The biggest challenge new investors face is funding.
There’s no way around it – if you can’t afford the deals you’re after, no amount of subdivision, renovation or development skill will help you put money in your pocket.
Even if you are entering the property game with some savings, the bank will only let you borrow so much until they tell you, “that’s it, you’ve borrowed enough!”
When that happens, you have two choices – slow down drastically… or…
Get Someone Else To Fund Your Deals!
Knowing how to get deals over the line using none (or little) of your own money – is the ultimate way to become financially free faster than most people think possible.
But there’s a lot of misinformation out there about money partners and joint ventures. So in today’s post, I want to share with you the answers to the questions that boggle most investors.
1. “Should you ever do a joint venture or money partner deal with close friends / family?”
In my opinion it is quite possible to do a joint venture with close friends, even family but be warned.
If things don’t pan out the relationship can be damaged which is a common occurrence. Chose your partners wisely by creating structure to your process and maintain transparency at all stages of the agreement.
Using the resources of family and friends should be treated carefully. No investing endeavor should be at the expense of family relationships or friendships.
A successful joint venture will always be based on quality communication between all parties. Its up to you to ascertain whether you think that level of communication is present in your current family relationships.
Like all joint venture and money partner agreements, ensure everything is documented and treated professionally, as you would with any business relationship or financial arrangement.
2. “What are the different exit strategies you put in place in your joint venture agreements and why?”
Joint venture agreements carry an associated amount of risk due to the nature of the endeavor.
In my experience, I always have the end goal in mind with a planned end date, so that all parties can exit the deal in some form.
My first rule is to keep my property projects and joint ventures separate to any other business or personal entity.
That means setting up a separate purchasing entity (e.g. company and trust structure) with a separate bank account, so that project related income and expenditure is managed efficiently.
This ensures a less complicated end to the project – not to mention a much simpler process for the bookkeeper!
Having a clear exit strategy from the beginning is paramount to an efficient project. Not having the end goal in mind will only result in wasted time and resources.
Having said that, it’s important to have a number of written exit strategies in case a change of market conditions or personal circumstance eventuates.
An exit strategy should be based on the needs of the investing parties. For example, a four-townhouse development, where 2 dwellings are sold and one each is kept for thejoint venture partners.
A discussion should be had early on in the agreement to ascertain if the partners wish to hold or sell their allocated dwelling.
3. “What are the top 6 considerations/clauses that should be included in any JV agreement?”
First of all, your joint venture agreement should be drawn up by your lawyer. Don’t fret, because in the Joint Venture DIY Kit inside the Ultimate Property Hub I tell you where you can get a Joint Venture Agreement template at less than 1/100 of the cost of getting one designed for you from scratch!
So this needn’t to be too expensive, or too time consuming. Phew! 🙂
Now, before you start spending money on legal costs, it’s important to have a clear picture on how that agreement will look. Here are six key considerations I like to start with:
- Roles and Responsibilities: Be clear on who is doing what and document those expectations fully. Be as specific as possible about every task.
- Who provides what: In order to determine profit shares, return on investments and the like, you need to determine the value of each contribution. This will vary greatly and is negotiable but some key inclusions should be: Who finds the deal, who provides capital (cash/equity) who provides servicing (ability to borrow money), who provides the skill (to manage the project to a profitable outcome). Each of the 4 above points should have equal weight.
- Separation: All financial resources need to be allocated before the project begins. Allocated means in a bank account ready to be utilized. The project must have the ability to move forward under all circumstances. To ensure sufficient funding and cash flow is available, it’s often best to have it allocated and held in trust at the beginning.
- Security: How are the allocated funds secured and who has what access and rights to them should the need arise?
- Structure and Strategy: Be clear on what type of purchasing entity you will be using and who controls that entity from a joint venture and finance perspective. Document the strategy implemented to create a profitable outcome in full, with a least five redundancy plans to enhance profit maximisation, but also to counteract multiple worst-case scenarios.
- Rate of return or profit share: This is always negotiable and will depend on who is contributing what to the deal.
4. “How do you make the bank see a multi-unit joint venture development favourably, so they lend the maximum to both me and the investors?”
Banks need to be treated like one of your joint venture partners. They are actually investing in your project, so it is fair to assume that they will want to mitigate their risk and be confident that the deal is going to be successful.
When borrowing money for a development, most lending institutions won’t just look at the lending capacity of the directors, they will also look at the expertise behind the project. If you are new at the game, this will be taken into account so it’s wise to have a joint venture partner that has some runs on the board before you look at financing the deal.
