So here we are again, it’s Friday! It’s been a busy week for us this week, the new lockdown rules don’t seem to be putting off investors which is good to see. It’s important to get your figures right and factor in additional time in these uncertain times – for the purchase, refurbishment and refinance – but on the whole we are seeing serious investors pushing forward.
Today I’m going to talk about joint ventures. It’s a popular topic at the moment, for two main reasons. Investors are looking for an alternative or addition to bridging in this uncertain time, especially when there is planning involved or if it’s a complicated transaction. Many people are looking for an alternative to their savings, and with share prices so uncertain and the premium bond rules changing there fewer options for your cash. Investing in property through another investor is an alternative. You may not have the time or experience to invest yourself, so joining with an experienced investor can work well if done right.
How does a joint venture work?
There are two ways you can structure a joint venture; by using Angel funds, or setting up an SPV which includes your JV partners.
What are Angel funds?
This is where you borrow money on an unsecured basis, as a loan from your investors. You can structure it in many ways, the important factor being that it has got to work for both parties. Usually it is a short term investment used to fund the purchase or refurbishment and then once you can refinance the property it would be repaid.
How does it work alongside mortgage lending?
Lenders will want to see a few things to ensure that they are happy.
- There must not be any charges on the property relating to the investor
- The funds must be borrowed for a reasonable interest rate – not too high or low
- There must be a clear repayment method. This is usually the refinance, so the end value and term mortgage have got to allow this, but if the investor funds have a monthly payment then this must be worked into your affordability
- You need to be bringing something to the deal yourself. Ideally this would be some cash and the experience.
- The lender is likely to want to know the source of funds, so your investor may need to provide bank statements or an explanation as to where the funds have come from.
Pros and cons?
The biggest advantage of this way is that it is usually a short term agreement. It’s a way to start a relationship with a JV as once their loan has been repaid then the relationship is over.
Where is can go wrong is that your investor has no control over the deal, it’s all in your name. They need to be ‘hands off’, so make sure they are happy with that arrangement. You also need to add in the contingency of not being able to refinance and pull all their funds out. Make sure you have a plan b, and that they understand what could happen and how you will move forward in that scenario.
What about using an SPV?
This is where you set up a company which involves the investor and you. You can set up the director and shareholder arrangement to reflect who has brought what to the deal, and any directors as well as shareholders with over 20% of the shares will need to go on the application. Bear in mind that your directors are the ones in control of the company, and the more directors you have the longer the decision making progress can be!
Pros and cons of this method?
You have got to be so careful with your due diligence in this scenario, you are entering into a financial application with your JV partners. You will be financially linked with them for a long time, so you need to be sure there is nothing in their background which could cause you issues. Use your solicitor to draw up agreements and understand exactly what you are getting into.
Before you start, you need to understand what your JV partners’ priorities are and ensure that you want the same outcome from the deal. Everything needs to be discussed at the beginning, as things are likely to change and you need to be on the same page as the deal progresses.
The big difference to using angel funds is that this is likely to be a long term relationship, where each member of the company is taking an interest in the deal and therefore you will all win or loose depending on how successful you are.
Make sure you go into this with your eyes wide open. JVs can be a great way to grow your portfolio but they don’t come without their own risks. Due diligence is the key word here!
Have a great weekend!