By leveraging your time, efforts and, what we call, OPM (Other People’s Money), you can turn your property dreams into reality. Now let’s assume after learning how to analyse property, and how and where to find them, you eventually find an investor who is cash rich but time poor – what 3 financing strategies can you possibly come to an agreement to with the investor?
1. Sourcing leads
This is arguably the best way to begin your property investment journey should you find yourself in limiting circumstances. Sourcing is essentially a no risk, low rewards strategy. All it entails is you spending your time finding deals, analysing the deal (doing the dirty work behind a deal) and passing on the deal to an investor for a fee agreeable between the two of you.
**Please note** when you earn commission off a property sale you need to be an Estate Agent registered with the EAAB. Though, when working with the right attorneys, you can structure a legal contract where you can legally source deals to other investors for a fee. Please consult a professional in this space, before venturing into sourcing.
The concept behind this strategy is that, often times as a beginner you will probably not have enough money to buy your first property in cash or even put down the deposit required. Should that stop you from becoming a professional property investor? Absolutely not.
What exactly does a property sourcer do, and how does the process work?
- Finding the deal: A property sourcer will spend time finding motivated sellers and distressed property by building their marketing strategy, be it marketing a website, handing out leaflets, or putting up newspaper adverts – essentially this is all in the efforts to build leads, instead of hunting for property, property hunts the sourcer.
- Analysing the deal: After finding the said property he/she will then run the numbers and do the necessary analyses on the deals found. Here is where the sourcer will determine whether the property at hand is over, under or just at market value. The sourcer will determine the cost associated to buying, refurbishing and selling the property to gauge a reasonable offer price. The sourcer will also determine the rent in the area the property is located in to decipher the amount the property can rent for. All the analyses is in a bid to calculate the return on investment should the investor take up the deal. This will make it easier for the sourcer to approach the investor with facts and figures because, as the old adage goes “women lie, men lie, but numbers don’t”.
- Negotiating the deal: After analysing the deals, a sourcer would then approach the distressed seller and negotiate an offer with the aim of acquiring the property. This is when all debates and discussions will take place, each party will negotiate a price for the property and eventually come to an agreement for the asking price. An offer to purchase will have been made to the seller of the property.
- Finalizing the deal and presenting the deal: Once an offer to purchase has been agreed upon, the sourcer would then package the deal, meaning put the relevant details and information in a presentable format to be able to market to property investors. Should an investor be keen on taking up the deal, the property would then be purchased by the investor and the sourcer is then paid after the transfer of ownership has occurred.
The advantages of sourcing, apart from being a great way to make money as a beginner, is that with sourcing you don’t have to deal with the management of the property or any cost associated with turning the property from distressed to presentable. You’re essentially selling the deal as is to a person who is looking to make all the necessary changes.
As time goes and you build your experience and keep saving the money received from sourcing, you can even outsource time consuming activities such as handing out leaflets or building websites so you can focus on the main task which is finding and analysing the deals sought after by investor buyers.
The success with sourcing lies in the ability to follow through on your negotiations with sellers, meaning you have got to make sure you have a list of investors who will be able to move quickly should the deal make sense, numerically of course. Invest with your calculator, not your heart.
2. Joint Venture (JV) Partnerships
The difference between a Joint Venture Partnership and Sourcing is, Sourcing is a once-off transaction between Finder and Investor, where the person who found the deal for the investor is paid for finding the deal and the amount paid is agreed by the parties involved and how ‘juicy’ the deal is, whereas a Joint Venture Partnership agreement is when the two parties take part in the investment and reap the benefits together, however at different levels.
In a Joint Venture Partnership, either parties will have different assets that when put all together give greater chances for the deal to be successful. In the beginning of your professional property investing career, more often than not, it is likely you will have more time on your hands, and less resources (i.e. money, contacts). You may be time rich and cash poor but there is a person who is time poor but cash rich. So the success with joint ventures lies in partnering with someone on opposite ends in terms of what they bring to the deal (i.e. it would be fruitless if both parties are time rich and cash poor, what you want is complementary opposites – two halves of a single system)
Often times you will possess one or a few parts of the deal equation and the other part is either missing or incomplete and that is when an additional party (i.e. Investor) comes to play and is the missing link to the deal.
A Joint Venture Partnership will be a combination of a time rich, cash poor person and a cash rich, time poor person. Each party bring value such that when combined, a deal can take place. The partnership or agreement spells out the details of how the parties involved will split the risks and rewards.
What exactly happens in a joint venture, and how does the process work?
The same way sourcing would work (Step 1 – 4), so would a joint venture but the only key difference is that both parties involved are part of the deal, meaning if you wanted to buy a buy-to-let property and you were funded by an investor, you will then both share the cashflow based on profit split ratio that was set out in the agreement. Before jumping into bed with anyone, it is helpful to do a self-introspection and try determine what it is you lack and therefore what it is you need (see the asset diagram). It is very important that each parties know exactly what their role is from the get go, and make sure the agreement is written and stipulates how responsibilities and decision-making will be split.
The challenge with this strategy lies in not only finding a willing investor but in finding a fair split between you and the investor. At times such conversations can get awkward however are needed to be done. One party may feel that what they bring to the venture is much more valuable, whereas the other may argue that he/she is doing the bulk of the work.
A prime example of a Joint Venture Partnership would be a property/construction company partnering with a Bank to construct a building. In this partnership, both parties bring key valuable assets to the deal. The construction company would be bringing the experience and knowledge, the contacts, and the time to the deal and on the other hand the bank would be providing the resources (i.e. Money), and in so doing, each party’s efforts combined form a deal. The way in which the risks and rewards are split will be stipulated in the agreement.
3. Loan Agreement
Another way to take part in property investing even if you do not have the money is by using the Loan Agreement strategy. This method is simply borrowing the money from an investor to fund your property investing business. The key argument to this strategy is ‘Investor/Portfolio Lender vs. Bank/Institution’ – Why borrow money from an investor when you can borrow from a bank?
“A bank is a place that will lend you money if you can prove that you don’t need it.” – Bob Hope
Collateral is said to be the name of the game. You are more likely to receive financing from investors, and banks included, if you have something tangible to use as a trade-off should things turn sour. Now the beautiful thing with borrowing funds from investors/portfolio lenders rather than a bank is that investors are less restrictive. Because most banks aren’t necessarily trading/lending their own funds, they have to adhere to a strict criteria and a bunch of rules prior to releasing those funds to anyone.
Investors and portfolio lenders are lending money from their own funds, which therefore means they have less restrictive terms, or rather they lend at flexible loan terms. More often than not, investors tend to look at and analyse the deal before they analyse you as a person. Investors will look at how profitable the deal will be, they will look at the risks involved to funding the deal, they know more or less when a property requires refurbishing, whereas banks require certain things met first (i.e. credit profile, income stream, etc.).
There are mainly two ways to borrowing funds from an investor:
- Equity Loan Agreement: This type of agreement would mean the money borrowed from an investor is returned with a portion of your business (a stake in the business).
- Debt Loan Agreement: This is essentially borrowing the money and be expected to pay back the principal borrowed, plus interest.
It is always wise to explore all options before taking a definite route. In conclusion, it is imperative you explore and find all options available before jumping into a decision. Make sure the option chosen is compatible with your strategy, goals and objectives.