Get Started in Property with No Money... with Joint Venture Finance
Investing in property can significantly boost your pension plan, supply you with a full-time income and pave the way to a work-life balance, which most people can only dream of.
But there is a high barrier to entry.
There are mortgages, deposits, costly refurbishments, everyday maintenance and management fees.
You will need a financial cushion to cover potential void periods, damage and acts of God; a broken roof, a flood, a broken boiler.
Building a property business requires money.
But that doesn't - necessarily - mean it requires your money.
If you can bring the right skills, knowledge, work ethic and character to the table, then all kinds of partnerships are possible to forge.
And knowing exactly how to work with OPM (a nice acronym, meaning 'other peoples' money') is a legitimate and often lucrative way of getting in on the action, that won't require any of your own capital.
JV finance is exactly that - an agreement between two parties: one bringing the cash and the other, the know-how and the work.
And that's what I'm going to look at, today: how to build a property business, on a shoestring budget, building partnerships...
...Partnerships that will give you equity, a stake in the properties you work with.
I'm not describing a job in the conventional sense, at all.
if you're interested in the idea of building a property portfolio but you've little-to-no money to put down, don't let that delay you, whilst you save for your first deposit.
There are ways to get started, right away.
What are Joint Ventures?
In a nutshell, joint ventures are a collaborative effort between two or more partners to work together on a project - each contributing something different; be it capital, skills, contacts, resources or workload.
This could be called a JV Deal or you could also use the term JV Finance, with reference to the party supplying the money.
And yet, in such an arrangement, equity and ownership of the asset will be shared - which, of course, means that risk is shared as well.
If it's yourself, doing the work, while your partner pays for the asset the nature of the agreement between yourselves is entirely yours to agree; as bespoke as it needs to be.
But your work will be renumerated, typically, by means of a part-ownership of the asset and share of the profit; not through a direct wage.
It should go without saying...
...but before entering into any kind of agreement you should seek the advice of a solicitor and when it comes to joint ventures yourself and your partner need to discuss all eventualities and make your contract clear.
You need to discuss not only obvious factors like a breakdown in your own working relationship but also worst-case scenarios such as sickness, death and how your joint-project-ownership would work if, for example, one of you happened to go through a divorce.
A lawyer can help you navigate all this, effectively.
It's my belief, that much more can be achieved in life and in business if you focus on what you enjoy.
And when you find the right partner(s) to work with and that meeting-of-minds happens in a - I don't mean to be pithy -in a meant-to-be kind-of-way, it is - unquestionably - one of the more exhilarating aspects of an entrepreneurial lifestyle.
Wikipedia offers the following definition of a JV as a...
"...business agreement in which the parties agree to develop, for a finite time, a new entity and new assets by contributing equity. They exercise control over the enterprise and consequently share revenues, expenses and assets."
That's one take on it - but it's a broad definition.
And yet most joint ventures, in property - at least that I have done, seen or had some peripheral role in, have had one partner contributing the funds or finance and the other contributing their sweat, tears, time and skills.
If your personalities mesh, complement each other and you have the right agreements in place to avoid argument then joint ventures can work for anyone, with any project.
And it's a common way of doing business
The big investment companies (especially when it comes to commercial property) make such arrangements with banks and lenders all the time, where capital is given, not as a loan but in exchange for part-ownership of the asset.
But it's not just for big companies with lots of leverage, it's something anyone can do if they have something to offer.
I don't think I'd have a property portfolio if it weren't for this strategy
Or, at least, I certainly wouldn't be where I am today.
Because it can take a long time to save for a deposit and when you know exactly how to find and manage a property project, the wait can be frustrating and in-the-mean-time your portfolio isn't getting any bigger.
For me, it was a no-brainer. Going into partnerships with other investors, meant I could scale my portfolio faster, while increasing my income and cutting the amount of time it took to save for my next deposit, considerably.
And on the other side of the coin
We've looked at joint ventures as a way you can still grow a portfolio if you are time-rich and cash-poor but, obviously, there's another side to this equation.
If you're someone who wants to invest in property and have the cash to do so but lacks time and skills then it makes sense to partner with someone who makes up for your deficits.
I know what you're thinking...
And no, it's not complicated to buy a house or even refurbish it (you can hire a project manager for that).
But looking at the bigger picture, dealing with brokers, estate agents, solicitors and refurbishment teams (even with a project manager) takes up, a not inconsiderable, amount of time.
And that's after you've chosen a house, in the right location, where you can guarantee a good return, with little-to-no guesswork involved.
Just because you can do this, doesn't mean you should
You've probably heard of the Dunning Kruger Effect where someone new to particular line-of-work is so unaware of their deficiencies that they feel confident in their abilities. Then, the more they learn, the more they realise how much they don't know and become increasingly unsure of themselves.
Don't fall for it
I'm not saying that if you are inexperienced you won't be able to find a joint venture partner. After all, someone has to give you your first gig, just as someone, once, took a chance on me.
A JV is a business relationship; it needs to be based on honesty and being honest with others tends to start with being honest with yourself.
There's nothing wrong with having to pick up new skills as you go but if you promise that you are capable of doing something that later proves to be something you can not deliver on, then that relationship is going to go south, quickly.
And we've all done it; thought to ourselves, 'how hard can it be?' - to discover the answer is, 'very'.
Structuring the Money
To reiterate, what I said above, how you structure your JV is entirely up to you and your partner(s), depending entirely on what you are each bringing to the table and what you both feel is fair.
And yet, in property, it's not unusual for such ventures to split rental income and/or the sale of the property in question 50:50.
