joint venture deals

268: Bridging the finance gap – how to get more from your joint venture deals

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say cheers to joint venture deals
Prior to the joint venture Q&A we held with Mo Haykir and Tom Thorns in February, we had a strict criteria for doing joint ventures. Whilst we would do the work for planning, conveyancing and refinancing, we expected our partners to bring ALL the cash for the purchase, renovation and other costs. After the February Q&A, it became apparent that there exists other ways of doing things, which still involve partners putting in cash, but much less of it, whilst letting bridging and development finance fill the gaps.

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The problem

Recently, an opportunity arose to put this new approach to joint ventures into practice. We had two projects we had agreed on, but all our usual joint venture partners were tied up with other things and couldn’t contribute the money. We could have sought out another JV partner, but we like to keep our investor pool as small as possible to minimise complications and we only JV with investor who we’ve previously used on a personal loans basis.

Nor did we want to pull out of the deal: it could have damaged our reputation and we’d be losing out on profit.

The cash gap

We purchased the first project for £160,000 and we calculated the works and associated costs would come to another £190,000, meaning we needed a total of £350,000 to go forward with it.

Our offer of £215,000 had been accepted on the second project and we calculated we’d need another £170,000 to complete all the works, bringing the total to about £380,000.

In short we needed £350,000 + £380,000 to complete the two projects. But where were we going magic-up £730,000 from?

Bridging the gap

We dropped our requirement that the partner must bring all the cash. We contacted one of our regular JV partners and offered them the project with a 70% bridge on each property, based on the purchase price. We reduced the total cash needed from £730,000 to £460,000, whilst doubling the properties and profit we were offering. Two properties gave an income of £50,000 per year, split 50:50.

By dropping one of our red lines, we made significant profit. It just goes to show that the roadblocks that prevent progress are sometimes self-imposed. Revisiting your rules of engagement may sometimes stop you restricting your own growth. Don’t be your own worst enemy.

 

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