Is it a good idea to do joint development?

Whilst I am searching for investment property, one of my friends offered me an opportunity to invest together with him on a development site.

The basic idea is to create a company/trust, buy a pease of land and develop multiple townhouses.

The upside of the idea:

• He is experienced in development project whilst I know almost nothing about the process.
• Development is higher profit (or lower risk) relative to residential property investment (which I am looking into)
• The land is off-market. It has better value than most of the land I can see from online.

The downside:

• Not sure how complicated it will be in terms of joint development
• My friend probably want to hold a few and sell a few once developed, how do we split at that moment?

Before I go to a lawyer asking for professional advice, I would like to get your opinion on whether it is a good idea to go ahead or avoid the potentially complex situation. Thanks.

 

Generally a bad idea if you're looking to keep any of the finished product. If you're going to sell the whole lot it can be worthwhile, and a good way to learn. BUT - you want to make sure it's all done properly and you know the person you're doing it with well.

 

Personally, I would only do JV with investors who have similar experience and who contribute equal amount of money and end goal is the same. Joining forces to jump into larger projects that I could not do on my own.

Michael Yardney sums it up nicely, I posted this on another thread

Ineffective joint ventures
Joint ventures in investment properties can be brilliant – but they can also bomb.

For new investors who need a little help getting a foot on the property ladder, teaming up with other like-minded investors can be just the boost they need.

However, signing up for something as complex as investing in a property with others is no small undertaking, and needs to be stepped into with caution and good planning.

Firstly, all parties in the joint venture need to set and be aware of the common goals, time frames and risk tolerances.

There also needs to be clearly defined and allocated tasks for each party.

Everyone needs to know who is responsible for each process of the investment, such as all the facets of organising the finances, council approvals, insurances, etc.

Miscommunication and missed deadlines are common if the work isn’t allocated effectively.

 

He is a good friend.

 

I am considering to invest 25%, so if we build 4, I get 1. I know it wouldn't be that straightforward as the finished properties won't be the same value, just a rough idea.

 

There will be stamp duty implications - you don't just 'get' one, you'll own 25% of 4. If you want a whole one, you'll need to buy the remaining 75% off the JV partner. This is fine, just something to be aware of when doing your numbers.

The main thing to avoid is holding long term as joint owners as it can stuff up your servicing moving forward.

 

Another way is if developing 4, you sell 2, keep 2, each JV member keeps one townhouse/unit

Personally, if I was going down this route I would not to liquidate all and make it clean, that is why it is very important to share the same end plan and have it documented etc.

 

Thanks for the link, I found a lot of good points there. Definitely will help to make the decision.

 

All the best.
Even though many would not jump into JV, I actually know a number of investors who have entered into JV projects where its been a win/win and they continue to do this.

 

Yes, probably sell 2, I get half of the money, and the remaining 2 properties then transferred on to his name?

 

I think the converse is more accurate. The idea is that development should be higher profit (if you've successfully developed before) but that come with a much higher risk relative to residential property investment.

 

I used to join development with a close friend. It came out sour with a lot arguments. It is hard for two persons have the same ideas.

 

Thanks for sharing your experience. I guess in your case, you and your friends are equally experienced so both of you want to contribute ideas to your investment. In my case, I will basically just follow, as I don't have experience on development.

 

What does he mean by a jv?

How will it be structured? What will you own and waht will your liability be?

 

One way to split ownership is through a Deed of Partition. You would need to get legal advice prior to the purchase of the land.

 

See my legal tip on these in the legal section.

 

Legal Tip 77: Joint Purchasers of Land and deeds of partition

 

Simple, one wants to sell and one does not. This can cause big problem for partnership. You need a long agreement ahead.

 

If you cant share a holiday with the other party and both wive's then dont do it.