It's important to note, however, that this 50:50 split is likely (almost certainly) to come after the partner, who supplied the capital, has recouped their initial investment.
As a side note, buying a property, refurbishing it and selling it on, is a more common JV strategy than buying and holding (renting out). In other words, short-term partnerships are more standard than long-term ones, although both kinds happen.
And as already stated but worth repeating, for the partner who will be doing the actual work, this arrangement is not a job. If you need take-home money, like a wage, then this is something you can discuss with your partner, in anticipation of future profits.
But the reality is that if your situation doesn't allow you to take on a project without a traditional wage, then this probably isn't for you and you might be more suited to property sourcing - similar work but where you sell your services, without the promise of a stake.
- 3-12 months for an initial property
- 3+ years for longer-term portfolio building
This is quite an open-ended timeframe as it all depends on what strategy you look to combine Joint Ventures with, and if you want to stay in a long term agreement.
One thing I want to make clear though is finding the right partner isn’t as simple as some people make it sound, and you shouldn’t just jump into bed with anyone.
If you are looking for a partner with money there are lots of investors out there with the means to invest.
If you are looking for a partner with ambition, time and experience, there are lots of people out there who will be happy for you to leverage their time and contacts.
But to find the right balance of personalities to work with you, this is key...
Finding the right partner can take time, so if you’re interested in this as a strategy, it’s important to get started now and start getting out there and meeting more people.
Make the effort, network, outreach to like-minded investors, make it known what you’re looking for.
Often you will find joint ventures in the most unlikely of places, so keep an open mind, know what you’re looking for, and make a plan on how to find it.
Remember what your potential returns on these were.
If you're Cash Rich & Time Poor...
Would it be worth giving a portion of that away if you could be completely hands-off and have someone do all of the work for you?
Especially if you knew the person doing the work was only rewarded if the property was a success and achieved what you agreed to at the beginning?
Reduce your risk... Take back your time and still benefit from a property with great (possibly infinite)returns.
If you're Cash Poor & Time Rich...
Would it be worth speeding up your portfolio growth and working for free initially if you were rewarded for your skills and success with a massive upside?
If it would take you 1-2 years to save enough for a deposit to buy your first property, to then run out of money and have to start again... would you consider giving your time instead, and working to grow a joint portfolio, where you split the benefit and you can grow much quicker.
A Real-Life Case Study (How NOT to do It)
I’ve done a couple of joint ventures with property and I have a couple up and running now.
Not all have been successful, and I’ve learnt lots and what to look out for as I’ve made mistakes.
After looking back, all of my previous joint ventures that haven’t worked out seemed to have been because I was too similar to the other party AND our skills were too similar.
When I first started out I had a joint venture with a friend of mine. This was with sourcing property leads.
From the start, you could see it was always going to be tricky as we were both bringing the same assets to the table – time.
But I had a little more property experience than my friend as they were completely new to it.
This meant it was difficult to split roles, as I had the experience, so I would take on most of the work, and they had to learn everything as they went along so it was a steep, long learning curve for them.
This uneven split can easily breed resentment and frustration, and as property was new to them they soon realised it wasn’t necessarily what they enjoyed.
Luckily we were good friends, and we realised quickly that it wasn’t working out, and we should separate and do our own things.
In all, it probably wasted around 6 months of our time and a starting investment of about £1,000. It was a good first Joint Venture in a way, as it was a relatively painless end, and neither of us had committed too much apart from time.
But I learned that having similar personalities is not necessarily a good thing. Often it can be helpful when people bring separate and distinct assets to the table. This way, there is a real benefit all round.
Top 3 things I Would Do Differently
- Check and Double check you have the right personalities and different assets to bring to the table. Meet each other a number of times before you do a deal where possible and don’t rush into things.
- Doing J.V.’s with friends is fine, but it’s still important to make sure you have the right agreements set up from the beginning.
- Make sure all parties know their roles from the beginning and set markers to make sure they are kept to and achieved. This will help you analyze if the J.V. is going in the right direction and help you steer it back on course if you need to.
A Real-Life Case Study (When Things go Right)
The first joint venture I did with a partner to purchase a property was in 2009, and it is still going strong to this day.
As I was sourcing properties for my own portfolio and for other investors, I was in the unique position of seeing the very best deals as I was direct to the source.
I would often come across deals that I wish I could purchase myself, but I had run out of money or I wasn’t in the position to buy
(Note: it doesn’t matter how much money you may have to start with –eventually you will run out – this is why Joint Ventures are so powerful if you are continually looking to grow)
I started off selling the deals to other investors as ‘packaged deals’ and I would get a finder’s fee for sourcing them.
The finder’s fees at the time were good, around £2-3k per property so it was a good return and use of my time, but my personal plan was to buy and hold properties. I wanted to grow my portfolio, and I was regularly passing up great deals because I couldn’t buy them.
One of the original investors I was passing deals on to at the time, asked me to meet up as they were planning their strategy for the year ahead.
At the meeting, they asked why I sold on these properties and didn’t take them for myself, and I explained, that I would but I had run out funds, and I now had quite a few mortgages and lending restrictions were getting harder.
It was then that they suggested a joint venture. I had never even considered that as an option before.
We agreed that they would provide the finance if I would source the deals for free, and put the best deals I sourced into the partnership. We would then split the rental profits and equity growth on anything over their initial investment.
To this day I manage the properties as part of our agreement and when the time comes to sell the properties or refinance, I will benefit from any capital growth and the equity that I negotiated on the discount.
One of the properties was valued at £75k and we purchased it for £45k.
Now I’m not saying all deals are like that, but you can see why I was glad I wasn’t just passing that on for a £2k fee!