Episode 023 - Learn how to start a property investment business in the UK - Part 2
Start to understand the world of property investing and discover if you want to build a property business in this wealth creation focused episode. Dr Ro has been investing and educating in the area of property investing and building a property business for over 2 decades. Harms has been busy building his property business for over 5 years now. With that in mind, Dr Ro & Harms give you a property investing 101 from two different stages of an investment journey.
The benefits of building a property business (yes it still works even in 2020) include:
Long term security through monthly income
Long term equity builds over time for your family
Short term cash opportunities through lucrative strategies
Bricks and mortar based business
The ability to use leverage to build your business quickly
Transitioning from a career you don’t enjoy and add a new income stream into your life
Plus so much more
In PART 2 Dr Ro & Harms share the final 7 fundamental components to be aware of when starting a property business:
- The important of creation a VISION
- Getting the right EDUCATION & implementing the right STRATEGY for you, 8 unique strategies are covered in this episode
- Understanding your CREDIT STATUS and learn foundational knowledge about MORTGAGES
- Researching MARKET the right way ensuring you avoid the media noise
- Identify how the professional’s SOURCE (find) the deals most post miss
- Once you have identified a market and the type of property its time to ANALYSE the investment and let the numbers drive decisions
- If you have wondered how professionals grow their portfolio so quickly, hint, it’s through the skill of RAISING CAPITAL
- To successfully complete on your investment, ensure it performs and make sure you are not creating yourself a new job is to ensure you have an OPERATIONAL DREAM TEAM in place.
- Often overlooked early on is a BUSINESS PLAN & correct STRUCTURE
- Finally, time to get those deals through a VIEWING & OFFER process
‘But I thought property investing was easy?’ – said everyone before they set off to build an investment portfolio and a profitable property business. By the end of this episode, you’ll begin to discover that property businesses are like any other business and require education, specialisation and ongoing support.
This may be a future step for you, but first, get started with these action points:
- Consider how much time you have to commit to building an investment portfolio. I guess what we are saying here is do you want to be a hands-on property business builder or a hands-off property investor. Either is fine, but it will depend on you.
- What is your primary objective is it lump sums of cash or passive income through monthly rental? (Or maybe a bit of both?)
- Time to turn a dream into a vision. So start to discuss and capture on paper how you want the future to look and how having a portfolio would help achieve that.
- For the younger generation, how much do you love your day job? Can you happily do that for the next 30-40 years? Would you be prepared to commit time alongside your day job to build a property business?
This course has been made available as a gift to listeners completely FREE (normally paid) because we want to support self-education during these uncertain times – TIME MANAGEMENT SERIES >>
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For a full read of the podcast, here is a full transcript of everything Dr Ro and Harms covered in this episode of the Seekardo Podcast.
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Harms: Hello, its Harms here and welcome to part two of this Seekardo episode specifically on the wealth creating expanding episode specifically talking about property investing.
If you remember from part one and I do encourage you if you’re joining this and you’re thinking what the hell is Harms talking about.
You must go listen to the property investing and property business creation episode, which is the one just before this, that’s episode 22.
We spoke about three big areas in which you can go and create wealth.
One being property two being business and three being trading and within business there’s also online business there.
Our focus is very much on property investing.
Ro you’ve got two decades plus you’ve been teaching property investing for two decades, plus physically investing yourself.
I’ve been now investing what feels like a lifetime, but it’s just six, seven years and we’ve started to build a portfolio ourselves. Where Ro and I come from is we have two different kinds of ways we actually build our business.
Ro is more the hands-off property investor now as he’s been doing for many years whereas I’m actually still building my business. I’m in between hands-on and hands-off, but in the early days I was very much hands-on with the property business.
That’s where we are and we’ve been sharing with you if you tuned in on episode one essential components of building a property business and we’ve been talking into that space.
Now, I would encourage you to go check in on episode one again just to really capture what the benefits are for people who are building a property business and if you’re my age 30-ish area and you’re from my generation, the benefits are incredible the earlier we do it.
I’m sure if you asked anybody listening who has either started investing or has been thinking about it the question, when do you wish you start investing or building the property business?
Their answer is always 20 years ago, 10 years ago it’s always I should have done it yesterday.
We encourage you to listen to the next 10 steps and really take notes alongside with what we’re talking about.
Ro hello to yourself welcome on another episode of the Seekardo podcast.
That’s a brief introduction as I very much want to get into property investing and the next parts that we discuss. Maybe you can capture what we discussed so far in a short summary and we can go straight into step number four.
Dr Ro: Hi everybody, thanks Harms, and again, thank you for joining us as always on the Seekardo podcast. For us this is a really passionate subject, so we had to stretch it over two different podcasts, you might have heard in the last one that I got carried away, Harms got a bit carried away and we got through the first three areas.
We are going to wrap up the last seven in this section because actually in part one we talked about vision. We talked about education and strategy. Component one vision, we talked about number two education and strategy.
Then we talked about component three which is credit status and mortgages.
We spent a lot of time in those first three, particularly two and that’s so important because there are so many different strategies in property and we covered some of them in the last podcast.
That actually, in itself could easily take up a whole day if I were running a property training right directly in front of you.
They were the three elements and I want you to go back and revisit those.
Dr Ro: Let’s go through the other seven outstanding areas, the components that make up you as a good property investor.
Component number four is market research.
