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Hey Property Insiders, this episode is going to be a little different than normal, for two reasons. We’ve now released 20 episodes interviewing some fantastic property experts and whilst it’s great to hear the stories of people who have already made it, it’s also good to see what other people are doing who are just starting out. Now it’d be a little unfair to say we were completely new to this, given I’ve been investing in property for almost 10 years now, but we’re only really just beginning to take it seriously.
If you want to hear more about my full background you can go back and listen to episode 1, but the abridged version is that my fiance and I have done a handful of flips predominantly in the North East, we’ve just finished two in Greater Manchester which I’ll discuss in more detail later in this episode, and along the way we’ve had a couple of rentals including one small unlicensed HMO. So we did start this year with some experience, but we decided this is the year we start to take it seriously and find out if we can make a real success of investing.
The idea behind this episode, which we’ll do at the end of every month, is that we want to reveal everything we’re working on, what’s working well, what problems we’re facing and where we see opportunities going forward. I’ll share details on specific projects, my major insights from the podcast guests, and our goals for the next month as I’m a big believer that sharing your goals makes you more accountable. If you want to join us in sharing your own goals, why don’t you tell us in the comments what you’re working on? I’d love to hear your thoughts on this property update as well.
The second reason it’s a little different is that for the first time, I’m not recording from the UK. We are out in Shanghai for a family wedding and I thought recording this whilst looking out from out hotel window across the Shanghai skyline would be a lot of fun. I never realised the sheer scale of this place until we arrived, but it’s home to 23 million people, making it around 4 times the size of London, and it’s apparently one of the most expensive places in the world when it comes to real estate prices as well. I’ve put some pictures below if you want to see what we’ve been up to so far.
Our Goals for 2015
So to get the ball rolling, our goal for 2015 is to be generating £2,000 net rental income per month by the end of the year, which will hopefully come from 4 HMOs each generating £500 net profit per month, after all costs including paying our letting agency a fair management fee, and paying interest on money we’re borrowing from investors. When I quit the corporate world to join my father-in-law’s letting agency, I took a fairly heft pay cut, so this £2,000 a month rental profit plus my salary from the lettings business will get me roughly back to the income I was earning before, and then we can reassess our future goals from there.
Whilst flipping properties will take a back seat for a while, we have done two since we moved to Manchester and decided on our rental strategy, so I want to share a bit of information on them first. One of them was a bungalow on the outskirts of Stockport which we bought, renovated and sold earlier this month, all in the space of 6 months and 2 days. We spent £30,000 on the works including all buying and selling fees, and sold it for £50,000 more than we bought it for, meaning a nice £20,000 profit on that one.
The second is in Greater Manchester as well and is a 2 bedroom mid-terraced house that we bought for £80,000 after it had sat empty for a number of months. It needed the full works including a full rewire, new heating, re-plastering, new kitchen, new bathroom and full redecoration. The works on this one including fees came in at £17,000 and it is now on the market for £115,000 so if we can sell it at that level we’ll make between £13,000 to £18,000 on it.
These aren’t huge sums of money, but we like doing low ends flips as we have a good team of contractors and good systems in place that mean we spend very little time on site and can get them turned around quickly, so are getting about a 50% ROI every 6 months. I’m staying positive that we’ll have a sale agreed on the second one by the end of next month.
Our Own ‘Non-Investment’ Decision
With these flips we had built up a reasonable pot of cash with which to start buying properties to convert to HMOs and hold on to, but we made the decision earlier in the year to buy our own house as we’d been renting since we moved to Manchester last summer and resented paying off someone else’s mortgage. We found a Edwardian semi that we loved and again needs a lot of work which means we can put our own stamp on it, so made an offer on that which was accepted and we exchanged on it at the end of last week, with a plan to complete when we get back from Shanghai.
Between the deposit and the renovation costs, we need about £100,000 which brought our investment pot back down to zero. Maybe not the smartest investment move, but we both love the house and we should make a good sum of money on it when we decide to move on again in the future.
Finding Outside Investors
In order to replenish the investment pot, we worked with our property coach on bringing in outside investors. I was pretty sceptical of this approach at first, as I couldn’t fathom why someone would let someone else invest their money for an 8% return when we were making 100% annual returns.
It turns out though that a lot of people have no interest in doing the work themselves, nor the time to learn what we’ve learnt over the past 10 years, so getting an 8% return on their money compared to the 1% they were getting on it sitting in the bank was actually quite appealing. Being impatient and cynical as I am though, I wanted to prove our coach wrong by offering potential investors an even better return and watching as nobody took the bait.
Obviously I was wrong, and we were immediately contacted by a couple of people who were excited about the returns I was offering them. It’s not an approach I’d take again as we’re paying them more than we need to pay a passive investor, but it proved to me that outside money is possible to find and it can be a good way to keep your investing moving forward so long as you can find the deals that deliver enough profit to pay your investors and still make it worth your while. We have quite a lengthy contract in place with them, but it’s basically an unsecured personal loan agreement so they’re really entrusting us to look after their money.
So in the space of about 6 weeks we have the first investors money in our bank, with another one waiting to do the transfer when we need it, and with these two on board we’re going to continue to seek further investor finance as a continuous process. With money back in the bank, it was time to start hunting for properties that fit our long term HMO strategy.
