LETTING & ESTATE AGENT

Do Joint Ventures Really Work?

Do Joint Ventures Really Work?
There is so much of a buzz within this industry around doing joint ventures (JV's as they're more commonly known) to help you start or build a property portfolio. With such a positive spin being put on this strategy in most property magazines and networking events, I thought it was about time to give perhaps a more balanced viewpoint.

Whilst the ability to raise finance this way most certainly can help to springboard you forward in your endeavours, there are definitely risks attached. If you are literally just starting out and need finance to raise even your first deposit, then my argument is, how do you know you can handle the sort of money needed to go into funding a property purchase?

If you have never done it before, and you are working entirely with someone else's money, then you are potentially setting yourself up for many unknown outcomes. Not least of which is putting your JV partner's money at risk...and your reputation.

There is no doubt that the ability to purchase property with cash funds is by far the most powerful way to buy, and it is tempting to think about using others' money for this. Likewise using money for a deposit and raising a mortgage in order to buy.

There are some guidelines I would suggest you follow ahead of attempting to approach people to come into a purchase with you:

  • Start on a small, low value unit, preferably with your own funds (or those which you are able to raise on your own, without the need for a JV partner)
  • Prove your ability to handle the financial aspects well and turn a profit (either in terms of a resale or refinance)
  • Use the proceeds of your first deal to fund your second purchase and increase your level of experience
  • Once you have successfully completed 1-2 projects, then you have a tangible portfolio to show others what you are capable of
  • By doing this you will not only build confidence in yourself, but also in others
  • Compile a project folder, complete with before and after transformation photos, due diligence and research reports and financial evidence of end profit
With more experience under your belt and a provable track record, then it is more likely that JV partnerships can work for you. I have successfully run several projects using JV finance; all after learning the ropes myself and initially using my own funds. Whenever I have run a project in this way, I have also always had some of my own money in the deal so as to show people that I believe in the project I am taking on.

Exceptions to the rule can be made in some circumstances. I have known (a very few) people who have made JV partnerships work in the early days of their property career.

This has mainly been possible due to having an exceptional transferable skill set from a previous career and also having a mentor on board to help them navigate the first few deals in terms of the numbers.

I am still surprised when speaking with people who are considering venturing out in this way, about the lack of understanding around the rules and regulations affecting JV partnerships.


Money
New laws came into effect from 1st January 2014 restricting certain activities relating to JV partnerships, and for very good reason. Policy statement 13/3 of the FCA (Financial Conduct Authority) guidelines give you more detail, however, here is a brief list of the do's and don'ts of working in this way.

It is my understanding that if you are making an offer in public, then you can only offer for people to operate with you on a loan agreement basis (and only in the correct way).

Making an offer to a potential JV partner to share profits is not allowed except:

  •  If the person is a High Net Worth Individual (proven)
  •  If the person is a Sophisticated Investor (proven)
  •  If they are a close friend or family member (in certain instances)
  •  If you are working with a corporate entity, then JV partnerships work differently
If you want to know more, then I strongly advise you to discover the finer detail in the policy statement as mentioned above.

The best idea is to think of the worst case scenario and work out what would happen. By thinking in this way, all parties can go in with their eyes wide open.  If the worst case can be dealt with in an amicable and clear way, then the upside will be twice as sweet when it happens. :-)

Here's to keeping your joint property projects safe and clear.

Hazel

Hazel de Kloe

Property Investor | Property Mentor | Speaker | Author

The contents of this article are for educational purposes only and we make no recommendation of any particular property purchase. The price of property can decrease as well as increase and you make any investments in property at your own risk. 

© Why Property Works 2016 | www.whypropertyworks.co.uk