Harms you made a good point there, you talked about the younger generation and if you’re listening to this and you’re the older generation, you might be 40, 50, 60 years of age. Don’t think that you’re out of the game and it’s too late.
I have taught people from the age of 18 years of age right through to a gentleman that was 92 years of age.
Typical age groups I see are the younger generations of 30s, late 20s, early 30s and then we get a lot at the moment of people, and you’ll vouch for this Harminder 40, 45, 50, 55, really frustrated with their careers or feeling that they need more sense of security. Or they’ve worked a lot of years, but they still haven’t got financial security.
It really doesn’t matter what age you are, that’s the point I want to get across here and I think Harms that was a bit of a shock to you when you started coming on and being involved with the teaching, just spread of ages.
Harms: What really fascinated me and what really hit home for many of the people we interact with and help train in the area of property investing is they could have been 45, 50 and they’ve been working in their career which are actually great careers, great professions that pay reasonably well.
They’ve worked 20 years, 30 years but they don’t have any cash in the bank to show for that.
That was another big wake up for them. It’s like oh my goodness, maybe I still enjoy my career but I have no mechanism for putting cash in the bank.
No mechanism for a supplementary income. They are always in this tricky bind, and once we show them the strategies they are thinking oh my goodness, I just have to have an x size portfolio, or x income coming into my life and that will drastically change everything for me.
It means I have another thousand, £2,000 a month in addition to what I’m currently earning and that’s an amazing feeling for them.
Many of the people we see go on a year later, two years later, three years later, four years later and they’ve achieved that and they’re saying thank goodness for our meeting. That moment we met and you taught us the strategies, skills and you educated us on property investing it’s just mind blowing.
Then two years, three years, four years later they’ve achieved it.
They either replaced their career or they’ve got a supplementary income in addition to what they’re earning in their job and life is so much more enjoyable for them.
Dr Ro: In particular, in times when the market conditions change like you we are experiencing as we are recording this right now.
If nothing else, think of it as two things.
One choice is in second security. It’s providing a safety net in difficult times, or in good times, but equally gives you choices in difficult times and good times. To step away from your job, to have more holidays, to treat yourself to other things.
If you’re getting an extra 30, 40, £50,000 a year whatever the number is it just makes a difference.
But to get there we have to follow the system, these components. Working through them then number four is market research.
Now, market research is referring to the research that you do relevant to property investing in the area that you want to invest.
There are two levels of market research, there is the national market research in other words how’s the overall economy performing and there are 11 indicators that I normally walk people through.
We need to look at what the overall market is doing in the country that we’re living in where we’re looking to invest.
Having done that and established it’s a pretty good time right now and typical indicators might be things like, for example, your interest rates that would be a big indicator. Another area would be house prices overall market house prices for the whole country.
Even that alone can start to help us tune in and look at a couple of very specific indicators. For example, one being the house price indicator which looks at overall salaries, overall house prices.
You take the average house price divided by the average salary and you can get a ratio that can tell us where we are in terms of the house price ratio system.
A low house price ratio is usually a good sign there are opportunities for growth, whereas a high house price ratio means the market might be topping out and it’s about to turn down. These are kinds of things you need to be aware of.
Then we can narrow into the local market now we are starting to decide what strategy we’re looking for.
Dr Ro: Let’s pick two examples.
If I’m going into an area and I’ve now done my national research and I can see that the indicators are pretty strong for the country at the moment, it’s a good time to be looking at properties, good time to be investing.
Now I need to start to look at pockets around the country. Where are the opportunities?
If my strategy as we talked about previously was a house of multiple occupation you might remember that in part one, I decide I’d like to rent to students because I know that students are there for a whole year, some for three years, even four years.
Maybe I can get a set of students to stay with me all the way through, but it’s no good just finding a house.
I’ve got to find a house in the right area and that market got to be strong as well.
For example I met an investor some years ago who bought properties in an area where the university was actually reducing and moving and relocating.
He bought two properties for students and he bought them about six months before and then all of a sudden he started getting these huge voids. Period where there was going to be no tenants. He couldn’t fill them into the next year and it turns out that he hadn’t done his market research to find out that the campus was relocating.
The University wasn’t closing down, it was just repositioning itself. Where he bought was fine had he been there 10 years ago, but not now.
That’s the sort of market research you’ve got to be looking at.
You’d be talking to the University, you’d be finding student grants, you’d be looking up where are the optimum locations to be buying in that area and where do students want to hang out. Are there bowling alleys, cinemas, social environments, shopping malls. Certainly, groceries and looking for amenities like supermarkets etcetera.
I’m going in and I’m finding out what’s going on, I’m looking at what the council is doing in the area in terms of regeneration and what I’m looking for are areas where I know are popular for students, but equally from a market research perspective.
I want to look at properties that are ideally potentially on the edge of that.
Lower value that I can buy adds value, gets an increase in the profit on the long-term gain, but also gets the tenants staying there as well.
Also market research in terms of are there areas where people will drive further away from the University?
Are there areas where students prefer to cycle or walk?
I’m starting to do that research on the ground, that would be for say students as an example.
Harms: Social housing is a fantastic strategy as we discussed and essentially social housing is going to be providing housing for people in society who are either more vulnerable or need a way to integrate back into society.
Maybe they need temporary accommodation, but essentially just think of social housing which is not private rental but a different sector where essentially the tenant themself may be paying just part of the rent or no rent at all.
