248: Why property success comes to those who are zigging while everyone else is zagging

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In the first podcast of 2019, we thought we’d start to address one of the most common topics to come up during our open days last year: zigging while everyone else is zagging.

Whenever we’re in the middle of a question and answer session at the end of an open day we’ll get inundated with questions about market saturation and a lack of opportunities. These might relate to geography or strategy, such as HMOs or new-builds.

It’s not these aren’t problems, but if you’re looking at solving the problem from this way round, you’re probably starting back to front. Trying to achieve success by copying what everyone else is doing and then finding gaps isn’t the place to start.

What might help though is going against the grain, in other words zigging when everyone else is zagging.

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A simple trick: the bell curve

Historically, we’ve focused on HMOs and often when the issue of over-saturation comes up during one of our open days it will be in relation to them. It’s also the point when me and Victoria bring out our crayons and begin sketching a bell curve.

As simply as possible, the bell curve is made up of the x axis and the y axis.

Across the horizontal (x) axis is the size of HMOs, from mini-HMOs at the left hand edge of the graph, to large commercial conversion HMOs on the right side.  

The Y axis shows the number of people investing in HMOs, or the popularity of each size of HMO.

HMO Bell Curve
HMO Bell Curve

The shape this graph produces is a bell curve. There’s a small number of people investing in mini-HMOs, the bulk of investors looking at typical 5-6 bedroom HMOs and then a small amount of people at the other end investing in larger commercial to residential HMOs.

Investing at the extremes

As you’d probably expect, if everyone is seeking out 5 or 6 bedroom mid-terraced houses to convert into HMOs, the prices of these are going to skyrocket. Inexperienced investors will likely be willing to pay over the odds and the agents will cotton on to the buoyant market and encourage vendors to test higher prices.

It makes no sense to invest in the bulk of the market so we choose to focus on the extremes. Whilst we’ve not really concerned ourselves with mini-hmos, there are many excellent investment opportunities in them. What we have focused a lot on is the other side of the market, commercial conversions. Not only is there less competition here, but there are also more opportunities to create desirable HMOs.

Development opportunities: the inverted bell curve

The market distribution isn’t always shaped like a bell curve. Sometimes it’s a straight line, or in the case of development opportunities the exact opposite, an inverted bell curve. Here, at one end you have every person who has ever watched Homes Under the Hammer hoping to make a quick buck. At the other end you’ve got large new build developments that volume house-builders takes on, costing a fortune and employing dozens of people.

Development Bell Curve
Development Bell Curve

There’s nothing wrong with either of these approaches. Victoria and I got started by doing small scale renovations, making £15-20k on each project. But the competition is intense and the margins are low. At the other end, building on such a large scale takes lots of planning and even more patience.

The sweet spot with development opportunities lies in the middle. It’s the projects that are too ambitious for those starting out only comfortable with flipping two bedroom houses, but equally too insignificant to catch the eyes of the larger developers.

Finding a niche

If after getting this far you’ve realised that bell curves aren’t your thing, then another way of looking at this is finding your niche. Many people struggle to grasp that there are no set rules that can be cut and paste to any location. Depending on where you live and what your circumstances are, your niche will differ. It could be found by exploring how each tenant or buyer demographic is served in your area. A friend of ours found a niche for well renovated bungalows in an area where the retirement market was underserved. Or it could be found somewhere else, like the construction type of a property.

Your approach to investing in 2019

It was Einstein who said that insanity was doing the same thing over and over again and expecting different results. If you feel like you were in a rut towards the end of last year, struggling to find deals and gain momentum, the maybe it’s time to take a step back and return to the drawing board before going through the same sourcing processes again.

Rethink where the opportunities exist in your area. Once you find that opportunity, you’re in a much better position for everything else to fall into place. Not all HMOs, service accommodation units and single lets are created equal. Quite the opposite in fact. It’s the niches in the execution of each that determines their success or failure, whether that’s location, customer demographic, building type, or even something else that sets them apart.

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