Joint ventures (JVs) can be extremely powerful. For anyone who really wants to take their HMO portfolio to the next level, JVs can open so many doors. 

When we think about the limitations that we often face with HMO investment, such as lack of finance, knowledge, or time, these gaps can be filled by setting up a JV partnership with the right people.

In this blog post, we’re going to talk about what JVs are and what you need to be aware of before going into a partnership. So, if you’re interested in learning more about how JVs could help you build your property business, read below or listen to the full episode on The HMO Podcast.

There’s a lot of detail here because this is a fairly complicated area of investment, but I’ve tried to break it down and simplify it as much as possible!

What Is a Joint Venture?

A joint venture is a business arrangement where two or more parties agree to pool their resources together for the purpose of accomplishing a specific task, such as investing in HMOs. In a JV, each participant is responsible for a certain amount of the profits, losses, costs, risks, and liabilities. 

These kinds of agreements can take almost any shape, making them such a flexible arrangements. There can be anything from 50/50 JV partnerships, which is where the profit, losses, and liabilities are divided evenly, to 60/40, 70/30, or 80/20 agreements. This will depend on what you and your business partner are bringing to the table and what’s been negotiated. 

As a HMO landlord, you may be looking for a financier who’s bringing cash to the partnership, and you bring the skills, expertise, knowledge, and time to acquire, develop, and manage the properties. If it’s become difficult to scale your HMO property business because you’re running out of cash, a JV can be a great option!

What Are the Benefits of JVs?

There are a number of benefits that come with entering a joint venture agreement. Here are some of the most important reasons why you would consider this.

1. It can reduce the risk involved.

For starters, joint ventures are a way of reducing the risk for everyone involved. JVs can allow people to share financial risk, and as you can share the expertise of your business partners, this will also help reduce the risk involved. 

2. It can create more opportunities.

JVs can also create more opportunities if you work with the right people. You could bring more locations to the table and be able to cast your net a lot wider. It can also bring more finance, which can help you buy more properties. And you can tap into the networks and contacts of your partners, which can help you further build your HMO portfolio.

3. It can increase your chance of success.

Additionally, working in a partnership with the right people can massively increase your chance of success. If everyone in the agreement brings skills, support, and expertise to the partnership, you actually increase the chance of being successful with what you’re trying to achieve.

4. It can be extremely flexible.

When it comes to joint ventures, there are so many things that you can throw into the mix. There is so much flexibility that you can consider, unlike with loan agreements. This makes it such a wonderful way to build your HMO portfolio and business. 

5. It can be a lot more fun.

It can be more fun working with other people. Over the years, I’ve found working independently in the property industry can be quite a lonely business. When working with other people you have good relationships with, it can be a lot more enjoyable. And if it’s much more enjoyable, chances are you’re going to get a lot more from it as well!

6. It can help build your brand.

Going into a JV can be a really great opportunity to build your brand and profile because you can leverage some of the credibility that your partner might have. And as long as that’s an open arrangement, then that’s one of the benefits for all of the parties involved.

 

What Are the Drawbacks of JVs?

While there are a number of great benefits to joint ventures, there are a few drawbacks to going into a partnership like this, and here are a few of the main ones. 

1. There is added responsibility and pressure.

First of all, going into a partnership brings a huge amount of additional responsibility and pressure toward what you’re trying to achieve. You’ve got to be mindful of that as you’re not just investing solely for yourself anymore.

2. There is a risk of disagreements with partners.

Another drawback of JVs is that there is always the risk of disagreements. Naturally, to make a partnership succeed, you really need to be able to come to an agreement on most things. But there may be times when you can’t agree on everything. If you come to an impasse with a business partner, that’s when things can really break down!

3. You have to share the profits.

At the end of the day, you’ve got to give away a certain amount of the profits across the lifetime of the JV agreement. The actual agreement will ultimately determine how much of the profits you and your business partner will get, but just remember that you can’t keep everything.

What Details Should be Considered?

When it comes to joint venture agreements, the devil is in the details. There are a number of areas that should be considered, and here are a few of the main considerations. Keep in mind that this is not an exhaustive list.

• How will your investment partner get their money back out? Will it be before you start to distribute profit? Is there interest involved or a specific time frame the money needs to be paid back?
• If you’re going to be self-managing the HMOs, will you charge a management fee? If so, what will that fee be? And does that fee come out before your investment partner starts to get their initial capital out? 
• What if one of the partners wants to sell some of the HMOs and release some of the equity? Who makes that decision, who will value the properties, and how would the properties get sold?
• What will the process be if your investment partner decides that they don’t want to be involved anymore? 
• What if you have a disagreement? How will that be managed and what happens if you come to a complete impasse?
• What if one of the partners gets injured or becomes incapacitated, do you have provisions in place to manage what happens in that scenario?

These are the sorts of very key details that you have to think about as these specifics determine how a JV agreement will function. You don’t have to think about them all right now, but it’s important to be aware of these before you get into a partnership. 

Start by thinking about what’s fair for all parties. If the agreement isn’t fair, resentment can creep in over time, and that’s where partnerships break down. 

You need to have conversations about these and really drill down into the details to make sure everyone in the partnership understands exactly how it’s going to work. Make sure that there is a solution for every eventuality, and this will all need to be clearly documented in due course.

What Paperwork Do You Need to Setup a JV?

To ensure that a joint venture partnership will work not only today but also in the future, in addition to protecting everybody involved, you need three forms of paperwork:

• A document that clearly states the mutually-agreed objectives, roles, and responsibilities of the company, the partnership, and each other.
• Articles of Association are required by law for all companies and should be filed with Companies House. As a public document, it lays out the rules and regulations regarding how the company should be governed, owned, and managed. It also serves as a contract between each shareholder.
• A Shareholders’ Agreement similarly outlines how the company should be run and managed, but it also details how the shareholders should conduct themselves. This is a private agreement and really details the framework needed to manage the partnership long term. It also offers additional provisions designed to improve and manage the relationships between shareholders. 

There are lots of details to think about, but this paperwork is often standardised. Any amendments you need to make and clauses you need to add will get drafted by your solicitor or lawyer. They can also prompt you about all of the things you need to think about. 

Once the paperwork is drafted, everyone signs it. If a JV partnership is set up in the right way, then that paperwork should go to the bottom of the drawer and nobody ever needs to get it out, because if things ever change in the future, everybody knows what the outcome should be. 

The key is getting this right at the outset, and then you can move on without any stress or worry! Seeking out professional legal and financial advice is an important part of having a JV agreement drafted and finalised.

I hope this has helped you understand what’s involved with JVs, opened your eyes to how powerful these can be, and given you the motivation to seriously explore it. Because if you get this right, the results can be fantastic!

If you have any more questions, join us over on The HMO Community Facebook Group. And if you want to learn more about funding and scaling your HMO business, become a member of The HMO Roadmap for access to all the training, content, and resources to help you with that!

About the Author:

Andy Graham is the founder and the lead trainer at The HMO Roadmap! He is also the co-founder of The HMO Mastermind and Smart Property, a specialist HMO property investment and management company. He writes as a regular columnist in different magazines about a variety of HMO topics and is the host of The HMO Podcast! Follow Andy on Instagram!