Which means the actual rent is being paid by the government, housing association, charity, a program that looks after vulnerable tenants.
That’s social housing as a reminder.
I’ll give you two areas in which you need to approach social housing from, number one in relation to market research specifically.
Number one is identified in areas that work for your strategy for example, is it buy to let?
Do you want HMO social housing?
Are you looking for a block of flats which need a social housing programme associated with it?
Once you determine what kind of housing you would like to be involved in and it may change in a moment you will then approach typically councils, government programs, housing associations and charities and ask them the question within this particular region, postcode, area and this is part two, what programs do you have and what kind housing do you need to support this program?
To make sure that your tenants have housing, safe housing, reliable housing.
Then a final question is what specification do you need this housing to be finished in?
There are a few points to get you started.
To get your conversation started with governments, housing associations, because that’s really the key here which is to start a market research conversation with a specific body in a specific area.
There are a lot more questions to ask but they are the first areas to start with.
Now let’s assume that you found an area in the country and the local housing association says great we are looking for one- and two-bedroom apartments and houses if you do have them available but we prefer apartments.
This goes back to the point number one, is that an area which you are comfortable in?
Have you got education in that specific strategy? If the answer is yes, you know how to handle flats one or two bed houses then great. You know that there is a demand for that kind of property in that specific area.
What we’ve really done here is I understand that there is a market for a particular social housing product or service that a charity, housing association, government programme would like.
Once you have a conversation with them also, just work out with them what is the programme? Ask them if there guaranteed rent contracts in place in addition to that, what is your maintenance team like, how are you getting funding?
These are all different ways to explore what kind of programme they have, what kind of tenants will they be housing, what is best suited to these tenants?
For example, they may want housing which is on a bus route because these tenants may not have access to vehicles, they may have only the requirement where they just need to go to the local Asda, Sainsbury’s, via the bus route and come home.
That’s pretty much their day to day. So what we are really looking for here is what is the ideal marketplace for these kinds of housing strategies.
That’s social housing and some questions to get your conversation started with and also who to speak to on the get go.
You’re not going to walk into an estate agency and say I’m looking for social housing programs. You need to approach the governments, the council’s housing associations, those kinds of bodies.
Dr Ro: The other thing as well to make a note here is the geography of the two examples we have given are very different.
If you are looking at social housing it will be generally in areas of more regeneration and it’s unlikely to be right next to, for example, a university.
Your student tenants will geographically be located in a different part of the town to your social housing not always, but generally and of course we’re making the assumption for example that there is social housing in that particular town.
It might be that that particular town you’re looking at only has one particular area. The councils, the specialist, charities et cetera they’ll give you a really good indication of where they’re looking, but from the start, you’ve got to know what your strategy is, which is why go back to number two in the component process which is strategy.
Each of these have subtleties within them as well, we’re not trying to teach you how to invest in property you really need to go on as we talked about in the previous one, learn how to this properly.
Get yourself educated, attend seminars, do online training.
We’re trying to give you an indication here of what’s involved so you can say this is really exciting, I’d love to have a business with a structure like this, I reckon I could do this.
Harms when you walked through the door at first training I happened to be running this type of thing wasn’t really on your radar. Was it?
The level of going down to this depth, i.e. the market research, speaking to the council’s, shaking hands, putting a proposal in front of them, your brain wasn’t in that place when I first met you.
Is that correct?
Harms: That’s correct, and to give you some context when my brain did get into that place and I realised that this is a business and there’s work required and there’s a whole bunch of steps to go through actually, in order to start to research the market I think our first strategy research took about six to seven months’ worth of research.
That was going back six years ago now. So if I now say fast forward to today, where last year we also shifted our strategy where we source social housing products and houses for clients that process probably was quicker because we’ve done the process before and know how to do it, but probably around five months in market research in order for us to pivot strategy as an example.
What really scares me is when somebody says I’m buying an investment property and they know what I do as a business so then they ask me for advice once the work’s been done typically and what they will say is, I’ve got this house.
I would leverage Ro your points, your 11 indicators that you discuss with people in person.
I’d say okay have you done this, this, this, this?
Often they may be done one or two of those items. And that’s when I start to get worried because I know it takes time to actually put the work into identifying as much as you can within that marketplace, which is applicable to your strategy in order for it to be effective.
Dr Ro: As we go through this property done the wrong way will lose you money, that is the bottom line.
There are mistakes people make, not having a vision, not having the right education, having no clear strategy, not understanding mortgages, credit status. That’s step four market research.
Step five is sourcing or finding the property.
Or component five as it is not necessarily always a sequence to this, some parts will definitely have a sequence, some elements of this you’re jumping in and out of these components on a consistent basis.
You might be running market research parallel in five different areas but only sourcing in three of those. Sourcing is about finding properties now finding properties is not market research, market research is looking at the overall market to start with.
Getting an understanding of what works, what doesn’t work where the demand is, who is interested, does this market really fit my strategy?
Once you’ve found an area that you go to, students can definitely live in this area or social housing. The finding of the properties is the nitty-gritty getting online, pulling up all the different websites.
For every single country go into there will be portals and these portals are basically websites that provide you with the actual information of properties that are for sale. Or you can just get on the ground and go driving around looking for properties.
Each person has a different approach.
But if you’re busy you can do a lot of research online.
This has to be coupled with step six which we will come to in a minute, but the finding of properties has to be like a narrowing down of the funnel.