Using your current portfolio as security is fine; just make sure you get some advice from a good mortgage broker on what value of security is used to service the loan. You don’t want your whole portfolio exposed at the expense of one project.
5. “Should I have a shared everyday account with my investors for expenses, or offset the contributed funds against the loan?”
Compartmentalising is a smart way to begin the setup of your joint venture. There are many components to a successful property purchase and adding a joint venture agreement to the mix only adds to the list of components to manage.
With this in mind, I like to keep my property projects and joint ventures separate to any other business or personal entity. That means setting up a separate purchasing entity (e.g. company and trust structure) with a separate bank account for each project so that all the related income and expenditure is managed efficiently.
To further enhance the separation of resources, in my experience, I have found it best to have all the required funds allocated from the start of the project. This is particularly important in a joint venture, because it means not only are the borrowed funds locked in, but also the unborrowed funds are allocated as well.
Here is a broad example to articulate the importance of having the funds pre allocated:
Investor A is providing $200k in cash to pay for the 10% deposit on a property as well as the subdivision expenses, to split the block into two. Investor B is providing the servicing capacity to borrow the funds required to purchase the property.
If Investor A only provides half of the $200k at the start of the deal with the promise the other $100k will be provided as the project progresses, what happens if Investor A loses his/her job? All of a sudden the project comes to a grinding halt because Investor A won’t fund the ongoing costs of the project because he/she has had a change in personal circumstance that now jeopardises the deal.
If the full $200k was allocated in the beginning, Investor A’s circumstance would not have affected the deal.
Bear in mind that $200k could be offsetting the mortgage to lower interest repayments however having the allocated cash liquid and available has a far greater priority to ensure no time is lost during the project.
With regards to which loan product to use to facilitate the borrowing, I recommend using an experienced mortgage broker who has access to the latest products on the market.
The lending market is constantly changing and having a mortgage broker that is skilled in providing the borrower with a suitable product is good business sense. (Check out my Property Investor’s Rolodex for a reputable referral in your area)
6. “What are some industry standard terms for joint ventures?”
There are a myriad of terms and definitions that can be explored relating to joint ventures and I have dedicated an entire chapter to this topic inside the DIY Joint Venture Kit and you can access it by joining the Ultimate Property Hub.
Here are a few key terms that are specific to the subject:
Joint Venture: a commercial enterprise or business agreement in which the parties agree to develop, for a finite time, a new entity and new assets by contributing resources including time, money, loan servicing and skill.
They exercise control over the enterprise and consequently share revenues, expenses and assets. Often undertaken jointly by two or more parties who otherwise retain their distinct identities.
Money Partner: An individual or entity whose involvement in a partnership is limited to providing capital to the business. A money partner (sometimes referred to as silent partner), is seldom involved in the partnership’s daily operations and does not generally participate in decision-making.
Purchasing Entity: The person, company, trust or partnership that has been created to purchase a property. It’s important to have your purchasing entity in existence before signing a purchase contract.
See your accountant about the most tax effective purchasing structure; failure to do so may mean double Stamp Duty implications or inappropriate tax issues on the sale of the property.
Investing Structure: The entity created for buying or creating an asset with the expectation of capital appreciation, dividends (profit), interest earnings, rents, or some combination of these returns.
Mezzanine Finance: Also known as mezzanine capital or private lending. In property investing this can be used to access funds in a non traditional sense, from other private lenders. Commonly used to ‘topup’ existing finance lending for a project that was not provided by a conventional institution.
Mortgage: Most people who buy a house need to borrow some part of the purchase money, usually from a bank. The bank will normally require a mortgage to be given by the borrower as security for the repayment of the loan. The mortgage is registered on the title to the property. A mortgage sets out the terms and conditions of the loan, including the rights of the bank in the event that the borrower fails to repay the loan.
In the case of a second mortgage, this refers to another secured loan (or mortgage) that is subordinate to the first mortgage on the property.
Title: A title or title deed or land title is a legal document that provides evidence of legal ownership off a property. When you take out a mortgage on a property, the bank often holds the title on your behalf whilst you are indebted to them. If you are paying off a mortgage, you may not have even seen this document yet.
The title deed is generally issued by the land registry department within your state and includes information on the registered owner, mortgages, covenants, caveats and easements affecting the land.
