Traditionally, one of the best times to get involved in residential property has been as early as possible in the development’s lifespan - and unless you’re planning on building the houses yourself, the best way to do this can by investing alongside the builders through a joint venture.
A joint venture (JV) is an arrangement between two or more partners to co-operate in order to achieve a common objective. It’s a structure that is commonly used in property and development and, when used effectively, can provide significant value for all the parties involved. In essence, JVs enable the sharing and spread of risks with other parties, helping to unlock sites, access finance and combine various specialist skills.
With numerous resources available to detail everything an investor needs to know about joint venture investing, if you’ve made a decision that it’s the best way to get involved in property for you, the next question for most is obvious - how do you work out which of the many joint venture property opportunities out there are right for you?
With lots to take into account, the following poses some initial questions you should consider asking.
Can you comfortably invest the minimum amount required?
The minimum investment threshold for joint venture property investment projects can vary. For the projects we work with, the minimum investment is generally £1,000.
For some sophisticated investors, they’ll look to invest considerably more than this, and will be able to do so confidently as it will make up only a small part of their investment pot.
However, for others £1,000 will be at the very top of their investment limit. And if this is the case, you need to make a decision as to whether it’s the right move for you at this moment in time.
Something that an independent financial advisor would be able to support with, it’s all about understanding your financial and portfolio requirements - if you invest into a project knowing targeted returns won’t usually be due for at least 18 months, and you’re comfortable having the majority of your capital tied up for this length of time, it could be the right option to you.
Conversely, if you’re not, it may simply be a case of looking at other investment opportunities with an aim of building up your investment pot before returning to look at joint venture opportunities at some point in the future.
Will the opportunity allow you to diversify?
Diversification is one of the most important points to remember as an investor. The more investments you have, spread across different asset classes, the more you’re mitigating risk.
Joint venture property investments can be useful when considering portfolio diversification, as generally speaking they offer an easier path into property in comparison to other routes, give you more control as to the location where your money is physically going to be invested and the lower thresholds can make them particularly accessible.
Importantly, given the growing popularity of joint venture opportunities on the wider investment market, if the current deal you’re looking at doesn’t give you the option to diversify (i.e., it’s in the same geographic location as other property investments or the target audience is the same), it shouldn’t take much time to find another suitable opportunity which does allow you to diversify.
Remember: don't rush in - there really is no need to do so.
Do the returns the developers are targeting fall within your portfolio requirements?
Many joint venture agreements target base case returns of around 1.5x money-on-money. As a downside this can be 1.2x and upside around 2.0x.
Whilst there’s no doubt the returns can be particularly positive, especially given the relatively short timescales anticipated, for some they may be looking for opportunities that have higher returns (but higher risk - such as when investing in startups) or conversely, would prefer less risk and therefore smaller targeted returns (perhaps between 5 and 10% when investing into a property bond, for instance).
Are you comfortable with the risks?
As with any investment opportunity, joint venture property investing brings with it risks that need to be fully understood.
Whilst each opportunity will have risks specific to it, the general risk for any property deal is the market. If the market turns and house prices drop, this is where targeted returns can be lower than anticipated.
And although the risks are important to understand, it’s arguably just as important to understand what steps are being - or can be - taken by the house builders to mitigate them.
For instance, in many joint venture deals, falling house prices don’t necessarily mean lower returns or a loss of capital - houses are always going to be needed, and so it’s commonplace for the properties to be rented out and income generated this way.
Do you have confidence in the investment company and house builders?
Carrying out in-depth due diligence is vital to any investment opportunity, and there is no change when it comes to joint venture investing into property.
How experienced is the company facilitating the investment? Are they FCA (Financial Conduct Authority) authorised? What does their track record of investments look like? How much due diligence do they do themselves? What is their reputation like online - do they get some favourable mentions?
Similarly, how experienced is the house builder? Is this their first development or their tenth? Is this type of development new to them or is it where they focus their attention?
What about confidence in the opportunity as a whole?
Saying ‘houses are needed’ is a very high level reason for investing into a joint venture property project. You need to look further into the opportunity and understand the specifics.
Is there demand for the homes being proposed within the area? Is the target audience living within the region already? Is it an up-and-coming area or is it well-established? What does the commercial and recreational activity in the area look like? How about distances to nearby towns and cities, as well as links to major road networks?
It’s arguably as important to carry out due diligence on the opportunity as a whole as it is the investment company and house builders themselves. The latter aren’t going to invest in and build homes they can’t sell, but carrying out your own research will go a long way to ensuring you’re as confident as can be before making an investment.
Is it the right time to invest in the deal for you with regards to the tax liabilities?
Investing into property doesn’t bring with it the tax reliefs and efficiencies of investing in startups under the likes of the Enterprise Investment Scheme. As such, it’s important you’re aware of the tax implications and liabilities for you as an individual investor.
Something you should undoubtedly take financial advice over, for some investors it won’t make any difference to their tax liabilities. For others, however, the amount of tax they’ll have to pay may be able to be adjusted by strategically investing at a certain period to make the most of any tax free thresholds.
But as with investing in general, speak to a professional and take their advice to ensure you’re able to invest in the most tax beneficial way.
Investing in property via joint ventures
After a decade or two of property investors focusing on buy-to-let, changing legislation has led many to explore other routes to property investment.
As the growth of equity co-investment platforms has opened up investing to more people than ever before, joint ventures have surged in popularity from this wider access, ultimately providing an attractive way to integrate and enhance your portfolio with property.
And with so many opportunities available, it’s important you are fully confident before any investment is made to ensure the opportunity is as right for your investment portfolio as it can possibly be.