Let’s say Harminder and I are both sitting next to two computers on the same evening. I’ll be looking for areas which are near a university, near a college, those sorts of areas. I’ll have a postcode. I do my market research and I’ve narrowed it down to a certain area, Harminder will be given other areas from the contacts he’s got from the council from some of the local charities and now we’re looking for different types of properties.
Harms give me a couple of types of property you might be looking for social housing if you are narrowing down your online what would you be looking for?
Harms: We do two parts for social housing; one is providing the housing association or authority with a two-bed property.
This is a two bed house.
They prefer beds rather than three beds and that’s part one and part two would be looking for houses which we can convert into a house of multiple occupation which we spoke about in part one.
An ideal scenario is a four bed or a five-bed house, so we’re looking for three bedrooms upstairs and two rooms downstairs that can be isolated and renovated to add additional bedrooms.
Then still have a living room, a place where you can have dinner as an example and a kitchen in addition.
That’s the two areas we’re looking at when we’re doing our online research.
Dr Ro: Imagine you’re sitting there and you’ve got that list in front of you.
You would literally search for two-bedroom or three-bedroom houses in a very specific location, not across the whole town but in just the area where you have been doing your market research and found out where the market is strong.
For me if I was doing students I might be looking for a four, five- or six-bedroom house, depending on how big I want my house of multiple occupation to be and I’d like to see at least one or two reception rooms downstairs.
So if it’s a five-bedroom house that’s five rooms lettable upstairs, I’ve got two reception rooms, I would want to keep one of those reception rooms as a common area because students typically like to hang out together.
Ideally, a common area close to the kitchen. This is where your online plans are really useful if you go to Right move or Zoopla click on the section that says plan. The house plan comes up and straightway I can see a kitchen right next to it is a dining room and next to that in the front of the house might be a lounge.
Great, let me turn the dining room into a general communal area but let me turn the front facing room to the roadside into a lettable room. I’ve got five upstairs, one downstairs that is six rooms lettable, one lounge which can be knocked into the kitchen. I got a nice social area.
Very different types of house to your social housing or your asylum seeker properties.
Harms: Yeah it is a completely different vibe.
So when we are looking we are looking very specifically. You may be listening to this thinking that’s not what I normally do.
Typically people look for the price of the property and normally in the market area, which is quite nearby to them. I used to live in West London. What I did before I met Ro I’d just look at houses in West London on right move and just look at the prices are increasing; this house looks cheaper than the other houses that would be my criteria for finding houses in my local area.
We are saying that is not the approach here, we’re looking in a specific market for a very specific type of housing.
Dr Ro: We are now extracting part of component two which is strategy which against the market research was component number four, and then from that we’ve narrowed down to sourcing, which is component five.
Then we go to component number six; this is the analysis.
But it’s not complicated math. It’s actually fairly straightforward once you’ve done it 10, 20, 30, 40, 50, 60 times.
A lot of people don’t appreciate that property investing isn’t that complicated for a number’s perspective, as long as you’re good at pulling all the numbers into one place, and then breaking it down.
So what is analysis?
We’ve talked about three core areas of strategy, one being creative, one being passive income monthly income from your property and another one being cash generation.
Again, this is a podcast, it’s not intended to be a property training online program we’re reach trying to give you headlines and an understanding and maybe inspire you. So from an analysis perspective very, very simply, if you’re looking to buy and renovate and sell a property that is a cash strategy.
We need to know how much we’re buying it for so the analysis will involve my cost of buying, so there’s the purchase price, all the associated costs with that.
Of course there’s the renovation let’s say Harms was my builder he says I reckon from all the breakdown this is my quote to you my quote is £18,450, whatever is, and that’s to do the work to convert into, for example, a student accommodation or it might be that the conversion to social housing might be £16,450 as it’s slightly less work to do.
The analysis has to involve all my entry costs, buying of the property, any renovation costs, and any financial and legal costs. Then I look at what it’s going to sell for and then a simple calculation is what it sells for, minus all those costs tell me what my profit is.
Alongside that we also have the return on investment.
If I’ve borrowed the money from my uncle to do the project and he’s lent me £40,000. I know if I sell it, I’m going to make a £20,000 profit on that particular deal.
My return on investment analysis involves me now looking at profit divided by cash invested and that gives me an opportunity to see if the money is working hard. I might borrow the money from my uncle at 6%, but I might be making 50% on the deal, which means my net profit is 50%, minus the 6% to my uncle, which is a 44% return on investment, which is very, very good.
These are all sorts of things you need to be analysing.
That’s from a cash perspective. Harms walk us through the basics on a passive income.
Harms: If you imagine an excel spreadsheet there’s 80 different factors or financial factors I’m factoring in for this particular one property which means I have broken down the costs associated with this.
That depends on what strategy you’re focusing on.
Dr Ro: Remember we’ve said, this is simple once you’ve got the system in place, so these are predetermined rows.
Once you’ve got them you don’t have to reinvent them, you just put the numbers into them once you have them.
Harms: That’s, the level of detail we would love you to get to at some point in the future.
If we’re looking at a buy renovate hold, or potentially buy add value and hold then we’ve got to think about very much these three areas.
Number one is the entry cost. Number two is the holding cost associated with holding it whilst renovating and getting it tenanted and number three is the exit.
This is essentially the long term income that you generate from the house once it’s all renovated there’s a tenant in the property and now we’re exiting it in, in the sense that we handing it to a letting agent who can manage the process for us and pay us our rent every single month into our bank accounts.
