Property Investing Success.pdf

ISBN: *Insert here*

First published in 2018

Copyright © 2018 Peter Rowan

All rights reserved. Apart from any permitted use under UK copyright law, no part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information, storage or retrieval system, without permission in writing from the publisher or under licence from the Copyright Licensing Agency Limited. Further details of such licenses (for reprographic reproduction) may be obtained from the Copyright Licensing Agency Ltd, Saffron House, 6-10 Kirby Street, London EC1N 8TS.

Disclaimer Every effort has been made to ensure that the information contained within this guide is accurate at the time of publication. We cannot accept any responsibility for any errors or omissions within this guide, however caused. No responsibility for loss or damage occasioned by any person acting, or refraining from action, as a result of the material in this publication can be accepted by Peter Rowan. The information within this guide does not represent the views of any third-party service or organisation. Your level of success in attaining the results claimed in the book depends on the time you devote, your finances, knowledge and various skills. We cannot guarantee your success or income level. In fact, no guarantees are made that you will achieve any results from our ideas and techniques. Nor are we responsible for any of your actions.

Contents

My Story

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Chapter 1: Why Property?

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Chapter 2: How to Buy Property With None of Your Own Money

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Chapter 3: Maximise Your Cash Flow Using HMOs

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Chapter 4: The Best Kept Secret in Property Investing!

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Chapter 5: Finding The Right Property

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Chapter 6: Making money from sourcing and trading deals!

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Chapter 7: Other Ways To Create Cash flow: Rent-to-Rent & Serviced Accommodation

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The Most Important Investment of All

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Resources To build on the learnings in this book: •

Head across to my YouTube channel (name to be forwarded) for plenty of videos explaining all aspects of property investment!

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Visit my Facebook page (name to be forwarded) to keep up to date with all my latest posts!

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Go to my website (name to be forwarded) for more free resources!

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In addition, as a reward for you being an action taker and buying this book, I want to give you a complimentary gift – my 99 Top Tips For Property Investors eBook. To download this, just head across to www.99propertytips.co.uk

Finally, I extend an invite to you and a guest, to come along to one of my completely free live training days. Here, I’ll go through everything you need to know to set up and run a successful property investing business, when you have little or no money yourself! That’s right, you can have 2 free tickets to kick start your property journey. Just go to www.propertyinvestorsbootcamp.co.uk to claim your free places.

To Mandy, my ever-patient wife and Jess, Molly, Ted and Amy, my four wonderful children.

Preface Congratulations for making the decision to invest in yourself and buy this book. Having read it, you will have the knowledge to transform your life, by investing in property and having the choices that financial freedom brings. I am confident that the information within these pages, which might only take you a couple of hours to read, can have more of an impact on your life and your finances than all the information you received throughout the whole of your schooling! A bold claim, you may be thinking. However, I don’t make it lightly, and you will understand why when you have completed the book. Here’s the good news. If you don’t have any funds yourself, or your credit is poor – meaning you’ll struggle to get a mortgage – you can still be a great success and generate an income from property that gets you out of your day job! I was in this position three years ago. It didn’t stop me building a £4 million portfolio in 2 years, and it needn’t stop you either. Three of the chapters in this book look specifically at how you can succeed with none of your own money! Property is the vehicle which can take you from where you are to where you want to be. That said, understanding what you need to do is only half the battle. You then need to take action and implement what you have learned. If you do that, there is no reason why you cannot be financially free in the next 6-12 months. If you wish to build on the knowledge in the book, feel free to join me as my guest, at one of my property investor bootcamps. Just go to www.propertyinvestorsbootcamp. co.uk where you can book your place. To your success, Peter Rowan

