Firstly, let me apologise for my absence on here the last couple of months, things have been “challenging” in the property world (I told you they were) and the blog had taken a place on the substitutes bench. However, once more into the breach……
The content below is an article that I have been asked to write on behalf of Education Boon, commenting on “how to be a success in the property market”. Of course I have had to tone it down a little for another platform, because we all know my number one tip is “OWN YOUR SHIT” (take responsibility). I think they want more practical advice. So I have dispensed accordingly.
I am writing this article giving tips on investing in the property market as a beginner. However these are the key principles that I have continued to carry with me for 10 years now as a property investor, developer and property business owner that has been involved in thousands of investment transactions during this period. I find that people will only fail when they abandon the basic principles, try to force a deal to work (usually driven by ego) or betray their instincts (gut feel).
So my top 10 tips are;
- GET RICH SLOWLY –
If you are looking to get rich quick, property isn’t for you. There is absolutely no doubt that property can make you good sums of money relatively quickly, but property is a business. The days of “doing some property on the side” or as a hobby are being choked to death by increased legislation, changes in tax law and educated competition. Property can be “get rich eventually” but it can almost certainly “get poor quick” if you do something wrong, and that is often overlooked (it doesn’t sell). Property investing now being a business more than a hobby means that knowledge and network are now where your power is, but it takes time to build both. Hence , property IS NOT get rich quick (sorry).
- STRATEGY FIRST-
It baffles me how many people invest in property without a plan. If your mate at the pub tells you that “its easy, you buy a house cheap, spend some money on it, then sell it”, then whilst he has the core principles of flipping property right, he has the difficulty rating wrong, and a complete lack of insight on “how to” (find the deal, finance the deal, finish the property, who to sell it to, how to sell it, profits, taxes etc). There is just so much more to property investment.
Also flipping might not be your strategy. Flipping is an active income, meaning you only make money when you are active. You might want a more passive income, where you do the work once and get paid continuously for a longer period (rental income).
These strategies need to be approached in a very different way.
So what is your strategy? Do you want chunk sums of cash, or would you prefer to build a salary replacing income on a monthly basis, or even a bit of both? Property is a business, and every business should start with a clear business plan.
- BUY TO DEMAND-
Once you have defined your strategy, you then look for an area where that strategy can work effectively. Property strategies are regional, there are very few, if any, where you can do every single strategy successfully, based on two variables; demand and the numbers. Tackling the demand here first, you need to establish what people are looking to own and rent in the area that you want to buy. What is renting and selling quickly, what figures are they achieving, who are they rented/sold to and why, what do they look like, what are agents most confident in etc etc. We buy to a qualified demand, and that is essential. If you buy a property that you cannot rent or sell then you have bought a liability, and not the asset that you intended. Buying liabilities will see you “get poor quickly” without a doubt.
- KNOW YOUR NUMBERS –
I am not talking Pythagorean theory here, people get nervous when you talk about numbers because “I hated Maths at school” or “I am crap with numbers”, but they can work out 15% discount on ASOS or their engagement rate on social media with their eyes closed. Property is numbers, and you need a system that acknowledges all of the (growing) costs associated with the purchasing and ongoing management of property. Now I know that there are fancy CRM and Cloud based products out there, but I keep it old school – Microsoft Excel is life. Once you run a few hundred cashflow calculations for your income purchases and/or profit margin calculations for your flips, instinct kicks in and you start to know what does and doesn’t work with a few headline figures. But check and double check still.
Also whilst we are on the subject of numbers, I am going to destroy a common myth, money is not made when you sell the property, it is made when you buy. Negotiate your discount and profit margin in at the start of the purchase based on your numbers. We do not rely on capital growth, that is a benefit when it occurs but is ultimately out of our control, and speculation. Buying for less than expected is far more common than selling for over what you expected, so you make your money when you buy. PS when you get really good, you will do both.
- GET COMFORTABLE WITH DEBT-
I was brought up with the mentality that you had “made it in life” when you have paid your mortgage off completely. My parents generation have worked their whole life in many cases to achieve this goal. This is borne out of a genuine fear of debt and the consequences associated, and for no other reasons. We have all seen or heard of people cutting up their credit cards, or celebrating as they clear a loan. DEBT IS NOT THE PROBLEM – it is how people use debt that is so often the issue. The average person uses debts to buy liabilities (a liability being something that takes money out of your pocket like a car, holidays, designer ‘stuff’ and your own home (yep)) – a property investor knows that debt is important, and powerful, as long as it can be serviced and profitable. If it costs me £100,000 per year to borrow a £1m, but I am making £200,000 then you can give me as much of that debt as you want. Good debt and bad debt are very different, good debt is taken to make money in excess of the cost, and that is the debt a successful property investor thrives upon.