For example, we purchased this house and it needs some renovation work.
To do just a ballpark number it should be a lot quicker than this. Let’s say we are renovating the house and it’s going to take six months. Large scale renovation.
Now, this renovation will have a cost associated every single month because we now own the house and we’re holding it.
An example for that might be the mortgage payment you must pay every month whilst the house is empty and being renovated, so that goes according to the holding cost.
Okay, great, now it’s renovated all of the work is done, a tenant now moves in.
So what money are we making on the exit now we’re going to hold the property and rent it? We now look at the income the property generates, i.e. the rent and then we start to minus a few costs off.
This is the mistake that a lot of people see again and again where they don’t factor the true expenses associated with each house they own into the mix.
I would ask the question, you’ve got your first buy to let property fantastic. I would say to them what’s the cash flow that that house is making you?
What I mean by that is what is the net income after all expenses that that property is generating for you? But they won’t answer me like that.
What they will say is the house makes me about £1,000 a month. Okay great, so after all expenses do have £1,000 a month in your bank account? No I don’t.
What I mean by that is £1,000 comes into your bank account for the rent.
Now are you removing all the expenses of that when you calculate this in your head?
It’s amazing to see how many people fall into this trap.
What we would typically do is minus your lettings fees. We would minus your mortgage that you pay, insurance. We would also minus some additional costs, which helps future proof against that particular property.
These are typical expenses that may occur in the future.
For example, putting some cash aside to replace the carpets if the tenant moves out in five years’ time, so we also factor that in upfront.
Once all of those expenses and there are few other nuance ones depending on what strategy you operate, once those expenses are taken out of the mix and taken away. Now you are left with your income.
When you have the income this is the figure that we’re interested in because it is the figure that lands in your bank account, that when you go to the restaurant and they ask you to pay the bill you can use that money actual cash after all expenses and say amazing. We really enjoyed the pizza with the family. Here is the cash to pay the bill.
Dr Ro: I have done it with thousands and thousands of people now globally and it’s one of those things that people think they’ve got.
I usually do a test with a bit of a game put an example up in front of the audience get people into teams of three, and say get to the back of the room with your answer and see which teams get the right answer and people don’t get the answer right the first time because they haven’t taken some of these allowances you’ve talked about into consideration.
Property investing is definitely about understanding the numbers and, of course, having done the numbers component six, we now know is it going to work?
It’s going to give me the cash flow for one.
Harminder might say, for my social housing properties I’m looking for a minimum cash of 300 to say £650 per month, or dollars per month and that’s my minimum.
Remember that’s the cash flow that is net of all of the other costs we’ve talked about, it’s not the gross rent. His gross rent might be 1500 a month coming in but after all the costs that Harms has talked about he is now sitting on, say, 650 a month or £600 month and it is great that fits my criteria.
I know what my offer price needs to be to buy at this price I need to put an offer in at this price he secured it. I look at my student let and I say right minimum cash flow £800 a month to £1,000 a month six rooms being let out, looking for at least 2£,000 gross coming in.
Hopefully, I should net out about 800 to 1,000. If it comes in at 450 and Harms comes in at 320 we’re both sitting next to our computers alongside each other looking at our strategies, and we both say that is not good.
Because it just doesn’t fit our numbers.
Now both of us can rejig the numbers.
Harms may not be able to get much more out of that because he’s got a set amount agreed with the social housing department.
But what if he drops his house price?
If he brings a house price down you maybe can get the cash flow up. I might look at mine and say, well, let me just check what if I could turn the extra space downstairs into one additional room.
I can get my cash flow up so that might be how I do it, so there’s possibilities to reconfigure the house.
Possibly just going with a low offer, I might need to bring it down another eight or 10 or 15,000, and then the numbers work for me, in which case, that’s what I do.
The analysis drives your final decision about your offer.
Harms: Component number six analysis is one of the core components in order to allow us to make the decision to actually purchase, it allows the numbers to do the talking.
Because once we have now analysed it and we are saying, I would like to purchase this house for this particular price point that works for me and my analysis, what’s the next thing we need to do?
Dr Ro: Component number seven is you need to be looking at raising your capital.
In theory, you should start the process earlier. But maybe you have already done that. There are multiple ways to raise money and I had that conversation, maybe two months ago with various people, but now I can see this deal stacking up.
Let’s say Harms and I are both business partners and our strategies are social housing and students, and I’ve cracked a deal and he’s cracked a deal and we need between two of us in our business 75K for the two deals.
We now go to the pot of people that we know and we say right, who have we got that said they got money available, let’s go back and raise that capital.
Or it might be we’ve got the money already in the pot, might be in the company accounts or it might be that we’re refinancing another one of our properties.
If done correctly, the new mortgage pays off the old mortgage so the new mortgage might be £100,000 the new mortgage, the old mortgage might be £75,000.
In doing that, you pull out £25,000 and it could be that £25,000 of refinanced equity is what Harms and I can use towards these deals, so raising capital is a constant and ongoing process especially if you’re expanding a property business and it falls into three categories.
The headlines are private money, institutional money, and then creative.
These are three headlines of ways that capital can be used for your property investment business, and again it could be used towards buying the property or it could be used towards refurbishing the property.
Again, we can’t give you financial advice here. You can seek that independently, but it depends on the strategy, structure of the deal and the lending and what your lender’s requirements are when it comes to the table of buying a property.