My Story

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It was December 2011. I was standing by the window of a cedar wood conservatory, in my beautiful 18th century hotel – high up on Exmoor. Through the glass I could see Dunkery Beacon, and distant rolling hills. It was a crisp winter’s day, with a clear blue sky and white frost on the ground. Here, at 1200 feet, I had come to talk about my finances. “Mr Rowan, I’m not very good at small talk, so I’ll get straight to the point. The bank have been looking at your latest management accounts. There seems to be trend – and that trend is downwards.” I looked at the man opposite me. He was in his early fifties, wearing a pin-stripe suit. The moment he arrived, he had thrown himself down into the leather armchair, almost in disgust. It was minus three degrees outside, but beads of sweat were running down his forehead. “You know what happens in winter, Mr Goddard,” I said, “there’s always a downturn in trade. We get a lift over Christmas, but it’s not until the spring that things really take off again. It’s been this way for the last eight years.” Mr Goddard looked at me stiffly, “Maybe, Mr Rowan, but the bank have become very nervous. Trade is down significantly on this time last year, and I’m afraid they’ve taken the decision to call in the loan.” My mouth went dry. Ever since I’d received the email from the bank two days previously, where they’d expressed an urgent need to meet, I’d had a sickly feeling in my stomach. Now it felt like I’d been punched. “Call in the loan, Mr Goddard? Are you serious? What on

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earth are you talking about?” “I’m afraid things have changed since the financial crash. This is the way they’re doing things now. Please don’t shoot the messenger, Mr Rowan. And if you’re thinking about appealing the decision then I’d save yourself the trouble. They’re within their rights. It’s in the small print, you see.” I was speechless. “Seven days, Mr Rowan. Seven days. If the loan is not fully repaid within that time, the bank will repossess.” He heaved himself out of the armchair, stood up and shook my hand. Then he was gone. I sat down opposite his now empty chair. We owed the bank over a million pounds.

The Good Days Starting in 1997, we’d rode the property wave in Cambridge for a few years. Accumulating a portfolio of buy-to-lets, and selling these on, gave us the deposit for the hotel purchase – in 2003. It had been extremely hard work in the first couple of years. I’d naively thought, “Slept in an hotel, eaten in a restaurant, drunk in a bar, can’t be that difficult.” Ha, not quite… Despite the steep learning curve, after 3 years we’d doubled the turnover and increased the value to just short of £2 million. I’d had offers from two national pub chains, but life was good and profits were excellent, so I saw no need to sell. But neither did I see the storm clouds on the horizon…

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The Perfect storm In many ways, it was the perfect storm. We set out on a building programme at the hotel in 2008, extending our borrowing with the bank to fund it. Back then, the banks were spraying money around like confetti – and I was the grateful recipient! The previous year, on the advice of one of the large investment banks, we’d invested £350,000 in a large Australian construction company. They were building top end homes in green belt Bucharest, as Romania prepared for accession to the EU. This money was the deposit on 8 new houses, which were likely to double in value before they had even been built. Such was the madness of the property market back in the day… We’d also bought a plot of land on a top end Portuguese golf course, ready to build a 6- bedroom villa and a 2-bedroom apartment in a 5-star ski complex in Bansko, Bulgaria. At that point, everything seemed perfect. In 2007, the first domino fell. Northern Rock became the opening casualty of the financial crash. They were swiftly followed by the much larger Lehman Brothers. In 2009, we were hit by our own triple whammy. First the Australian construction company that we had been using went bankrupt, taking £350,000 of our cash with them. Then in August of the same year, the same thing happened to the construction company building our apartment in Bansko. Finally, we discovered that the company to whom we’d paid the deposit for our plot of land in Portugal had gone under. In February 2010, we saw the heaviest snow fall in 18 years.

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At 1200 feet, in the hills of Exmoor, we didn’t see the road again for nearly 2 months. The entire time, trade stood still. Although this was rough, we got through it. I remember telling Mandy that we’d be fine, just as long as we avoided another winter wipe out. Mother Nature, it seems, took this to heart. On December 1st 2010, it started to snow again. Thus began the earliest heavy snowfall for 20 years, and the coldest December since records began. We would usually have a massive spike in trade for 3 weeks over the Christmas/New Year period, as we had a 200-seater function room which hosted 4 big party nights with live music. These, along with a full hotel over the whole festive period, coupled with Christmas Day lunch and a New Year’s Dinner Dance, would bring in about £100,000 in extra business. In the event, the snow was so bad that we had to shut up shop on December 17th. We didn’t open again until February. We continued paying the mortage though, and trade came back in the summer, so I assumed that we had beaten the weather. Thus, it was absolutely devastating to hear from Mr Goddard that the bank were calling their loan in. I had built up a false sense of security, inside the walls of my beautiful West Country hotel, only for Mother Nature to tear them down. When I got home that night and broke the news to Mandy, she was shocked. It was a couple of weeks before Christmas and we had £2300 in the bank account. And that was it. No idea where the next pound was coming from, or how we were going to survive. We held onto the house. Just.

