Potential Joint Venture Partner Q&A – Part 1
Here is the first part of questions that we put to Jay Munoz BSc(Hons), MSc, Chartered Civil Engineer, MICE, Co – Founder & Director of Assets for Life Ltd.
The questions were designed to cover the sorts of questions a potential Joint Venture Investor might ask.
These are the basics people need to know from the point of view of a new investor looking to invest their existing capital into a project or a rookie Property Developer looking to connect with a potential joint venture partner.
Sometimes it’s the fear of asking or being asked these simple questions is what holds people back, hopefully these blog posts will help!
A couple of fairly obvious basic questions you need to know to start.
Potential JV: Where is it?
Potential JV: What development are you planning on doing?
Then the more in depth questions.
Potential JV: Who decides target buyers/renters?
Developer to Jay M: Who does market research?
Jay M: I’d say ideally you want to be proactive and do all of that yourself.
Jay M: When you go into a meeting you got to know how much price per square foot you can get. And you want to know price per square foot in that area for every single product, studio flats, one bedroom flats, two bedrooms flats, houses, whatever you’re building basically. You want to be confident to say that you know what you can achieve. Let’s say either if you have planning permission or you don’t have planning permission for an instance yet, you can say look this is the highest pound per square foot in this area. And ideally what we want when we meet our own architect is ask them to build this amount. And you also want to say something along the lines of ‘I know that bungalows are in demand in this areas because these ones fetch ???, so let’s build bungalows’ it depends really where you are because if there is already planning permission granted, you might want to go and have a look at the drawings and see if there is anything for you to maximize what’s already approved, you know sweat the asset. If it has a pitched roof, can you just go into the loft and get extra planning for that volume, is that sellable? More or less costs you nothing but you can up the GDV, this is what we do with Priory street. Is there any car parking spaces? You can sell each one for £10,000 each just to give you an idea
Potential JV: So what’s in demand in the area?
Developer: Would I go and talk to some agents to find this out?
Jay M: Absolutely, for that obviously there are different ways to do it. Check the area in Rightmove first of all, the statistics in Rightmove, sold prices in that area. What’s actually being sold as you’re doing the feasibility study.
Developer: Someone said to get an idea of what’s renting or selling in that area to get the Rightmove results including sold/subject to contract and the results not including sold/subject to contract and compare them to see what’s actually been sold/rented compared to what’s on there still for sale/rent. Is that right?
Jay M: Yes absolutely, in Zoopla there’s also summaries of areas when you subscribe. It gives you summaries per month of how many properties were on the market, how many properties were sold and all those statistics. There’s also a website called the National Statistics that gives you all that information as well, there’s lots of key information that you can use. So yeah, basically you have to know your facts very well, you have to show them what you know and that you’re confident of all your products. So the developer starts with the product that you’re going to sell and works backwards from the GDV. So the Investor needs to know that the developer knows what they’re talking about.
It depends absolutely on the target buyers. Every time I look at any project I answer these key questions, you need to know all the details of the typical end buyer – how old they are, what gender, where do they work, you need to know the transport links within easy reach of the property, shops, medical centres, everything. You need to know your customer inside out that’s paramount.
Hopefully to answer this question – what do you give them that they come to you and only to you? What is your USP, your unique selling proposition? And how do they change options as a result of what you can give them? For instance, for our sites, you provide them with really good accommodation and they’re going to stay there for a long time. So if you‘re able to answer those questions, you’re going to know your market very well. So that’s key -making sure that you know your customers very well. And you can go up to the potential JV and say my stance for life is low risk, and I’ll tell you why. Take for instance the sixteen one bedroom flat conversion we are looking at, it is all targeted at first time buyers, and you look at the numbers first. Look at the typical graduate out of university earning £20,000- £25,000 salary, multiply that by 5 times and it’s about £100,000+. Help to buy gives them the 20% of the deposit that they need, they only need to come up with the 5% which is only about £5-10,000. So that is like hot, we sell those units in no time.