Institutional money is basically going to institutions like a bank, like a credit card company, like a loan company, it is institutional money, so you’re likely to have to fill in paperwork.
This is more formal, you’re likely to have your credit file checked as part of the process and you will be signing an agreement with that organisation or that institution and there’s a lot of money out there to be borrowed in institutional money.
This is for you to go out and look at what is available when you get a letter through the door saying we’re a loan company and we’re happy to lend you money on this.
We’re a credit card company or a bank happy to lend you money on this, that would be typical examples of institutional money.
Harms: I think this is very powerful in terms of raising capital as a whole component as a subject is often the question I would get now is, Harms I’m struggling to get on the property ladder.
If somebody from my generation is asking the question, I’m really struggling to get on the property ladder. How have you gone and bought multiple properties in the speed that you have?
I will say this is the big differentiation between doing it slowly over your entire lifetime versus actually being able to build a business quite quickly in the grand scheme of things.
It’s asking yourself the difference between how quickly are you able to save the deposits, the renovation costs associated with the houses?
Let’s take the example myself and Ro gave £75,000 to get a student let property and a social housing property.
How long would it take you to save £75,000, versus if your deal is structured the correct way, how long would it take you to raise 75 grand?
If you’re very good at this and build this as a business and learn the skill set about raising capital it’s actually so much quicker to raise £75,000 then it is to save £75,000.
Most people in the UK don’t even earn £75,000 a year, never mind have the ability to save it. So that’s the reality of how we do this and why this component is so pivotal and it is almost like the secret combination and once you master the skill set and do it properly and safely it’s an incredible skill to have.
On that note private money. This is actually one of the areas where people can start and often people build their entire business in this area.
I agree with Ro.
It’s not as large and some can debate whether it’s an unlimited pool that you’ll get in the institutional world, but certainly private money thinks about it in regards to a category of people that like you, they personally know you or they know you from a second source and they trust you.
They’re fed up with the banks.
The banks are now offering no 1% at best on people’s savings, but they’re willing to work with somebody they like, know, and trust, and invest in one of their projects and lend you a bit of cash for a period of time.
Who are these people?
These are the people who like, know, and trust you. They could be friends. They could be family members.
Then you go ahead and raise capital.
There’s a whole legal side of things to discuss, but that’s not the purpose.
It is just to make you aware that it is easy to raise 75 grand than it is to save it, and it is even easier if your business is built correctly, safely, soundly, to borrow money from people in your sphere of influence, in your circle of friends and family.
Dr Ro: It is all about approach, building trust with people, not about being desperate and the whole area of raising money is a massive subject in its own right.
Creative is really just simply any other way that you might be able to raise money.
What have you got that you could do or sell?
You might have a service you could offer; you might have something that you want to get rid of, think creatively in other ways that you could potentially raise money.
That gets us to the last three components.
Component number eight is operation or your operational dream team.
Another term sometimes used by people is your power team, your wonder team.
We tend to refer to it as a power team or an operational team.
These are the people that are necessary to make your business work. You have a local team and you have a core team.
The core team are the people that basically support everything in the background. People like your mortgage broker, lawyer, your accountant. These are the people that typically don’t have to be geographically in the location where you’re buying, but they do need to be familiar with an experience in and around the property investing field.
I’ve got one accountant who lives about four hours where I am. I’ve got two lawyers that I use, one in the North of England and the other in the south of England. I’ve got a bookkeeper, personal assistant. We’ve got architects all over the country so they don’t have to necessarily be in the area that you invested.
But you do need these people in your team and then you’ve got your local team that’s local to wherever you are investing.
For example, Harminder when he was living up in the North of England developed a bit of a core team up there with his wife that will be local to where they were investing.
Every area that you invest, you will need core people. Examples of that would be a builder, an estate agent, and a letting agent.
If Harminder was doing developments he would need a larger core team and probably a larger local team than if he were doing straight buy to let residential renting out properties.
Your operation team will expand or contract depending on your strategy. They are vital. They are essential.
They are critical to your business and without them your business will fall on its face, and this is where the DIY thing comes in.
The challenge I get when I’m out teaching is they know how to do everything; I say to them where do you want to buy?
I want to buy in the North of England. But I’m teaching you in the south of London. North of England is like seven hours away. “But I’ve got a builder.” Where is your builder? “In Croydon”. So you’ve got a builder in Croydon in the south of England and you want to build a portfolio of 20 properties in the North. Your builder is not going to travel up and down. “Yeah, but I’ve got a letting agent.” Where’s your letting agent? “Down in Croydon.” Your Croydon letting agent manages properties in Croydon, not in the North of England.
It’s being mindful that although you might think you can do it yourself, having a team of people around you in a different area makes a massive difference. Learn to use and leverage other people.
Harms: Just to finish off on the DIY which is a fascinating thing.
We meet an incredible amount of people like this and it is frustrating.
I try to empathise but I can’t because typically, people want to build this business in order to free up more time, in order for them to do the things that they want to do in life.
That’s what is very special and magical about a property business.
It doesn’t matter what strategy you operate, there’s going to be parts of it that can be handed over to a team and you factor these costs into the analysis component number six and it is an amazing thing.
Any business owner who has built a business who’s actually built it would very quickly tell you, that the idea of building a business is to work on it, not in it.
Please take that approach because you’re so early on in this now it’s a great time not to get sucked into the trap of creating another job where you’re involved in it.