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The Hamster Wheel Bankruptcy would have been the soft option, cancelling out various loans I had in place, but I never seriously considered it. I’d never been late with paying the credit card or the mortgage before, never mind wiping out a complete debt. My thinking was clear enough – I’d taken the loans out and it had been lent in good faith. It was my duty to repay them. Simple, right? Sure, I’d have to put them all on hold for a while and pay a pound a month until things were straight again, but one day they would be cleared. Needless to say, my credit score was shredded. I wouldn’t be able to borrow diddly squat for another 5 years. My cousin was a carpet cleaner, and called me when he heard the news, “Pete, if you need to pay the mortgage and put food on the table, I suggest you give carpet cleaning a try.” I wasn’t proud, and within a week of that phone call, I was out cleaning the muck from Mrs Jones’s carpets. And so it began – working 10-hour days, often 6 days a week, just to get the income I needed to support the family (we had 4 kids by this stage) and pay off loans to friends who had helped out in the short-term. One day in 2014, I was cleaning the carpets in an upmarket house in Cheltenham. As I was down on my hands and knees, working on a difficult stain, the lady of the house popped her head round the door, “You must have a double. Our daughter got married up on Exmoor five years ago and the hotel owner looked exactly like you.” Have you ever wished you had an identical twin? I fessed up. I admitted that yes, it was me.

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She looked at me, clearly confused. “But…but…” and she waved her hands as if to say what on earth are you doing getting the crud out of my carpets? “The bank pulled in the loan, in 2011. Difficult time, but that’s the way it was.” “Oh, I see. I’m sorry to hear it. A real shame.” A chastening experience, to say the least… Luckily I was fit as a fiddle – as this cleaning lark was mighty physical. I went to the USA to learn about marketing and built up a successful business. But my heart just wasn’t in it. It wasn’t my passion, and it was never going to be. At best, it was just keeping my head above water. In March 2015, I was driving home from a job. It was grim weather. Horizontal rain – cold, wet and very miserable. I had been cleaning carpets for over 3 years. I realised I was on the hamster wheel: running flat out but getting nowhere! Have you ever been in that position? Working really hard, chasing your tail, but not seeming to make any progress? In many ways, it reminded me of the scene in Lewis Carroll’s Through The Looking Glass. Alice, having been running fast for a while with the Red Queen, says: “In our country, when you’ve been running fast, you tend to end up somewhere else.” “What a slow sort of country,” replies the red Queen. “Here, you have to run very fast just to stay where you are.” And that was it. Exactly. Running bloomin’ fast, just to stay where I was…

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Truth be told, I was pretty low. At 53, I couldn’t see how I was going to turn things round. I thought about my father, who had died 6 months earlier, and how worried he had been when I told him I was leaving teaching to buy a hotel. I thought about the pride he’d felt as the business took off and flourished and how he had managed to hide his sadness when it hit the rocks. I had made a promise at his funeral that I would make a success of things again. I just wasn’t sure how or when… So, there I was, driving in the rain, trying to work out how exactly I was going to make all this running pay off. I leant forward and pressed “play” on my iPod. Desert Island Discs started playing over the speaker – a Radio 4 programme where famous people use their 10 favourite songs to discuss their life story with the presenter. It was to be the turning point in my life.

A kick up the backside To see why, come back with me to January 1994, to a very cold winter in Edinburgh. I was working as a supply teacher, and only had to work 2 or 3 days a week. Living in a bedsit which was expensive to heat, I regularly took myself off to a very warm café in Haymarket with the fabulous name of The Oasis. And it was, believe me, an oasis. If you parted with the regal sum of £1.50 for the three-course lunch, you qualified for endless top ups of tea and coffee. In my case, this meant that I no longer had to brave the sub-zero temperatures outside, or spend money on heating.

