Pooling resources can fast forward your ambitions, but choosing the right legal framework is crucial
I’m a British national living in Dubai and I’ve been buying the odd UK buy-to-let property (BTL) over the last few years with money saved from my salary working as a lawyer. The process is slow and tedious, and far from the get-rich-quick promises of so-called property experts. Don’t get me wrong, I’m a big fan of BTLs, but I cannot say that I jump for joy every time I have to deal with conveyancing solicitors or submit countless proof-of-address documents to mortgage companies.
I knew property was where I wanted to be, but I longed to do the development deals that seemed so exciting and lucrative – but were out of my league. So, I started fiercely listening to podcasts and reading books to acquire the knowledge to take on a bigger project. At last I felt ready and just needed to take the plunge. Wait, where was I going to get the cash?
The contents of my savings account was never going to result in the deals that I was seeking, and when you are an expat, getting any type of finance in the UK is like poking yourself repeatedly in the eye. Banks do not like lending to expats as they think we are all perpetually on holiday, squandering their cash on oysters and fizz. If I was going to achieve my dream, I needed help.
Strength in numbers
I had been going to a monthly property networking group for the last four years, where I made a lot of good contacts as well as some close and supportive friends. These friends also had some cash reserves and a wealth of property expertise using various different strategies, but they were encountering the same issues as I was. The other issue we all faced was sourcing deals. Being so far from home meant we lacked on-the-ground knowledge and the ability to act quickly – especially on the smaller cash deals that are snapped up by UK investors.
The lightbulb moment happened during a mastermind session in Dubai, when Mike and Victoria Stenhouse from Inside Property Investing held a weekend session. They suggested that the ten of us in our group – what would become DEP Group – pool together our resources to accelerate our property careers.
It made sense that we could achieve so much more combined than each one of us individually, and at a much faster pace. We would be able to skip the smaller deals where there is more competition and focus instead on larger developments, leveraging our combined funds, contacts and expertise. We were all either British or had strong links to the UK, so we decided to focus on the UK because it is an established market we know and trust, and, at some point, most of us had plans of returning there.
Legal framework: LLPs
All the members were naturally nervous about how this was going to work, especially as we had never worked together before. So, we decided to use a structure that was quick and easy in order to do our first couple of deals. That way, if we ended up ripping each other to shreds, at least we hadn’t spent too much time or cash in the process. We incorporated a limited liability partnership (LLP) in the UK.
The reason we chose an LLP was because the members have limited liability and it is tax transparent, meaning that your tax treatment will be determined by the capacity in which you hold your membership of the LLP. For example, you can hold your membership via a limited company and be liable for corporation tax, or alternatively, as an individual and pay income tax on your share of the profits. This allows the members to opt for the most tax efficient vehicle for their own circumstances.
We have now completed our first deal using the LLP – a simple buy/refurb/sell – to test the model, and we are all still alive. In fact, we are even more cohesive and motivated as a result, and we made a decent profit in the process. This structure worked well for us and we shall use the LLP again for projects that are low value, with quick turnaround times and where all members are contributing the same amount of funds. It’s cheap, easy to set up and run, and works well for flips. I should add that we use this company for trading only (buy to sell), not to buy to hold. We would use a separate investment vehicle for the latter for tax purposes.
Moving up the ladder: Ltds
For higher value and more complex deals, or projects where we are contributing unequal amounts, we will incorporate a separate private limited company for each project. The two main reasons for this are: (i) you can ring fence your liability to each project; having multiple deals in one vehicle means that a loss on one project can affect the gain on another, and (ii) you can have multiple shareholders contributing different amounts holding different classes of shares, for example, non-voting shares for pure investors, and voting shares for the decision makers. You can achieve a similar structure by incorporating separate LLPs, but you would need a lawyer to cater for this in the LLP agreement, which can add complexity and cost.
Without going into specifics, this structure can accommodate a more complex joint venture arrangement. The downside of using this structure is the extra cost of setting up, running and dissolving these companies. Hence, why we are prepared to use our LLP structure for smaller deals.
Depending on how familiar you are with managing companies and LLPs, you can do a lot of the leg-work yourself. The registrar of companies, Companies House, is fairly easy to navigate. However, if you do not have the time or just prefer to be something else a little less dry, you can pay specialised companies a fee to do this all for you. For example, we paid Companies Made Simple (www.companiesmadesimple.com) £69.99 to set up our LLP). My only recommendation is that you get a good accountant to manage the books.
Over to you
I hope you have found the above useful. This is the way that we have decided to structure our business, which is always subject to change and personal to our individual tax situations. The information in this article is designed to suggest ways of potentially structuring a property business. However, it should not be in lieu of seeking specialist advice specific to your situation.
Whatever you decide, I wish you the best of luck. Joint ventures can be an exciting journey that open up a world of possibilities. We’re now scoping out our next deals and I’ll be sure to report back on how we structure it. Until then, happy investing!
To quote the article above, “…pool together our resources to accelerate our property careers.”
What is being pooled? The skills and expertise? Or is this a collective investment scheme of some sort to pool cash for investing?
Independent of the cash element, what is the management structure of the LLP or Ltd company? Is everyone expected to vote on the decisions or is there some sort of designated managing partner / CEO for the group?
Thanks for your questions John and for taking the time to read the article. We are looking to pool expertise and cash. We are all sophiscated investors looking to do bigger deals than what we can achieve on our own.
In terms of voting rights, these are all set out in our LLP agreement. Some decisions are unanimous, while others are majority driven (depending on the importance of the decision). For cash injections, the decision is completely up to the individual investor. In terms of day-to-day decisions on individual projects, these are taken by a project management sub committee of 2 or 3 investors.
At present we do not have a managing partner, but we may look at this down the line, once the business is established. Naturally, we are starting to fall into certain roles, for example, some of the investors are more financially minded, while others excel at social media etc. We may look at formalising these roles.
I hope that answers your questions.