Joint Venture | Baya financial

In this current market, we really have a big split in the situation of our clients. On one hand we seem to have plenty with cash available to purchase property and then refinance once works are completed. On the other, however, we have so many people trying to get into the property market but struggling to find the deposit funds.

Before I get to the options, one thing that comes up often is how much money you need to prove and whether credit cards can be used.

You need to be able to show the lender where the deposit is coming from (and it needs to be in your bank account!), as well as any refurbishment costs. This will need to match your schedule of works, and a valuer needs to agree that they schedule and cost match the works needed in the property. For example, if there’s clear evidence of damp then the solution needs to be covered off in your schedule.

How can you use credit cards within this?

I hear property mentors often speak about using credit cards to pay for refurbishments so that you can refinance and pay it back without putting your own money in but to be honest it doesn’t always work that way! Lenders will want to know that you have the funds to carry out the refurbishment – if you’re not able to finish it then they will be the ones left with it and that’s not what they want!

As with lots of things though, it does come down to experience. If you’ve done it a few times before and got off your bridge successfully then they are more likely to be more flexible with where your money is coming from and we may be able to agree it.

Here’s some ideas for where your funds can come from

Savings

This is the easiest one, but often the one that gets used up first! If you’re serious about getting into property then you really do need to think about how you can save money from your day to day expenses to creat funds for it. Especially for your first project when the lender wants to see you’re using your own funds. Look at a budget planner, find a savings account that encourages monthly savings and go from there. There may be some sacrifices that need to be made!!

Refinance of your residential or other property

Refinancing your residential property can be seen as risky by some, but you are moving the equity from one property to another. With residential mortgages back up to higher loan to values and lenders now using bonus and commission again this may be a good time to look at this option.

Remember that your home may be at risk if you do not keep up repayments on it, so look at the overall picture. It’s an idea to explore though.

Gifts

Often when investors are looking for investor funds, family and friends are first on the list. It’s an easier sell, but comes with more pressure! Gifts from family are easier to use for your first few projects (before you build up some experience) and it counts as your own money!

Joint ventures

This is an alternative where you are relying on the experience of someone else. It means your JV partner has more security over their funds and equally you have more support on the project. You are able to split the shareholding to reflect the funds and experience of all applicants too, so it’s flexible.

One thing to remember is that generally all applicants to the mortgage will need to sign a personal guarantee to be jointly and severally responsible for the loan, so ensure that your JV partner is happy with that set up.

Company loans

Something we are seeing more of, is where clients have a (non- property) company which is profitable and they want to use these funds to put into property. It is a tax efficient way of doing things, but ensure to check with your accountant. You may have utilised a BBL in the company too, so you will be able to use that. Most lenders will allow you to use company loans as long as they are interest bearing.

Angel investments

Once you’ve built up a track record of projects – usually one or two similar sized projects – you can move on to using other people’s funds!

Loans are an option where you run out of your own money, when you factor in the overall costs. Most lenders will now be able to use investor loans where there is a loan agreement in place and no charge on the security property. There needs to be a clear replacement method and any interest payments need to be taken into account so bear that in mind.

With the right strategy you will be able to recycle some of your funds, so you’re not starting from scratch with each project – although ‘no money left’ deals are hard to come across at the moment!

As always, let us know if you want to run anything past us!

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!

Thinking outside the box: where can your deposit come from?

Back to basics: what you need to know about JVs