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I could be found at my usual window seat. More often than not, next to me would be a girl in her mid-twenties. She had long, light brown hair, a dishevelled appearance and a toddler in a buggy – usually asleep. She didn’t talk much, but after a while her story came out. She had been a teacher and travelled to Portugal to teach English as a foreign language. She met a Portuguese guy, got married, had a kid. Things didn’t go well. He started abusing her, so she headed back to Edinburgh. Now, her and the kid lived in a 1-bedroom flat, which was damp, so she spent most of her time drinking coffee in the cafes of Edinburgh – keeping warm and writing. “C’mon Jo, what are you writing? Is it a book?” She admitted it was. “Can I have a read?” “Definitely not.” “Will you read some of it to me? I’m interested. Really.” “No.” “What’s it about?” “A boy wizard.” “A boy wizard. D’you think it’ll sell?” Fast forward 21 years to 2015, and I’m sat in my carpet cleaning van, half-listening to the episode of Desert Island Discs, my thoughts more centred on how I was going to get off the crazy hamster wheel. Bit by bit, I hear the story. The work in Portugal, the boyfriend, the baby, the domestic abuse. The move back to Edinburgh. The damp flat. The cafe…

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I felt the hairs on the back of my neck stand up, and I pulled into a lay-by. I put my head in my hands. “Jo…oh my God, Jo. JK bloody Rowling!” It took a while to sink in. Turns out, they were very tough years for her. As a single mother, on welfare, she wasn’t just depressed, she was suicidal. The baby kept her alive. She was writing her first book, The Philosophers Stone, back in 1994. Twelve different publishers turned her down, until the daughter of one of the editor’s at Bloomsbury read the first chapter…and demanded the second. The rest, as they say, is history. I listened to her commencement address at Harvard University, and it was one of the most inspiring speeches I have ever listened to. If you haven’t heard it, I suggest you Google it… JK had clearly felt like a massive failure at the time in her life when I knew her, but her ability to rise above it, to totally transform her circumstances through dogged persistence, was mightily inspiring. There are two major quotes from her which stand out for me: “It is impossible to live without failing at something, unless you live so cautiously that you might as well not have lived at all – in which case, you fail by default.” “Rock bottom became the solid foundation on which I built my life.”

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This proved to be a turning point for me. Realising what an amazing transformation had taken place for Jo, how she had dealt with “failure” and kept on keeping on – it was the kick up the backside I needed. All this time, I had been wallowing in self-pity, never taking complete responsibility for my failure. I was seeing failure as a person, and not an event. I had a supportive wife and four fabulous children. I was fit and healthy. It was time to make a change. “For things to change, you have to change.” Jim Rohn Two days later, I was chatting to a friend, and told him I was looking to get into property investment. He mentioned that a group of property investors met monthly at a local hotel and suggested I Google it and get myself along there. That was in March 2015. I decided that it was time to get myself educated in property. I used to be an accidental (and fairly amateurish) landlord, but this time I would borrow the money to get a mentor and fast track my education. My problem was that I had next to no funds for deposits, and assumed that I wouldn’t be able to buy any property. However, I was wrong. Part of my education was to learn completely new ways of building monthly cashflow, and combining this with accumulating equity for the future, and all without needing my own money. This period in my life coincided with me deep diving into the personal development space. I had heard about “personal development” before, but always dismissed it as being American “whoo whoo”. How wrong I was! As ever, you don’t know what you don’t know, and ignorance

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is no substitute for knowledge. Within 2 years, I had built a £4 million portfolio, which continues to grow today. And all I did was put into practice the knowledge I had acquired during my year’s mentorship. This allowed me to give up the carpet cleaning and concentrate on the property business. I was back doing what I enjoyed – doing deals, adding value, creating win/wins. It was at this point that I truly started to understand the concept of a “win/win” in business. Listening to the great Zig Ziglar in 2016, his words made a lot of sense to me: “It’s ok to have anything you want in this life, so long as you help enough other people get what they want.” He was talking about the fabulous balance between self-interest and altruism. Creating “win/wins”. I got that! And so, that’s why I have written this book. I want to share the knowledge I’ve gained in property investing with as many people as possible. I want to help people make massive transformative changes in their lives. Most of all, I want to show how it can be done when people have little or no money to start with! As I’ve already said, I love teaching, imparting knowledge. I love making a difference. And I know this book will help you to achieve this. I sincerely hope that you can use this book as a catalyst, to bring change into your life. Here’s to meeting you one day at one of my property investing bootcamps. Peter Rowan

Chapter 1: Why Property?