Caveat: A caveat is basically a form used to secure or protect any other interest over a property.
A caveat is a form of statutory injunction provided for under the relevant local government. It effectively prevents the registration of any dealing until the caveat is withdrawn. You should consider lodging a caveat if you have an estate or interest in land that you cannot protect by registration of some other dealing, for example, a transfer or mortgage.
After a caveat is registered, a caveat note appears on the title giving prospective buyers notice that a third party might have rights over the property.
7. “I’m in a position where I need 100% finance from a money partner. Is it possible to find a Joint Venture partner with absolutely no money down?”
No money down deals have the ultimate leverage attached to them because your leverage is infinite.
Having said that, using other people’s money to fund your deal, whether it be 100% or 1%, should be guarded with your life.
In this scenario you may want to bring in a money partner to fund the initial deposit as well as the cost of the added value strategy, for example the subdivision expenses. A second party could be used for servicing the debt which would make them a joint venture partner.
By sharing the resources amongst multiple parties you spread both the risk and the opportunity, while not having to pitch the deal to one person only.
Guaranteeing the capital is critical and can be done using multiple strategies. Here are a few points that could be considered to satisfy security over the funds invested:
- First or second mortgage over the property
- First or second mortgage over an alternative property
- Personal guarantee verified by your lawyer
- Caveat registered on the property title
- Shareholder agreement All of the above items should be discussed with your lawyer before entering into any agreement first.
All of the above items should be discussed with your lawyer before entering into any agreement first.
8. “In a joint venture how is the project management / operational component equally split or shared amongst partners?”
The project management is one of four major parts to a successful property deal. The other three components are cash/equity contribution, servicing capacity and ability to find the deal.
Breaking the project management down further to split across multiple partners can be tricky because there are so many tasks within that component.
It’s all about being crystal clear on what all those components are, so you can allocate them properly, even to the point where each task is weighted according to complexity and time taken. Here are a couple of tasks to get you started:
- Market research
- Booking, reviewing and confirming quotes from consultants
- Managing trades and/or builder
- Creating the schedule and ensuring tasks are completed on time
- Bookkeeping and monthly reports
- Company and staff management
- Sales and marketing of end product
- Property management and maintenance
- Work health and safety compliance.
9. “As an investor how do you ensure that your money is safe/secure during the deal?”
It’s critically important that your money is secured for the entirety of the project in case the worst should happen. There are many ways to protect your capital.
The most common is by way of a first or second mortgage over the property. Much like a bank, the person borrowing the money would have a mortgage document written up by a solicitor that has an equal or greater value to the money being lent.
A second mortgage is the same however, it falls behind the first mortgage in repayment priority, meaning it is riskier. A typical example of this is when a bank has a first mortgage over your property and you borrow $100k from a money partner to pay for the subdivision costs for which you provide them with a second mortgage.
The associated risk with the second mortgage is that should the bank need to resume your property and sell it to extricate their capital, the second mortgage holder will only get what’s left.
With greater risk comes greater reward and the money partner should be compensated with a higher return on their money than the first mortgage holder.
Mortgage and security documents aside, you should be doing your due diligence on the deal itself, so that should the project go bad, you have plenty of scenarios to receive your contribution back.
For example, if the project was bought or acquired well (i.e. min 20% under market value) there should be equity built into the project before the development even starts.)
Bottom line is there will always be risk when investing your money. Take the time to do the investigation on the parties involved and the feasibility of the deal itself. From there you can decide whether the transaction meets your risk profile and if in fact the return warrants the outlay.
10. “What are the best online tools for connecting with people who are looking to be joint venture partners? Like Tinder just for investors?”
There are many rules and regulations for advertising for joint venture partners, money partners and capital raising.
You should seek advice from a lawyer before attempting any public announcements in this field.
In my experience, I have found there to be an abundance of potential joint venture partners within your general network of friends, colleagues and professional service providers.
If you are considering traveling down the complex road of public advertising, consider these existing third party websites that provide information to facilitate this:
- JV Partner Search
- Angel Investing
- Forbes Magazine
- Tim Ferris’ podcasts:
I hope you enjoyed this resource, and I hope it gave you a taste of the kind of epic learning experience you will have when you try my DIY Joint Venture Kit inside the Ultimate Property Hub!
If you have any other questions you’d like answered, please leave a comment below!
P.S. Do you know the secret to making $30k, $50k, $100k, even $500k or more in profits in a single property deal – consistently? Click here to find out 🙂