So if you say something like that to someone that you’ve just met they think ‘he knows what he’s doing, he knows exactly what product he needs to be sold, what product is his target market’. In his head all the risk he’s worried about is laid out and you’re ticking all the boxes for all the risk. At the end of the day how do you manage risk anyway? So yeah, it’s so important to know that.
Jay M: Market research, I’m actually working on a piece of research I’m doing right now that is about how to project the asset value in a few years’ time. There’s nothing out there right now so I’m working on that now with a friend as well. But ideally what you want to know is the past, you say, look I know for a fact that this postcode, you have to be specific, you find information from all these websites I’ve already mentioned, property appreciated in all these instances. For example property in CO2 in Colchester 7% since 2003. 7, 5 and 6% that sort of thing is what gives confidence as well that you know your product.
Potential JV: Are there links to rail, roads, buses, Doctor, dentist?
Potential JV: Is it a residential or commercial area?
Developer: These are some of the basic research things to find out anyway, correct?
Jay M: Ok yeah.
Potential JV: If it includes any retail shops is it in a place for good passing trade? Is it part of a development with a shop at the bottom?
Jay M: Yeah, I mean obviously for this, if you have a scheme already that has an existing commercial unit, speak to commercial agents to find out how much would you rent this out for, how much would the value be once it’s built and in the market. Because at the minute it’s residentially hot isn’t it, not everywhere obviously. But commercial – why would you bother building a commercial building when you can just sell it on or rent it out on a residential basis for a lot higher. If you’re talking about the high street then you’ve got constraints on it so you have to know what the price is per square foot on a commercial basis.
Developer: Well there was a place near me that was a warehouse retail site which they demolished and built flats on it, but the ground floor were retail outlets and I think they had to make them retail again. But they were empty and never filled for a year or two, so after a couple of years now they’ve turned them into flats. I suppose that’s a way to go.
Jay M: So you have to do your research yeah
Potential JV: If it’s student accommodation how far to the University/College?
Developer: So student accommodation, if university/college along the same lines as already discussed, market research yes?
Jay M: Yes
Potential JV: Will the development units be sold or rented?
Developer: Developments need to be sold or rented and I know you said if you had a 25% margin on them you could rent them later on so I suppose with that..
Jay M: You need to be clear on this one thing though that you need to say subject to the market at the time. You cannot really say because, what I’m trying to say is 25% could be now, but the market changes and they only rent at say 70% then you need 30% profit margin instead. So you say at this current present time 25% works, when you have a 25% profit margin then you get the balance, then you refinance at 75% you obviously use the equity and keep the asset and any excess rent for yourself. But just bear in mind, the market changes and the lenders are only lending at 70% then you need 30% profit margin. Just be clear. Does that make sense yeah?
Developer: Ok yeah so it’s talking through the possibilities as well, what could happen.
Jay M: Yeah i mean if you could lend out even more. On the other side of the coin, at the present time if we build 6 bed HMO with these properties for instance, we can get Kent Reliance to lend at 85% loan to value which means only keeping 15% equity we may be able to, depending on the situation, we could pull out some money here. If your profit margin is 25% and then Kent Reliance loan you 85% you can keep your asset and pull out 10% of the profit and still keep it. Does that make sense?
Developer: So say for instance I’m talking to someone that’s got the land, so is that something I can talk to them about? Yes they can make money on it if the units are sold, but if there’s a possibility of keeping them and renting them out there’s a possibility of a constant income in it for them
Jay M: Yes exactly and this is where they look at you as a developer with your knowledge, not like a builder who is hired, they wouldn’t come out with this solution. But if they see this guy knows what he’s doing and he’s got different exit strategies, they will go with you all the way. You know where they’re coming from, just say look if you want to keep the assets for rental income and this is one way. Sometimes people just prefer that, because people just care that you’ve thought it through and they appreciate your time and think they may as well keep the rental income and longevity
Developer: I think a lot of that stuff people don’t realise they can do, do they?
Jay M: They’ll say like I’ve done it before which is true but we have the build to rent and managed to do it. Happy days.
Part two will follow soon…
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