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“Whether you think you can, or you think you can’t, you’re right.” Henry Ford When it came to my final year of school, I had the usual 15 minutes with the careers adviser. He asked what job I wanted to do when I left, and whether I wanted to go to university. Did I want to become a doctor, a lawyer, an architect, or a teacher? Er, none of the above actually, which seemed to confuse him. In the end, I studied Biology for 3 years, on the basis that it was something that I was interested in and reasonably good at – but also because I didn’t have a clue what I actually wanted to do. I had left school and still didn’t know what a mortgage was. I thought the only way you could make money in this world was either to win the lottery or get a highly paid job. Had my education included financial literacy, the difference between an asset and a liability, and the principles of investment, then who knows? I may have decided that starting a business was the way forward! “The main reason people struggle financially is because they have spent years in school but learned nothing about money. The result is that people learn to work for money… but never learn to have money work for them.” Robert Kiyosaki 20 years later…schools haven’t changed all that much. The assumption is that everybody is heading off for work, either immediately or after a few years at university. The trouble is, the old days of working for one company for 40 years, before

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driving off into the sunset with a super-duper pension, are well and truly over. Gone. Finito! “Formal education will earn you a living. Self-education will earn you a fortune.” Jim Rohn I was reading an article last week. The article predicted that people born in 2018 would have a life expectancy of 120 years, and would be expected to work until they were 100 years old, such would be the speed of medical advances. Not only that, but they would work (on average) for 40 different companies over their 80 years of employment. Ouch! Look, I’m not knocking schools or education in general. Heck, I was a teacher for 18 years and loved the classroom interaction. All I am saying is that the existing model of 40/40/40 – working 40 hours a week for 40 years, just to try and survive as a pensioner on 40% of your previous income – is broken. There is a better way. In this book, I want to help you find it.

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My Financial Education It wasn’t until I read Rich Dad, Poor Dad by Robert Kiyosaki, in 2015, that my understanding of money, wealth, and financial freedom totally changed. Kiyosaki talks about the “Cashflow Quadrant”, with the four parts of the quadrant made up of Employee (E), Small business owner (S), Business Owner (B) and Investor (I). Schools encourage their pupils to “get a job” and thus become an employee, a member of the employed (E) sector. It’s as if the other 3 sectors don’t exist. While I realise that schools do this with the best intentions, as they want security for their pupils, the problem with this approach is that employees will always be exchanging time for money. In other words – getting paid for a certain amount of hours spent working for the company. When people in the employed (E) sector move into the self-employed (S) sector, it’s usually because they have become disillusioned with the “job” they were doing. They buy into the dream of running their own business, and the idea of having more time, more freedom and more money. Yeah, right! The reality for most small business owners is that they work every hour of every single day, because the buck stops with them. They are the manager, the technician and the entrepreneur, all rolled into one. Even if the business is successful and they earn loads of cash, they often don’t have the time to enjoy it. My point being, the small business owner feels they need to be working in the business, as “nobody else can do it better”. They haven’t learned the art

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of successful delegation. Maybe some of you reading this are running a small business, and can relate to this description? Before you can start to talk about gaining financial freedom, and time freedom, you need to shift your mental focus. You need to make the shift to the other side of the quadrant – to Business Owner (B) and Investor (I). Property sits squarely on the right-hand side of the quadrant. For most people, property is very much in the investor sector. Here, money is exchanged for time. We invest money to free up our time, and get that money working hard for us. In a recent survey, 68% of people said that they were sick and tired of their day job. They’d had enough and wanted out. However, there was a problem. They needed the cash the job gave them. Just “upping sticks” wasn’t an option. The result? An awful lot of people spending a large chunk of time each week, doing something they either hate or aren’t getting any satisfaction from. The vast majority of people would like to retire at some point in their lives. By retire, I mean stop working and enjoy the twilight years, hopefully in some degree of comfort. If, by the time they reach retirement, they receive a state pension, they will get the princely sum of £159.55 a week (if you’ve paid in for 35 years!) Enough to just about survive on…maybe. Enough to enjoy retirement? Dream on! As for private pensions, this only makes things worse. Many people don’t have a private pension in place, and are relying on the state providing for them. The average private pension “pot” is only £45,000. This may sound like a fair chunk of cash, but remember that it’s the pot and not what is paid out each year. If you’re lucky, the pot will pay out at about 5% a