Spend the time hiring the team very well and you know you will thank us for it in 10 years’ time, 15 years’ time.
This takes us nicely onto component number nine, which is treating this in terms of a business structure and having a business plan.
Dr Ro: This is such a complicated subject, business, planning and structure. I’m not a tax adviser and neither is Harminder.
We’ve got to be mindful of that but under this section, you’ve got business planning, tax planning and structuring.
Business planning is really going back to your strategy. What do you want to achieve in what timeframe?
How much have you got available to play with? Typical plans would be I want £3.000 a month passive income.
I’d like to buy properties that are no more than this much in purchase price. I want to achieve this much minimum cash flow per property and off the back of that if you said, I want to get 3000 a month and I want to get £1,000 per property, then you’d need three properties that would be part of a plan.
If you said you’re aiming for properties that produce 500 a month and you did six properties, we would make a plan based on that.
Now I’ve started to work out a plan in terms of financially what needs to be put in place, structurally what needs to be put in place I need to start considering am I my buying it on my own, as a partnership or am Harminder and I going to set up a limited company to buy the properties together, and do it in a corporate structure for tax efficiency.
Is it a special purpose vehicle because it’s a one-off project?
What about protecting myself for the future if I die I’ve got a limited company have I got a will in place?
All of these are major considerations and, of course, if you want to be tax efficient buying a property in your own name versus a limited company is very, very different.
Do you think that a lot of young people don’t think about this whereas I think older people tend to because we’ve been hit with pain of not structuring in the past.
Do you think young people are more open to this or just ignore it, want to get on and get the job done?
Harms: The gut feeling from the conversations I have with people is this is not top of mind.
The fact is if you get it wrong from day one it can be very expensive later down the line, so let’s get it right from the initial set up, so it doesn’t become that costly later.
Even when I was building my business in the first year I was very blasé about it and worry about this stuff later.
It is important and I think our generation should think about it early because it can be very expensive.
Why wait 40 years to think about it?
Hopefully, our expert coming in can answer that question for me personally, because that’s a personal thing that I want to discover.
Dr Ro: Which takes us to component number 10, which is viewing properties and putting offers out there.
Harms: Let’s assume that we are in a time where we can view houses.
Once we do come out of this our preference should always be to physically go and view the houses that fit the criteria.
When we say criteria it means market research is done; it means you’ve done your online research.
It means you’ve done your analysis, it means you’re raising the capital alongside everything that you are doing in order for you to physically view the house and the reason we want you to physically view the house is because we must ensure that it actually fits everything that you want.
But also there are four walls standing; we get a better gauge on how much things are going to cost in terms of renovation.
The property’s world is not as rosy as people would like it to be so for example, the house could be advertised in regards to being a vacant property at the moment.
I’ve visited houses that are advertised as vacant properties, but actually there’s tenants inside it and when I asked to see the tenants AST.
They are on a six-month AST.
An assured short hold tenancy, so this is an agreement between yourself and the tenant which protects both parties and essentially gives them the contract and the confinement for which they can rent this property for you.
It’s an agreement in place and a very powerful agreement.
Dr Ro: In all the years I’ve been out overseas a lot of the time when teaching in real estate people go, but what about getting the tenants out?
In Australia, South Africa, even places like New Zealand and parts of Europe when I explained that we have a formal legal agreement between ourselves and the tenant, the United Kingdom, which means that when the tenant goes in we have the legal right to get them out the property after a certain period six-month agreement, typically giving them two months’ notice.
That’s why the banks are so comfortable lending to us in the United Kingdom with interest only mortgages.
Our banks are relaxed.
One of the main reasons is because of these AST’s they make it easier for them in the event that mortgage is not paid by a landlord to get the tenants out under the AST.
It means, as well as landlords that we have a structure here which is why the UK is such an amazing place to invest because we’ve got lenders lending interest only mortgages, we’re not restricted on how many mortgages we can get typically.
Again seek independent financial advice and we have an AST system with an assured shorthold tenancy team agreement in place which is a legal contract between ourselves and the tenant which means we can get them out.
Whereas other countries they can’t.
Harms: Once you’ve now viewed the house the next stage will be to offer on the property and most interactions you have, let’s assume it’s conventionally through an estate agent, they will actually ask you to view the house before you offer anyway.
They will not take offers over the phone without you viewing.
If you’ve caught on, you would have heard me say offers and this is a lightbulb moment for people who come and spend time with us, which is we’re not solely reliant on offering on just one single property that is not the focus here.
The focus here will be offering multiple properties.
Let’s assume if you take myself and my scenario four years ago.
I would go and view maybe 10 houses a day and offer on maybe eight or nine of those properties. I would put multiple offers on multiple properties that fitted my particular strategy at the time.
Now, why is that important, because property is dynamic every offer that we put out may not get accepted.
Let’s assume that we are offering 80, £90,000 for a £100,000 house. Not everybody is going to accept that in the first instance.
But if I’ve got 10 of those offers out the probability of one or two getting accepted increases, so why is this different to how commonly people approach property and even property investing?
Because typically people get very much obsessed or very much attached to one house. T
hat particular negotiation may take two months, three months, six months and in all that time their focus and obsession has just been on this one particular property.
Whereas in that time you’re competing against people like myself or our friends, or maybe a Dr Ro out in the market, who’s got 10 offers out for every one offer you’ve got out.
