Investor Mistakes: Not using leverage to get started
Not using leverage to get started can really hold you back as a property investor or property trader.
Disclaimer: Nothing is this article is meant to constitute financial advice of any kind, and is the opinion of the author only. Seek professional advice before making any financial decision.
One way to screw up property investment is to think that you can’t do it because you don’t have enough time, money, resources or know how. I firmly believed that all these things related to me.
I had been the handbrake on my husband and I starting property investing because it all seemed so scary and there was no way that we had the knowhow or funds to go down this road…Or so I thought.
I had never thought that the solution was to not do it alone, find someone to leverage off that could create the perfect partnership, bringing to the table what I lacked. This is exactly how we finally managed to start property investing. It seemed a lot less scary when you had someone to share the load with.
Firstly, we started by joining a mentoring programme to learn what we didn’t know. I’m a visual learner so reading books or talking to people didn’t give me the skills I needed to take those first steps. I was able to leverage off my mentor’s expertise and that of the other clients to learn what to look for in properties to trade or hold, also what to look for with renovation or adding value and the process involved in getting a property from a do-up state to being fully renovated. I was also put onto an amazing mortgage broker, Dave Windler, who showed us how to structure our money so that we not only could do one deal but three at one time!
At this point I felt like I was starting to fill in the blanks of what I was missing, except for the hurdle of finding properties. As much as I tried, I just couldn’t build those relationships with agents and I was too nervous to put in offers that they wouldn’t like. Also, with two small kids at home and working part time, I just couldn’t find the time to improve my skills in this area. Within my mentoring group I found my perfect partner. She was doing property investing full time and had amazing skills with agents and seemed to be securing deals. Like me she was lacking something to do deals, finance. That was something I could help with!
After a discussion we decided that we would be a good match to form a Joint Venture. She would find the properties, I would fund them and we would both manage the renovation. We would each take 50% of the profits after all expenses and GST.
This was the perfect arrangement. Neither of us could do deals on our own, but through leveraging off each other we could capitalise on deals that we would have missed out on.
We completed six joint venture deals before we each had all the necessary elements to trade on our own. Those deals were the platform to get us to that point. Without those deals I might still be missing out on all the benefits that property investing has to offer, sitting on the bench so to speak.
One thing to consider when you are looking at a deal to joint venture is to make sure that there is enough profit in the deal. You don’t want to look at a deal with only $15,000 profit margin, as if the deal has renovation problems you could end up with very little money. We looked at deals which had sufficient profit for us to both invest months of our time and be rewarded for it.
This was our second deal together, a Manurewa trade property. We worked this Joint Venture with my JV partner managing most of the renovation at the start and I managed it at the end, while she went away on holiday. Another example of having a deal being more successful with two parties rather than struggling on your own.
The final numbers on the property were:
Purchase price $375,000 (GST Incl) $326,086.96 (GST excl)
Renovation cost $45,920.65 (GST Incl) $39,931 (GST excl)
Holding costs $12,865.33 (GST Incl) $10,468.12 (GST excl)
Selling costs $2,194 (GST Incl) $1,907.83 (GST excl)
Sale price $520,000 (GST Incl) $452,173.91 (GST excl)
This gave us a final profit of $73,780, resulting in $36,890 for each of us.
Creating a Joint Venture to leverage off another person’s strengths can be structured in many different ways, depending on what is lacking from one partner to another. It must always be entered into with a lot of thought and planning, and you should consult your lawyer to see how best to structure it for you. A Joint Venture agreement should be drawn up with all the particulars relating to how you want it structured. Possible scenarios should be outlined and how you would deal with them planned for.
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