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year. With a pot of £45,000, this is £2250 a year, or £187.50 a month. Again, hardly a king’s ransom! Some of my friends, who are now in their 40s and 50s and in corporate jobs, receive pension projections each year. They are shocked as the number goes down year after year. These are folk earning £70-£100,000+ each year. It’s clear that they need to take drastic action soon if they are going to come anywhere close to living a comfortable retirement. Given that this is closer to the top end in terms of salaries, the time bomb ticking at the lower end is potentially catastrophic! Recently, we’ve seen pension fund after pension fund collapse, leaving many thousands of people with next to nothing when they retire – as the pension funds have been raided by the owners to prop up a failing company. It is truly shameful when folk on not much more than minimum wage, some of whom have given loyal service to a company for many years, are left on their uppers through corporate greed. Don’t get me started!

The benefits of property investing Hopefully we can agree that we need to take some action. We need to move across to the right-hand side of Kiyosaki’s quadrant and do some investing! When it comes to investing, there is quite a choice – whether it’s the stock market, private pension plans, gold and silver, art or wine… Or, how about property? The really good news is that you can invest in property even if you don’t have the current funds to do so (more on this later). The fact is, property outperforms all other investment

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classes, over time, and is safe. There is a well-known saying: “As safe as houses.” When it comes to investing, provided you do it properly, there’s no safer venture than property. Here’s the thing, people will always need somewhere to live. Plus, we live on an island – one which has a population growth of 250,000 each year. The government statistics show that we are already one million houses short, and this situation is only going to get worse. So, guess what? Demand will always outstrip supply! If demand outstrips supply for an asset, the price goes up, and that’s exactly what’s happened with property. On average, property prices have risen 10.3% per year since reliable records began to be kept. Sure, there have been dips, but with knowledge these dips are not a problem to the investor who knows what they are doing. What I like about property is that there is something physical – bricks and mortar. You can touch and feel it. This is not really the case with most other investment classes. Plus, with property investing you get a double win. There is monthly cash flow and there is the equity which comes over time, as the price of the property increases.

Leverage! Another massive benefit of property investing, is the ability to invest using other people’s money. This is often the bank’s money, but can also come from private investors who want to get a better rate of return on their cash. So, essentially, it comes down to how well you can use other people’s money to get a good return on your cash.

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If I asked my bank manager to lend me £100,000 to invest in the stock market, he’d laugh me out of the office. Why? Because it’s considered high-risk! If I didn’t know what I was doing, I could incur heavy losses. And here’s the clincher: if I did make heavy losses, the bank would have no way of reclaiming their original money. And they’re rather keen on being able to do this, understandably… If I asked the bank manager for the same £100,000, but this time to invest in property, he’d ask me to take a seat and would be keen to hear more. Why the difference? Because if I default on the loan, there is a solid asset which the bank can take possession of, sell on and get their money back, which is not the case in the stock market. Thus, they will be happy to lend me up to 75-80% of the value of the property, meaning they want me to have "skin in the game" (by putting in a balance). On top of this, I also have a good track record, which certainly helps my case – but this comes with experience. Then, should it all go belly up, they stand a good chance of getting their money back. In the crazy “wild west” days of bank lending, in 2006 and 2007, it was quite common for mortgages of 100% or even 125% to be granted – presumably on the basis that property prices would never fall again! It’s often said that if you want to know what the future will bring, the best predictor is the past! Property prices have always had periods where they dip, before rising again. And guess what – this will continue into the future! It’s called a cycle. It beggars belief that the so-called experts of the time put their rose-tinted specs on and started spraying the cash about, in the belief that a new financial model had been born. When time was called, and the party ended, the biggest collective hangover in history

