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Joint venture experts Murat Haykir and Tom Thorns join us in this episode to discuss the ins and outs of JVs. They cover what a joint venture is, the benefits of them and the essential things to remember (and avoid) when getting yourself involved in one. This podcast was recorded for the IPI community, which is currently free to join.
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Mo Haykir bought his first property in 2010, when he was still at university. Plunging into property full-time in the summer of 2016, he hasn’t looked back since. Living in North London, but based in Plymouth, Mo manages 120 HMO rooms with his company Moorview Property. He is also a director of KHP Group, which specialises in commercial to residential conversions of heritage buildings into flats. He co-hosts the Your Success Podcast with Angelos Sanders.
Tom Thorns is an investor and developer from Living Smart, based in South Manchester. He owns a small portfolio of HMOS in an Article 4 area of Manchester, as well as larger HMOs around Greater Manchester. Living Smart also do small-scale developments of high-end executive houses in South Manchester and Cheshire. He is currently looking to add to his portfolio through select HMOs and commercial conversions to apartments.
Benefits of a joint venture
Put simply, a joint venture (JV) is an agreement between two parties to work together to achieve a common goal. It’s a business relationship and it can start off as a blank piece of paper.
For Mo Haykir, joint ventures work best when they allow each party to fill a gap of some sort. ‘Whether that’s a gap in finance, a gap in skill-set, a gap in time, those kind of things.
‘The key thing with that is if you’ve got an overlap of skill-sets or something like that, you want to have an aligned vision of where you’re going with JV partners. If you’re both architects or hot on finance, that can sometimes cause a bit of friction.
‘The best joint ventures work where you’ve got people with opposing skill-sets but aligned vision. Otherwise you start treading on each other’s toes.’
Tom Thorns prefers joint ventures to other sources of finance because they allow for money to be left in deals for longer periods of time.
Meanwhile, Mo appreciates the versatility that they provide compared to investor-finance. ‘If they’ve bought into the deal they’re going to bring maybe some skills that they’ve got or some resources that they’ve got with them,’ he says.
What to be aware of with joint ventures
For Tom, it’s essential to be upfront with joint venture partners. That means informing them of the lowest possible ROI, as well as the highest. ‘In the two HMO ones we’ve done, we’ve been upfront,’ he says. ‘We’ve said it could be as low as £30k or it could be as high as £90k. You’ve just got to be happy with those.’
Mo says that one of the challenges of joint ventures is determining the equity of things. ‘We had a HMO recently. We thought we were going to get £340k to £360k. The valuation came out at £320k.
‘The value of the shares in that SPV [Special Purpose Vehicle] or that company, is it valued at £360k because that’s a multiple of the rent, or is it the value the valuer gave it on that day, or is it the value of the bricks and mortar? It can be quite tricky to re-balance at the end I think.’
It’s also important that the structures the joint venture is set-up in covers the eventualities needed. Tom says a bank refused a friend of his term finance at the end of a project, because of a Deed of Trust set up with the investor. They subsequently had to dismantle it. ‘Term finance is a big one if you have a long-term relationship,’ he says.
Drawing-up a joint venture contract
Mo advises to sit-down and agree the terms in person, before getting a solicitor to write an agreement up. He says you then need to go through the document sent back from solicitor together and decipher the jargon.
Both Mo and Tom often put their own money into a deal to give it credibility. Tom puts in at least 10% of the money on development projects where he’s seeking a loan for the business. ‘That’s the buffer to protect the investor,’ he says.
When borrowing money to put into projects, Mo says he will always put in some of his own money into the deal. However, he doesn’t contribute his own money on joint venture, equity profit-share deals. ‘If the project fails planning and appeal, any money that is expended up to that point – which will be planning fees and drawings and things like that – we will effectively reimburse the investors 50%’ he says.
Listen to the full podcast to hear answers to many other of the finer points of joint venture deals.
Moorviewproperty.com – for information about Mo’s HMOs and serviced accommodation in Plymouth.
Khpgroup.co.uk – “creating high-end homes out of heritage buildings”.
Livingsmart.co.uk – for details of Tom’s Manchester-based developments and rentals.