Got this in from Mark Harrison

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Joint Ventures

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So far this week (and I am writing this on a Wednesday), I have 
been approached by two different people asking me to back their
property deals.

I turn down the vast majority of such approaches, as I know that 
most other property investors do, but I thought it would be worth
reviewing how to find a joint venture partner and how to pitch a
deal.

This article is mainly about property, obviously, but there are
some more general comments - over the last year I have been 
involved in fund-raising for several small businesses, and there
are many similarities in the two worlds.

Basically, investors are looking for several things, and you need
to have all four of them covered to have a chance of finding an 
investor:

- A partner they can work with and respect
- A track record
- A clear set of expectations about what they will gain
- An exit strategy

1: A partner I can work with

It is unusual for investors to back property deals with strangers.

This has been the real power of the networking events for many 
people - meeting face-to-face with potential business partners,
and getting to know them over a drink.

However, a pint at a bar is not enough - the way that most people
end up joint-venturing on a property deal is through having done
a small business deal first. For example, some people who have 
been on my negotiation training course have spent a few hundred
pounds with me, and then have a far better feeling for whether I
deliver. Some have gone on to ask me to work with them on property
deals. They have the assurance that I know what I am talking about,
I have the assurance that they are reliable. Of course, most people
do not run courses, so the small deal stuff tends to be along 
the lines of being a property finder for a few hundred pound, then
later doing a JV.


2: A track record

It is a cruel truth that it is hard to get started, because you
have no track record. This is, in my experience, true in many
different business areas, not just property.

Where possible, investors tend to look for people with a track
record, where there are clear reference projects, and reference
JVs, and clear previous business partners they can talk to.

One thing that some property projects people have done is put
together groups of investors, each putting in a few thousand, 
rather than trying to find one investor with 50,000 to start with.

Not only does this build up the partner aspect from above, but
establishes a track record with many different investors.

Of course, this can backfire - some big names have got caught
out trying to grow too fast, and started making a few people a
bit of money, before losing a lot of people a lot of money.

(This, by the way, is one of the reasons why I invest in others 
deals, but do not look for investors in mine.)


3: A clear set of expectations

Some investors prefer to receive a fixed payment - 1 to 2 per
cent per month is common.

Other investors prefer to receive a share of the risk, and a
share of the reward - generally, though, the partner putting 
in the bulk of the money will expect the partner doing most
of the work to put SOME of their own cash at risk, not just 
their time.

What the investor has is called an appetite for risk. But 
wherever along the line the investor sits, you will need to
meet them at that point on the line.

It is absolutely vital to be clear whether you are looking
for people who will receive a fixed return (guaranteed by
you personally), or whether they will receive a share in the
profit. 

Of course, if they are taking a share in the profit, and it 
goes well, then you have to pay them more. (But on the flip
side, if it goes badly, then you are not saddled with monthly
interest payments to them.)

The absolute reward is one part of the equation - the other
is the timing. Investors who are looking to receive 1 per cent
per month may well want that paid to them monthly!

If not, they may want the sums compounded, so if you borrow
10,000, then after a month you add 1 per cent interest - so
you now owe them 10,100. The following month, you add 1 per
cent interest of THAT sum, so you now owe them 10,201, and
so on. (At the 2 per cent per month level, it is more common
to have a flat return, not a compounded one, deferred until
the end.)

Which leads me on to:


4: An exit strategy

One key difference between investing in property projects 
compared to investing in small companies (which I also do) is
that with construction / refurb projects you have a clear 
timescale...

... at the end of the project, you will either sell the 
property, or re-finance it into your own name, and repay 
them the working capital plus their profit.

This exit strategy, particularly in a fast-selling housing
market is one of the things that REALLY makes property deals
appeal to investors. Never forget to play up this aspect in
your pitch, and be clear about the timescales. (But be 
conservative, particularly if you have not done many projects
- things always take longer than you expect, and an investor
who had expected their cash in June will be angry by August
and furious by October if you are still trying to finish
the job and sell the house.)



A final word of warning - at the moment, property investments
are unregulated. That is to say, you do not need a licence or 
any special paperwork to sign a deal. However, the moment you
start slicing things up in a company name, or are obviously out
looking for investors, then be careful, and always take professional
advice from a lawyer who understands these deals BEFORE you 
agree to anything.



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Property-related blogs since the last newsletter:

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- Property Negotiation, the book, now available at Amazon
- Mini Book Review - Building Agreement (negotiation)
- Anyone can do it does not mean that everyone can do it


Remember the blog contains many more articles than the newsletter,
but they are shorter and less polished. There are also a bunch of
other articles about business and entrepreneurship that are not
particularly related to property.


blog: www.markharrison.wordpress.com


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