Swept up in ‘this time next year we will all be millionaires Rodney’?, never fail to create a joint venture agreement. Pulling together gives great value but what happens when you are pulling against each other?. My transition from Teacher and landlord to Serviced Accommodation provider has been enlightening of the value of the unseen benefits, and some of the disadvantages, of working for yourself and together.
There is no industry like Property for outrageous promises of riches and we are all susceptible to the lure of money (that is why we invest, after all). It can strike in many forms. It is easy to massage the figures of a future project in your own favour but when that project, through blood, sweat and tears, comes to fruition did you do yourself justice in the original agreement? Did your initial enthusiasm ignore the number of hours or level of responsibility that you would be taking? Are you covered if you are incapacitated? Need a holiday? If your business does not cover these contingencies, it is not really viable for the long term.
If you are jumping ship from employment into Property (or indeed from landlord-ing to Serviced Accommodation) consider that the following:
The self-employed appear to charge high day rates, this is because their day rate has to cover the following: pension contributions, holidays, sick days, training, intrinsic knowledge and time spent in the office. Data from the Department for Work and Pensions suggests that the average annual earnings of someone working for themselves (30 hours+ a week) is around half that of an employee. Data from Scottish Widows suggest that 90% have no critical illness cover despite 75% having no one to cover them should they fall ill. I am not a fan of insurance products (having found that if you insure everything you have no remaining profit!) but measures need to be in place to look after your income if you can’t. I would suggest a competent second person or joint venture is priceless in this role. As I move into my 4th year as self-employed and the shine wears off these are the realities of planning for your future. My business is layered on top of my investments but must wash its face. The profit made must stand-alone from the Investment portion of the deal to be a genuine business. One of the most costly elements is the increased cost of borrowing once you are out of employment. Having given up secure employment and invested heavily in a refurbishment project my first couple of years tax returns in my new life were on the small side, I am now faced with interest rates for new borrowing at about 3% higher than as an employed person, this has considerable impact on the viability of new projects.
A joint venture shields you from many of these external risks, not only will a partner offer a sounding board for the project, they may be able to step in to run the show to cover many of these contingencies. A problem shared is a problem halved but only if you start with a clear picture of your internal responsibilities to the business, and a clear picture of who is rewarded, and for what. Suddenly those wedge-thick files of (largely unread) policies at my previous employment work start to make sense. There are 2 main elements to consider, the work involved and the risk taken. No one expects a start-up to be massively profitable, it is a high risk venture but be clear who is taking that risk, what its nature is and what will happen if it doesn’t pay off. You may be grateful for funds or permissions from your JV but don’t be so grateful that you allow them to slack off (or vice-versa) and make sure that the profit/loss split accounts for quantity of work done as well as risk. A joint venture agreement will consider these elements and the potential outcomes if the project doesn’t come off or either party is unable to fulfil their obligations. Beware of a 50/50 split in case of disagreement and make sure you are clear which of you has the final say in which areas of the business. You will inevitably disagree, but if you have a clear procedure for resolution you can avoid a lengthy stalemate. Include a time-frame for renegotiation and an end-point to review current arrangements. A JV is a slower process than working alone, time spent negotiating and decision making is prolonged so the decisions made and processes followed have to be of better quality. Remember the saying: If you want to go fast, go alone. If you want to go far, go together.
Written & oral information and advice from the Portsmouth & District Private Landlord's Association is given in good faith, but no responsibility whatsoever is accepted by the Association or it's officers for the accuracy of it's information & advice nor shall the Association be held responsible for the consequences of reliance upon such information.