An Education in VAT and 1614D
We had our hearts set on a commercial property that has sat empty for years and was available at a good price after being discounted several times. The area was a little run down but a test advert on spareroom.co.uk confirmed there was plenty of demand for what we planned to offer.
You might remember me asking questions about this one on one of the Facebook property groups, particularly about VAT on commercial properties and the HMRC forms that can disapply the need to pay VAT when you are converting commercial to residential. Whilst this would have saved us the 20% VAT on the purchase price, neither the agent nor the vendor’s accountant had heard of this form and so the long process of trying to educate them began.
In the end they accepted a slightly lower offer from someone who was willing to pay VAT rather than dealing with us. They would have ended up with more in their pockets had they gone with our offer, but they were reluctant to accept the unknown. Whether we didn’t do well enough to educate them or they were simply being narrow-minded, we lost out on the deal but at least it’s another tool up my sleeve for the next time we offer on commercial properties.
(Hopefully) The Next Project
Since then, we have had an offer accepted on a 3 bed property that we plan to turn in to a 5 bed licensed HMO. The vendor is happy to complete quickly, so we hope to have the keys by the end of April. It needs a full renovation, but has the advantage of a partially completed rear extension.
Our builder checked this out and seems happy that he can complete the existing structure rather than have to tear it down and start again, which will save us some money. In case this one falls through as well, I’ll save the detailed breakdown of costs for next month, but if it goes through it should be the first of our 4 £500 net profit properties.
I’m really hopeful we can get this one over the line quickly to start work, but we’ll continue to look for other good properties in the mean time, as well as continue to look for further investors and start the process of stripping out our own house ready for the builders to get started.
Podcast Progress & My Key Lessons
The podcast is also a big focus for me at the moment, and after 6 weeks we’re already getting 1,500 downloads per week which I’m so happy about and hugely grateful to all of you for listening. It shows there’s a real interest in the property industry in the UK, and that we can learn so much from those who have succeeded and made mistakes before us. I’d like us to get this number up to 2,000 per week by the end of April, so if you have any feedback on what would make it better I’d love to hear from you as always. You can email me at mike[at]insidepropertyinvesting.com, and be sure to tell your fellow investors about this great community we’re building as well.
On the podcast front, it has also helped me to build great relationships with some of our guests, including Julian Maurice who was kind enough to spend an evening recently doing a Q&A with the 100 property investors who signed up to ask him questions about HMO investing and design.
It was a great night, and we hope to do many more of these types of events over the coming months, so keep an eye on the website and the Inside Property Investing Facebook page for details. If you missed out on Julian’s session, you can watch the recording here.
The other major takeaways I’ve had from our guests so far are both pretty simple, but seem to resonate with virtually everyone I’ve interviewed whilst not necessarily making sense to the newcomers I interact with on a daily basis, and for that reason I just wanted to take a couple of seconds to reiterate the points that keeping getting made.
The first is more of a mindset shift, and is basically that the vast majority of our guests class themselves as investors rather than landlords. You may think of yourself this way already, or you may even think what you call yourself doesn’t matter, but it clearly has an impact on how they think of themselves as well as how other people view them.
By calling yourself a landlord, you are effectively saying you are a letting agent on a smaller scale – you deal with the problems that arise with your tenants and your properties, you are the first point of contact for them and your job is to make sure they’re running smoothly. In the e-myth, one of the books most of our guests recommend, you’d be the technician.
If that suits you and it’s what you want to do then that’s absolutely fine, but the guests who have made the mental transition from landlord to investor have other people in place to do these jobs and they spend their time focussing on building the business – determining which strategies to follow, and managing their people to make sure the vision is being following – a balance of the entrepreneur and the manager . This is where the real value is added to the process, so it’s where they choose to focus their time.
The other lesson that has come up time and time again is that plenty of our guests biggest successes have come off the back of their biggest failures. The very same property or project that was once causing them to tear out their hair is the one they now look back on as their biggest success.
This is partially because that pain of working through the problems sticks in their mind and they’re simply proud of the fact they survived it, but also because with hindsight they realise that big successes don’t come easily, and of course for that project to be able to come their biggest success, there had to be some bumps along the road.
I guess on this point, I just want to say that if you’re facing a real struggle at the moment, or something becomes a problem in the future, think back to this lesson and remember that as long as you can persevere and come out the other end, what’s causing you those sleepless nights now may just become the project you’ll look back in future as the one that you’re most proud of.
I know from my point of view we lost out on a number of deals recently including the commercial one I spoke about earlier, but I’m starting to see that going through that pain has allowed me to get clearer on what a great deal actually looks like to me and I’m confident the one we’re working on now will be better than any of the ones I was originally disappointed to miss out on.
North West Letting Agency of the Year (Runner Up)
The only other thing I wanted to mention this month was that our letting agency, Guildhall Residential Lettings, was nominated for and was a runner up as the North West Letting Agency of the year, which is a huge achievement for the whole team and we were all really thankful to those of you who took the time to vote for us.
So it’s been a busy month, but they all seem to be busy these days with no sign of slowing down. Next month we have a whole host of great guests lined up already to share their journeys and lessons with you, and I’ll be back at the end of April to let you know how everything is going on our personal property journey.
And remember, if you want to be accountable for your own property goals, I’d love for you to share them in the discussion section below. Thanks again for joining us, and we’ll see you next time property insiders.