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 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
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.
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.
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
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. :-)