Returns for Joint Venture Property Partners

by Readers Question

12:55 PM, 3rd February 2014
About 7 years ago

Returns for Joint Venture Property Partners

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Returns for Joint Venture Property Partners

I have a portfolio of ‘vanilla’ BTL properties with 70% mortgages on interest only basis. I have have come to a point where my investment fund is dwindling and there is no more equity to release.

I’ve got two potential investors asking about armchair investment with me and I have two potential properties in mind.  Both would involve purchasing with 70% BTL mortgages, refurbishing and re mortgaging or taking further advances to 70% LTV. The JV partners would get their money back at the end of a year or monthly at a very good rate.

I’d be interested in what others are offering though. Returns for Joint Venture Property Partners

I’m looking for about £20k investment from each of them for each deal and have all the legals covered. My problem is that both deals mean that although they get THEIR money back with interest and the monthly cash-flow will be good for me, my money will still be left in. That effectively prevents my next purchase and meeting my goals.

Ideas welcome, also how much detail to give them.

Thanks

Sue

Comments

Mark Alexander

13:07 PM, 3rd February 2014
About 7 years ago

Hi Sue

First off, well done for managing to find yourself some private backers. That's not easy to do at all so you must be doing something right.

I have never used private finance but my brother swears by it and only uses mortgage lenders for long term funding.

He pays his private backers 6% and borrows 70% from them. He also gives them a first legal charge over the property and puts the other 30% of higher risk capital into the deal himself.

It hasn't always been this way though, he didn't have much risk capital when he first started out so instead he offered 15% interest unsecured, loans in his personal name, or a 30% stake in the uplift in the property value after all costs were taken into consideration. He would also provide a guarantee on the costs. Using this structure would allow him to raise the finance over and above what he could obtain on a mortgage. The private finance paid the deposit, refurbishment costs and legal fees.

He has always been a very open book. The people who have financed him have always been close friends, family and more recently happy cash rich purchasers of properties he has completed and sold on. He always gives them as much information as they want and always makes them welcome whenever they visit him on-site. Another thing he always offers is to pay their legal fees as soon as the property is acquired. This encourages his JV partners to get professional advice on the legal agreements his solicitor drafted for him. He has never had to advertise to find a partner. He just casually talks about his business model to the right people and some express an interest. He's very proud of his work and is always happy to show people who show an interest in funding his projects around his developments and introducing them to his existing backers and people who have purchased his properties from him as well as the agents he works closely with.

The way my brother increased his working capital was to sell some of the properties which he may well have kept if money had been no object. Perhaps you should consider selling a few of yours and releasing the equity? If you can make more money on trading then why not focus on that and then invest any surplus when you have it? It sounds like you have tied yourself in a bit of a knot by investing all of your working capital.

The way my brother started out is much the same way as you did I suspect. He got a cheque book mortgage on his house in about 2003 and used the cash to invest into BTL. His main business was development project management and also working 'on the tools'. He did a lot of refurb work for me and the family but when he found his first project he needed money which he had tied up in his BTL portfolio. Sound familiar?

We helped him out and as his funds grew and as he completed and sold more projects that's how he attracted the investors who work with him now. These are mainly retired folk who want a decent return on their savings and have already bought into his experience and expertise because they usually live in a bungalow which he has refurbished and sold to them.

Be VERY careful about advertising for JV partners as it this became highly regulated at the beginning of 2014 - see >>> http://www.fca.org.uk/static/documents/policy-statements/ps13-03.pdf

If you are confident in your ability to make money from refurbishment it should not take you too long before you have made enough money to consider retaining a few of your higher yielding developments for long term investment purposes.

Whatever you end up doing, good luck 🙂
.

Sue Whittle

13:30 PM, 3rd February 2014
About 7 years ago

This is EXTREMELY helpful as always Mark and yes selling some of those that don't really fit my current strategy is an excellent idea, you've given me the courage to scale up a bit so thanks, I also really like the very high interest unsecured idea. Ill be back with results!
Sue

Phil Ashford

16:07 PM, 3rd February 2014
About 7 years ago

If I have interpreted your plan correctly - you're planning on getting mortgages with JV partners whom you may have no other relationship with?

Be very careful.

You are linking your credit files... That can be a very tangled mess if one person starts to get a bad rating.

Much better to finance the full project with cash investors rather than raise deposits from cash investors and subsequently get mortgages on top. If you are doing that, then you should highlight the credit linking risk so as to be transparent to the cash investor.

JVs aren't the easiest to structure, particularly long term ones between two relatively new acquaintances!

Sam Zawadzki

10:19 AM, 4th February 2014
About 7 years ago

Sue have you thought about using crowd funding to get the capital that you need? It might be worth having a look at Crowd Property - https://banktothefuture.com/pitches/1435/_finally-property-investing-meets-crowdfunding-now-everybody-can-build-their-property-portfolio

Mark Alexander

10:26 AM, 4th February 2014
About 7 years ago

Reply to the comment left by "Sam Zawadzki" at "04/02/2014 - 10:19":

There is a big question-mark over whether the traditional crowd funding models for property investment are legal since the PS13 rules became active earlier this year - please see >>> http://www.fca.org.uk/static/documents/policy-statements/ps13-03.pdf
.

Sam Zawadzki

10:38 AM, 4th February 2014
About 7 years ago

Great point Mark,

There were similar worries about equity crowd funding with sites like CrowdCube however this seems to rapidly be an accepted practise that regulators are not closing, great news for us, bad news for the banks!

S

Mark Alexander

10:41 AM, 4th February 2014
About 7 years ago

Reply to the comment left by "Sam Zawadzki" at "04/02/2014 - 10:38":

It will be interesting to see what happens if the FCA decide to challenge one of these schemes. I suspect it is unlikely to happen until such time as a big one collapses and then all hell will break lose.

My advice is to steer clear, at least until the FCA add further clarity.
.

Sue Whittle

11:56 AM, 4th February 2014
About 7 years ago

Reply to the comment left by "Phil Ashford" at "03/02/2014 - 16:07":

Hi there Phil

No, mortgages would be in my name only. The investors want to be provide cash loans to be repaid at the end of one year with interest. They may be interested I larger loans later on
Sue

Sue Whittle

12:50 PM, 7th February 2014
About 7 years ago

Reply to the comment left by "Mark Alexander" at "03/02/2014 - 13:07":

Mark

I now have two people ready to lend me a certain amount to be paid back in one year with interest. I source and buy the property and do it up, putting in an equal amount, they have no other involvement. Im told that because of FSA rules etc I need to do a high net worth statement and or sophisticated investor statement, and I guess we'd need a legal document outlining who does what and when and covering any risks, plus maybe a deed of trust, ( I don't want second charges). These are people close to me I know well and their investment is not high (£20k each) is there a simpler way that is within the legal boundaries, FCA PS13/3 etc but won't scare them off!

Mark Alexander

13:20 PM, 7th February 2014
About 7 years ago

Reply to the comment left by "Sue Whittle" at "07/02/2014 - 12:50":

Hi Sue

Are you splitting profits with them or paying them interest?

The latter is certainly far easier and I have the documentation for that, it is called a "promissory note". My solicitors drafted one for me as I have loaned money to people in the past. Never again! but that's another story. My solicitors charged me £300 to produce the documentation, pay me half and I will let you have a copy. Sound fair?
.

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