Property joint ventures can be fantastic but what happens when things go wrong? Nobody likes to think about things like ill-health, death or relationship breakdown but discussing these things when times are good is a lot easier than discussing them when something has already gone wrong.
Property Expert Series: Kristen Durose from Red Star Wealth
- Part 1: Introducing Kristen Durose from Red Star Wealth
- Part 2: Section 24 And What It Means For Buy-To-Let Landlords
- Part 3: What Investors Need To Know About The Changes In Stamp Duty
- Part 4: How Does Capital Gains Tax On Property Work?
- Part 5: Is There Still An Appetite For Investing In Property In 2017?
- Part 6: Buy To Let Limited Companies - Why Are Landlords Considering Them?
- Part 7: What Will A Post-Brexit Housing Market Look Like?
- Part 8: Can I Use My Pension To Invest In Property?
- Part 9: What Can Go Wrong With Property Joint Ventures?
Property Joint Ventures
Amy: So, we've talked about how a lot of investors are currently incorporating buy-to-let property businesses but business partnerships, property joint ventures (JVs) are becoming very popular as well.
People are teaming up, they're sharing their money, they're sharing their skills, they're sharing their assets. I think this is brilliant but you are are the voice of reason.
So, can tell me what are the risks with joint ventures? What can go wrong?
Have Legal Agreements In Place
Kristen: At times, I'm a little like the voice of doom but you have to ask yourself, 'what if it goes wrong?'.
When it is going well and people are getting on and everybody's fit, healthy and working then joint ventures are great.
As you say, it's a way of pooling your resources. But it is essential to have legal agreements drawn up to reflect who's putting what share and this is particularly true if it's not completely equal.
That's the first thing to do.
Because with property joint ventures, when everybody is friends and getting on or business colleagues, working work really well together, nobody wants to think about the bad things.
But it is easier to consider those things in the beginning before you get going. So, if capital investment is an issue, has everybody put in an equal share? If they haven't, then you need to get that written down and agreed.
You need to clarify how much each person has put in and what it gives them in terms of company voting rights, profit share, that sort of thing.
You need to have very clearly defined roles as well. You might have somebody who is more the finance person and the admin. You might have somebody whose role is to go out and find customers and properties.
You need to have very defined roles so everybody knows what they're doing from the beginning.
And if you do that you are less likely to run into trouble as you go along because everybody knows what they have put in, what the are entitled to and what is going to happen.
The Death Of A Joint Venture Partner
Kristen: One of the worst things that can happen is that one of you dies. This is, of course, a very big thing. It's devastating for a family and it can be devastating for a business.
Unfortunately, we've seen a lot of businesses that don't have any protection in place for this happening.
Amy: I suppose it's not something a lot of people think about. I've been in plenty of business ventures and have never discussed what will happen if somebody dies.
But now you've brought that up, it makes sense to do this.
Kristen: Absolutely. You should consider it. If you have two people who go into business together and, say, they've both got a family. The other family members may be doing other jobs and not be interested in property investment or not want to deal with it, should they have just lost somebody.
So, in a partnership, you have to consider what happens if one of you dies? Where will it leave the other business partner? Where will it leave the family who has just lost someone.?
So, you might want to organise things so that the survivor takes all of the business and the bereaved family is compensated, financially.
There are agreements that can be put in place. Very simply, financial advisers like myself will be able to give help and guidance on what's the best thing to organise and, if necessary, bring in a legal team to work it out.
But it is important to arrange things like that to cover that eventuality.
Long Term Sickness
Kristen: Illness is another thing.
Long-term sickness can also be devastating for a business, particularly if it happens to key personnel. So, that might be the owner of the business, it might be a business development manager if you have one, or somebody who always does the maintenance on your property.
What happens if they are suddenly no longer around or not around for six or twelve months? You need to know how long you could manage.
Amy: You need contingency plans in place.
Kristen: Absolutely. Because, in a business, we always work on the positive. We look at what happens when we're making a profit.
We talk about taxation like it's a bad thing. But if you are being taxed that's because you're making a profit. It's a positive thing because if you are not paying tax then you're not making a profit.
So, we do tend to always look those positive things but I think it's important to consider what would happen if the worst happened and this includes what would happen if we lost a key member of staff for a period of time.
Kristen: The third thing you should consider, which isn't very nice either I'm afraid, is divorce. If you are in a married couple or a civil partnership, what happens if that relationship breaks down?
I have, in twenty years of working as a financial advisor, seen a lot of companies struggle because of divorce whereby a wife or husband of a business partner has needed paying as part of a divorce settlement.
A business can be considered to be an asset of the marriage and if that business has assets, for example, properties, it is entirely possible that those assets can become part of a financial settlement on divorce.
Everybody likes to think their relationship will last forever. I know they do and I hate to be the voice of doom. However, it happens. It does happen. And if it happens between...
Amy: It could be devastating, even when it's your own property. You could go bankrupt.
Kristen: Absolutely. And you can't plan for everything.
What is important in terms of a property joint venture, is how this could affect the partnership and the business. If it's you and your family and you divorce, yes you can split the assets but if you are in business with somebody else...
Amy: In the property industry we go into JVs willy-nilly. We meet people at networking events. They've got money, I've got skills We get together and buy a house. And this happens So, it's really important to pull back and protect yourself and your partner and your assets as well.
Kristen: Exactly. And you can't say, well this will never happen or this would be the agreement that we would reach with an estranged spouse.
But what you can say is, as part of a property joint venture agreement we have determined exactly who has brought what to the table so that if one couple, for example, is getting divorced then it's documented, what belongs to that couple and what belongs to the other person.
Because it would seem unfair to take it as a whole. So, as I say, it's not the nicest conversation to have but it's better to have it when everyone's happy and fit.
Because you try and have them when they're not. It's going to be ten times as bad.
Thanks To Kristen
Amy: That's great advice. Thank you so much.
And I want to thank Kristen for coming in and sharing with us today. If you want more advice from Kristen and Red Star Wealth you can visit their website and we look forward to seeing you next time.
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