- PREPARE FOR THE STORM –
Stress testing every deal that you do, and all properties in your portfolio is very important. Currently in the UK we are enjoying some very low interest rates, and competitive mortgage lenders offering increasingly positive terms for the consumer. This won’t last forever – the property market is cyclical. I see people who are buying with very tight margins, on a very low interest rate. This is a false economy and risky, at best. You need to run your finance costs at 2-3% above what is achievable at that time to allow for any rate increase (inevitable in the UK in the near future), stress testing every deal is vital. It is only when the tide goes out do we see who has been swimming naked.
- UNDERSTAND LEGISLATION AND IT’S IMPACT-
Housing, and thus property investment, is a very political topic indeed. Here in the UK we still have the obsession of home ownership. This no doubt relates to the UK commonwealth history and years of “an Englishman’s home is his castle” being drummed into every generation. As such, housing and legislation change are a major part of every political election or budget announcement, because any positive movement in this area will reflect well in the hope for votes. The market changes slightly (sometimes hugely) depending on any change introduced, and it is important that you know the impact, and how to adapt. Here in the UK, we have had some major tax changes in the property investment market, that have seen landlords having to pay additional tax on income as well as significantly higher taxes to buy an asset to rent out. This has seen many old school property investor look to exit the market, and in its own way will create opportunity. How to buy now may have changed for you, but there is always a solution if you have the right knowledge and network. As a professional I want it to be difficult, I want increased legislation, because it will keep the hobby and “get rich quick” investors out of the market. Remember, property is a game of supply and demand.
- YOU CANNOT DO PROPERTY ALONE –
Your team is so important. Unless you are going to train to be an estate agent, letting agent, solicitor, mortgage broker, builder, plumber, accountant and tax adviser, you need people in this game, so find good people. Make sure they have a history of working in the property investment game, that they have worked with the strategy that you are looking to do, and that they do it regularly. Don’t scrimp on your team, pay peanuts get monkeys. Robert Kyosaki, author of Rich Dad Poor Dad, says that you should pay your advisors well, and I couldn’t agree with him more. The worst service I have ever received is when I have negotiated on fees. Keep your team hungry, incentivised and rewarded and you will be their priority. As a property developer, I have two major jobs, they are to find the investment opportunities and to find the money to buy them. I can, and do, delegate everything else to a proven team. Remember point 4 – you make your money when you buy, so focus on doing that in a volume you are comfortable with.
- GROW AND TAKE BIGGER RISKS – BUT IN TIME……
Know when to step up to the next level of deal cost or deal complexity – people often fall for “shiny penny syndrome” where they get attracted to a deal that is too big or too complex for them, far too early in their investment career. This is often driven by greed and/or ego, two dangerous characteristics for a property investor. It is probably easier to show you what I mean in picture format, with a basic investment triangle I formulated many moons ago.
Don’t worry too much about the strategy terminology here, but be aware that the level of risk and entry costs increase the higher up the triangle you get, and it is my belief that should come with both time and experience (as well as arguably and increased capital backing). Be strategic in your business plan, not greedy or ego driven.
- DON’T BELIEVE THE HYPE –
Property and property investment is a world full of hype jobs and salesmen. Focus on yourself at all times, don’t get drawn into what other people say that they are doing or compare yourself too much, it isn’t relevant and it won’t serve you. Property isn’t all sunshine and rainbows, sitting on a beach and watching your rents drop in from the perfect tenant whilst you nail a Pina Colada. Of course there can be some of that, in time, but property investment is going from challenge to challenge without any loss of enthusiasm, knowing that whilst there are challenges it is significantly more rewarding and less time consuming than working 40 hours a week for 50 years of your life. Sorry for the blunt dose of reality, but I promise honesty within the often great and often challenging world of being a property investor.
I hope that these 10 points are useful for you, whether a starter or seasoned investor I think that they are relevant. I often remind myself just how much they still apply to me, 10 years and a whole lot of experience in, and when I have messed up during this time it is because I have deviated from them in some way.