Raising Cash for Property Investment - Part Four

In part one of this series, Raising Cash for Property Investment, I looked at how dramatically the financial world has changed in the last four years and how this has impacted the property investment market. We considered the ways to raise cash by using your home as a capital asset. In part two we checked out ways to recycle your money and, in part three, considered many other possible sources of cash.

With the best opportunities to invest in property for a generation or more, albeit against a changed landscape of borrowing, investors need cash for deposits - or even to buy outright.

For many of us this is a challenge. Few investors keep large amounts of 'ready' cash under their bed or in a deposit account. So where can this cash come from?

If you've been through previous articles and have exhausted all possible sources of cash from your own resources then where next? A real possibility is to raise money from other people in a joint venture.

Joint ventures - an introduction

Simply put, a joint venture (JV) is where two or more people come together to share in the success (or failure) of an investment.

There are multiple ways in which joint ventures can be structured and how you go about it depends on your partners, your own contribution and the timescale. In this article we will discuss some of the more common types of joint ventures. If you choose this approach please keep thinking outside the box because there are so many possible variations.

Why use a joint venture?

People only come together in a joint venture because, for the investment to work, each partner brings something to the table the other partner lacks.

In this article, the ‘lack’ we are discussing is money needed for the investment

But what about your potential partner? Clearly they have the money, or can find it, but what do they lack? To be successful, an investment needs much more than money. Other key components are: time, skill, experience and contacts. Often your proposed partner will lack more than one of these.

But why joint venture with you?

The biggest problem that many investors face when considering a joint venture proposition is that they focus on what they want to achieve, without giving any thought to what their potential partner needs. For example, if you are busy with a full time job and family and/or are a new investor with no experience, skills or contacts, then why would a potential partner enter into a JV with you? I wouldn't , as you need to bring your own value to the partnership.

Step one: create value to your potential partner in what you offer

So the first rule of JV is to make yourself valuable! Work out exactly what you have to offer which the 'money man' doesn't. Most usually this is a mixture of time, skills and contacts. If I can trust you because you've done this before, you can work your socks off and you know a lot of the right people, then just maybe I'll trust you with my money.

Do JV partners always need money?

No. Although it is usually the first thought for investors short of cash. Maybe your credit isn't good - so find a JV partner with an excellent credit rating who is prepared to lend their name to the project.

Perhaps you want to convert a house to flats but don't have building experience. How about a JV with a local architect, surveyor or builder? All will know how to run a building job, thereby saving money and massively reducing risk. It may also unlock a loan from a nervous bank now that you have professionals on board.

For many years property developers have done a kind of JV with estate agents. My brother has spent more than 25 years developing property in London. Most of his deals are sourced through Estate Agents. The way it works is simple: the Agent gets a commission from the vendor for selling the deal; then the Agent asks the developer for a 'fee' for finding the development; and finally the Agent gets another fee for selling the converted property to the end buyer. A total of three 'fees' for one deal!

Step two: what are you offering?

Generally speaking most JV partners want the following:

Short term participation
Defined timescale
Guaranteed exit
Defined minimum return, with uplift depending on profitability
Security for their investment
High levels of return

Before you start approaching anyone, I recommend you gain clarity on what, exactly, you need the money for and how you are going to meet the list of requirements above.

For example, it will be easier to find a JV partner to lend you the deposit on a refurbishment and resale project with a six month timescale, where you borrow the rest of the money, than to get 100% of a long term investment proposition with no exit for 10 years.

Step three: preparation

Prepare an outline of the project, with good financial detail and an analysis of risk and reward. Exactly what do you bring to the table? Where's the value you have created? Why should a JV partner work with you?

This summary should be 1-3 pages long. Use photos where you can. Provide relevant background and experience if available. Anything that demonstrates your contribution and 'safe pair of hands' should be included.

Step four: where to find JV partners?

There are many, many ways to find JV partners and some are easier than others. Here's my starter list along with comments:

Family	Often the easiest, quickest and cheapest. If you have a good relationship and a member of your family can get the cash you need, then they may overlook any lack of experience because they want to help out.
Friends	Again, if you have the right sort of friends, then this can be a productive group to approach. But be careful - if the deal goes wrong in all probability your friendship will disappear!
Business colleagues	A bit challenging. Difficult to mix business with investment, but it might work for some.
Property investors	Yes, Yes, Yes. Find them at property networking events. I know one lady who raised more than £500,000 in JV money in one year starting from scratch and is now a property 'guru'. There are regular property networking events in most parts of the country.
General investors	There are many business and wealth networking events across the country where you can find wealthy people who might be interested
Advertise	Challenging but you might be lucky. Only works for a well defined business plan, great personal communication skills and a meaningful advertising budget. Don't waste your time with local papers, you need to work with media like the Financial Times, or online investment sites.
Ask 'who do you know'	Don't forget a simple rule - if you know 200 people and each of these knows 200 people, you are only one person from 40,000 people! So ask everyone you know ... 'who do you know who might be interested?' This is a non-threatening way to uncover interest and will often lead to a valuable contact.

Step five: make it legal

The biggest risk both to you and to your JV partner is to go ahead without a legally binding agreement in place. Most probably you will need to have this drafted by a solicitor. They will know what clauses to include.

This is to cover both sharing in success and when things go wrong. All eventualities should be covered in the legal agreement.

It's not just having the agreement that is important. It's the process of discussion and consideration which goes into creating the agreement. It means that you and your JV partner have really thought about all the possibilities and considered a full range of outcomes.

Step six: JV structure

Here are the most common JV structures. There is no 'one right way'. Each has a place and will depend on the deal, the wishes of your JV partner and the timescale of investment.

Fixed return over fixed period (eg. 35% profit over 15 months).
Fixed interest over variable period (eg. 10% interest pa, for life of investment).
Fixed interest plus profit share (eg. 8% pa interest, plus 25% of profit).
Profit share based on contribution (eg. contribute 30% of total funds, get 30% of total profit).
Profit share based on cash and time (eg. JV partner puts up 100% of money, you find and run project, split profit 50/50).

There are many variations, such as increased interest rates if the project takes longer than planned (to compensate for increased risk). In some cases the investor may wish to take control of the project if you run over time or over budget.

I have a friend in Australia who has a fair amount of cash and did a JV with a property developer. In a difficult market the property wasn't selling for the asking price. The developer wanted to hold out for the full price as his profit share would disappear if the price reduced.

My friend wanted to reduce the price in a falling market, to get out quickly and protect his capital. This is a classic example of how, in difficult circumstances, the partners had two opposing views.

In the end my friend got his way because he had insisted, at the beginning, to have control over the sales price as part of the negotiation. He was lucky because he got his money back. However, his JV partner ended up working for six months for nothing. Not surprisingly they haven't done another JV together!

Conclusion

JVs are a real possibility if you are missing cash, or another essential piece to make your investment project work. Treat finding and working with a JV partner very seriously - you only need ONE to transform your future.

The two most important elements for consideration are: the value you contribute to the partnership; and complete clarity of what you need and how you will structure the deal to the benefit of your JV partner.

Good luck in finding what you need and do let me know your JV success stories!

I was planning this to be the final instalment in Raising Cash for Property Investment, but because of the huge failure of pensions and the massive interest in finding better ways to plan for retirement, I've decided to feature one more article in this series.

Next month we will discuss how to raise money from your pension for property investment, covering both creating cash from traditional pensions and investing via your Self-Invested Personal Pension (SIPP).

In the meantime, I wish you every success with your investment plans.

Live with abundance,