The idea here is we’re not going to get obsessed about one particular property.
We’ve done the analysis; we know that all 10 work so we can get offers out as soon as possible.
That’s the key there.
Coronavirus is going on,everything Ro has just said we have had to do within a very short timescale, so there’s a house that we’ve currently secured for a client worth 85, £90,000 top end and we secured it for £62,500.
That’s where that becomes an art form, it becomes taking all of these things and applying them, the communication was essential in the process.
Knowing how turbulent the times are at the moment.
Dr Ro: It is a great example because I think a lot of people get nervous about this, but if you have a structural system, then it’s just about applying that to any communication that you have.
In recap component one is vision, having a very clear vision of how you want this business to be.
Component number two is having the right strategy and getting yourself educated and there are multiple strategies. We talked about three main ones, which were cash, passive income and creative.
Component number three is making sure your credit status, your credibility to the banks is high and that you understand how mortgages work and you’ve got a good mortgage lender.
Component number four is doing market research, doing the research based on the type of strategy you want to do.
Component number five is finding those properties getting out drilling down and having done that you move to component number six and check the numbers on the properties you found in component number five.
Analysis could be anything from cash flow analysis, right through to return on investment, which I talked about buying and renovating, selling, taking money from angels, for example, paying them back.
Analysis is very important.
Raising the money should’ve started earlier, but now you found deal component number seven right, let’s find out who is going to give you that money?
How are you going to raise it?
Is it internal money or externally to bring into the business to make it happen.
Eight is your operation or your dream team who do you need around you to make this business work. How can you leverage?
Who’s skills do you have to make this a business rather than another job for you?
Number nine is getting the right plan in place.
Having the right structure and then being tax efficient not just for you but for your kids in the future and wills which we will cover in a separate podcast, and then 10 viewing the properties and putting offers out.
Always coming in low and having enough offers out there and eventually you’ll get the deals at the right price.
That’s 10 components.
Dr Ro: Consider how much time that you have and do you want to be hands on or a hands-off investor?
Me in my 50s now tend to be more hands off.
For example Harms has found us a few properties just recently, so I’ll pay a fee to somebody that I trust that can find me a deal. They’ve done the work and because they’ve done the work they deserve to earn that money because of the research they’ve done, which has taken the pressure off me.
But if I’m more hands-on than I’m going to be in the market, which I was in my early days, I will be physically involved more in the whole process of finding and also the projects themselves.
That’s important to consider now because that will determine the direction you take your property business.
Next question I will ask you is, do you want passive income or cash right now?
You might be very cash rich.
Some people have a lot of money in the bank but don’t have passive income and you’re thinking I need to get properties in place right now that can produce a passive income for me.
Or it might be the other way around it might be that actually you are not very cash rich so you need to apply strategies that can generate you cash very quickly.
Like, for example, sourcing properties or buying and renovating properties and from the back of that after a year you’ve generated cash, you can now buy passive income properties. Think about, which is going to come first.
Finally, just discuss on paper how you want the future to look, go back to the vision.
Picture yourself with a portfolio, how many properties would you like to own?
How much cash flow?
How do you want to look because if you don’t have that vision now then you won’t have the inspiration, the drive and the direction to take your business and that’s when the education comes.
Three things hands on or hands off?
Passive income first or cash first, on a mixture of both and start writing out how the future would look for you as a property investor and how it will change your life and what it can do for you.
Harms: I’ll add two more and one is really speaking to my generation, which is if you’ve been working in a career from the age of 20 to 30 ask yourself the question, do you genuinely love your work?
If you do fantastic, but if you’re unsure and you’re really in this career or job because of the income that’s fine, once you’ve answered that question, then maybe if you don’t love what you do and you can’t see yourself doing that for the rest your time, ask yourself a second question.
Which would you be prepared to put in the time to actually go ahead and build a passive income?
To go ahead and build a property portfolio or a property business depending on what strategy you want to focus on.
Those are two questions just to start getting yourself thinking.
If you don’t love your work, you’ve got 30 to 40 years left in that career doing something you just don’t love and whereas building a property business can be done in two, three, four, five years.
Compare that to 30 years in a career that you just don’t love.
The question there is are you prepared, or would you be prepared to put in the time to build a property investment income.
That’s number one.
Dr Ro: Parallel to what you’re doing.
Harms: Absolutely when you go down this pathway of learning and expanding, it’s not going to be a case of I’m going to leave my job tomorrow and build a property income. It’s all done parallel.
The final element is it’s still essential to learn.
The reality is we’re surrounded by housing and you may not want to build a property business personally, but you still may want to invest in property, because you understand that property as an investment vehicle is fantastic.
What I suggest is explore and I guess reinforcing what we spoke about in podcast episode one on this topic is go ahead and still learn and develop an understanding of property on a deeper level.
Start to specialise because even if you go ahead and work with a sourcing agent, an estate agent or somebody else who has a property business you want to be clued up.
You don’t want them to lead you astray with the information that they are potentially giving you if you know as much as they know, then you’re in a level playing field and you’re wiser when you’re investing.
The place to go to start to continue to stay involved in learning about property is to check out Ro’s free videos.
He’ll talk into the space of property investing live on his Facebook or the best place to access immediately is go to the website that’s www.drro.tv.
Two massive parts to get you started discovering property investing and building a property business.
We’ll see you in the next episode. That’s myself and Ro signing out, take care.
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