Property investment is both an interesting and exciting journey. Property investors commonly start the journey by searching for a target property that fits their investment strategies and requirements. It can either be a long term investment where the investor is looking at the rental yield or a shorter-term where the property is ‘flipped’ for capital gains.
Nevertheless, one of the major obstacles in property investment is the issue of affordability. This may be due to insufficient funds for a down payment or the tightening of borrowing policies by the banks. Under such constraint, many investors are unable to proceed with — their investment plan even though they come across properties with great potential. One creative way out is by entering into a joint venture (JV) in property investment.
WHAT IS A JOINT VENTURE AND WHY?
A JV is a collaboration between two or more parties who agree to pool their resources/ funds for the purposes of accomplishing a specific project. It can be in the form of business activity or even the acquisition of immovable properties.
There are many reasons why investors should enter into a joint venture. All parties in a JV make contributions, share profits and returns in the agreed proportion. It creates a new investment opportunity where one single party may not penetrate if they were to do it alone.
Besides sharing financial resources, JV parties can also share expertise and knowledge. This will create a better synergy to undertake the JV project in a more efficient manner.
INVESTMENT GOAL
It is vital for a JV to have an investment goal. All JV parties must have a clear expectation and the same understanding of their goals.
If a property is intended to be ‘flipped’, then the next question would be — “What is the target selling price within a specific time frame?’ If a JV plans to acquire a property at the price of RM500,000, all JV partners may set a target that, after three years, if the property value increases to RM600,000, then all partners must agree to sell when that happens.
If the targeted value is not reached in that time frame, JV partners may need to decide whether they should sell or to hold the property for a longer time (depending on the circumstances and market sentiment then).
If the property is intended to be rented out, then the next question would be — “What is the target rental within a specific time frame?’ If a JV plans to acquire a property at the price of RM500,000 and targets a 5% return on investment (ROI), the rental shall be at least RM2,084 per month.
However, in the event the property is unable to fetch that monthly rental within a specified time frame, the JV partners may have to decide either to rent at a lower rental or to hold the property for a longer time without any rental income.
It is extremely important for JV partners to discuss and agree on the above matters. Once agreed, all partners must carry out the property investment plan in accordance with the agreed terms. It is not advisable for any JV to acquire property and ‘see how it goes’.
Different JV partners will have different expectations, holding power and priority in life at any particular time. Unclear or uncertain goals in any JV may lead to potential disputes between the partners when a partner insists on selling (to cash out for other financial commitments) and another decides to hold the property longer (hoping for better capital appreciation if he is not in need of cash at that moment).
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JV SALIENT TERMS
Before any party enters into a JV, these are several salient ferms to consider:
Target property
A JV must carry out a proper feasibility study on the target property. Generally, that should include its location, pricing, growth potential, who is the developer and/or the property management company, etc.
Joint venture partner
Due diligence on all JV partners is a must. JV partners can either be an individual or a company. All parties must know the background of all other partners involved in the JV.
Cash injection
A JV must set a clear understanding of cash injection capability in terms of down payment, legal fees, and stamp duty, outgoing payments (maintenance fees, quit rent, assessment rates, insurance, etc.) and loan repayment.
Borrowing capacity
A JV must also examine the borrowing capacity of each partner, which depends very much on the existing financial commitment of the partner. This is important as a JV needs to know the estimated loan size, loan margin and tenure before committing itself into any property investment.
Cultural consideration
A JV must also take into account the cultural consideration of the future buyers of a target property. Directions, house number, and layout of the property are among the few common factors a property buyer is usually concerned with. These factors may directly or indirectly affect the value of a property. However, the above list is not in any way exhaustive. Each JV may have other concerns or considerations which may be unique to each JV. All parties in the JV must address those issues well ahead before making a commitment to any investment to avoid any potential conflict or dispute.
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GET LEGAL
After going through all the salient terms, it is advisable for the JV partners to put their terms into legally binding documents. Very often JV partners do not think that legal documents are necessary, especially between parties who have known each other for a long time (for example, family members, relatives or close friends).
In such circumstances, a certain level of trust would have been built amongst the parties prior to the JV. It should be reminded, however, that the non-existence of any legally binding document may give rise to potential disputes in the future, which may also jeopardize the existing relationship between the parties.
All JV parties should enter into a Joint Venture Agreement, to record the goal, expectation, liability, and mechanisms of a JV. There is no fixed or standard format for a Joint Venture Agreement so long as the parties address their intentions and the salient terms are agreed upon between all parties before entering into a JV. Whenever necessary, JV parties may also enter into a Trust Deed and/or Power of Attorney.
Once the JV arrangement has been finalized, the parties may then acquire the target property and carry out their respective obligations in accordance with the provisions of the Joint Venture Agreement.
CONCLUSION
To conclude, JV in property investment is a good strategy of combining resources from various parties, in order to achieve a common goal, particularly when one single party is unable to acquire a property alone due to limitations of financial resources (for example, cash injection or borrowing capacity).
Although it is a good strategy, it may give rise to potential disputes due to conflicting priorities or interests of the respective JV partners at any time. Therefore, it is vital to consider the above salient terms and record clear intentions of the parties into legally binding documents. This will certainly make the property investment journey a much smoother one.
