work when partners split the roles clearly. I know two developers who did just that, one out finding deals and doing the marketing, the other strong on feasibilities and project management, and they went on to do nine projects together. But someone still has to make the final decision.

Where to find the right partners

Hilary: People often say they do not want to talk to family or friends in case something goes wrong, which is usually just a lack of confidence.

Bob: Think about it the other way. If you do an upmarket duplex and make 600,000 profit, and your investor makes 300,000, how much better is it if that person is your brother or sister than a complete stranger. The only caveat is you have to be comfortable if a project hits a bump.

Be careful in open online groups

Hilary: I am always happy for our mentoring students to post their deals, because they have been looked at properly. But large, unmoderated groups are a different story. A lot of people just want your information memorandum so they can copy your research and your patch.

Bob: So never give away all your information up front, and do not post a comment interested style callout, because it attracts the wrong people. Private message only.

Build the relationship first

Hilary: The best partnerships are built on trust and aligned values, and that takes time to cultivate. If you do not get on, or your views clash, that is 18 to 24 months of pain. But get it right and people go from project to project together, because a good experience makes them want to do the next one.

Formed face to face

Bob: Look at the business that happens after a workshop. You see people breaking off into pairs and threes, talking about projects, deciding to do one together. So many joint ventures start exactly there.

Hilary: One of our people even met a partner sitting beside her on a plane. People who love property and cannot stop talking about it make the best joint venture partners.

The October workshop

Hilary: That is exactly why we have rebuilt this year’s October workshop. We normally run three full days of property development with a little joint venture content. This year we are pulling some of the basics out, running a session online beforehand, and building in a lot more on joint ventures. So it is now Property Development and Joint Ventures, on the Gold Coast, on the 9th, 10th and 11th of October. There is a link below to book a call, or you can email admin@propertymastermind.com.au. It comes as part of either mentoring program, and you get a ticket for yourself and your business or life partner.

Bob: It is a great workshop for people who understand property development and realise that teaming up is a way to accelerate, rather than waiting to save or waiting to finish one project before starting the next.

Hilary: Otherwise, we have plenty of other podcasts on joint ventures if you want to dig in. Either way, we hope we have opened your eyes to working with people and accelerating your journey. Catch you again next week.