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kicked in… To explain leverage in more detail, let’s assume you have £100,000 and the house you want to buy is going to cost you £100,000. You have two options. You can either buy it for cash and have no debt on the property, or you can borrow from the bank (let’s say 80% of the purchase price = £80,000) and put in the balance yourself (20% = £20,000 from your pot of cash). Let’s assume that one year down the line, the property has increased in value by 10%. It’s now worth £110,000. If you put all the money in yourself, you would have made a (paper) gain of £10,000. Your return on investment on the cash you put in would be 10%. ROI = increase in value / money put into the deal. 10/100 = 10% However, if you had borrowed the £80,000 from the bank and put the balance of £20,000 in yourself, you would have made the same (paper) gain of £10,000, but because you only put £20,000 of your own money into the deal, you will have made a 50% return on your investment. ROI = 10/20 = 50% The simple act of leveraging your own cash, i.e. borrowing from the bank, has allowed you to increase your ROI by a factor of 5, from 10% to 50%. To extend the example, you could use the £100,000 of your money to pay five deposits of £20,000 on five houses costing £100,000. In each instance, let’s assume that you borrow the remaining £80,000 from the bank. A year down the line and

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you would now have a paper profit of £50,000 (5 x £10,000) with the same ROI on your original cash. ROI = 50/100 = 50% In this example, even though your ROI stays the same, the amount of profit rises from £10,000 to £50,000. This is all achieved by leveraging your initial cash amount. If in 10 years’ time the property has doubled in value, and is now worth £200,000, your original investment of £20,000 has gone up by 500%. The profit is now £100,000. Across the five houses, the profit is now £500,000, compared to the £100,000 that was originally invested. This is the power of leverage in property investing, and it’s the key reason why it outperforms every other asset class. There’s just no contest! I realise there will be added costs of legals, stamp duty etc with each purchase. These will probably be approximately £5000 per property. However, for the purposes of illustration, I have kept the numbers simple and ignored these. When we look at deals in later chapters, I will certainly be including them. At this point, you may be wondering about the interest that we have to pay the bank on their 80% loan. There will of course be interest to pay, but this is the beauty of investing in property (as opposed to the house you live in yourself). Because you will be renting the house out to tenants, and they will be paying rent, you don’t have to pay for the cost of the borrowing yourself – your tenant does! If you are holding the property for the long term (which I

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always recommend you do) as a form of pension, then having tenants paying the rent is like having other people contribute to your pension pot! When I cover how to invest without using your own money, you’ll see that there are many private investors out there who will be delighted to lend you the cash – either to buy outright or to put the deposit down for the purchase.

But isn’t property investing risky? “Life is full of risk. Let’s face it, none of us get out alive!” Anon We all have a different attitude to risk. One of the first questions that a financial advisor asks their client is, “What’s your attitude to risk?” The reason for this is that they want to establish what avenues would be the most suitable for you. Whether your investment has absolutely no risks, or is the equivalent of spinning the roulette wheel, it’s important for the advisor to know what type of person they are dealing with and what chances that person is willing to take. I have a pal who has accumulated a decent sized pot of money (over £500,000), but he is so risk averse that he would never consider “investing” it in anything. He has a total lack of trust in any investment scheme, and won’t even keep it in the bank – as the government only guarantee the first £85,000 if the bank goes under. He keeps it all in national savings with the post office, where it’s guaranteed in full. He also takes a screenshot every month of his account, to be able to prove that his money is with them, just in case! I think we can all agree that this is uber low-risk.

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On the other hand, I have another pal who regularly invests some of his money in film companies, always hoping that the film he invests in will be the next blockbuster, and his ship will then have come in! This is uber high-risk, as the chances of getting your money back are low. The vast majority of films struggle to break even! For most of us, our risk profile is somewhere between both of the above. However, pretty much everything has a degree of risk, including property. Let me explain: Back in 1995, I had a small portfolio of buy-to-lets in Cambridge, where I was teaching at the time. I knew nothing about property, but because the property market was rising quickly and rental demand was high, it was next to impossible to get it wrong. Within a year of buying an investment property, the value had gone up enough to allow me to re-mortgage and pull money out for a deposit on another house. However, my rents were only just covering my mortgages, and there was very little monthly cash flow (profit) from the properties. My mortgages were 1-year fixed rates. So, whilst I knew where I was on monthly costs in the short-term, I was leaving myself wide open to higher rates in the future. In the end, I was lucky. Any one of a number of things could have happened, and it would have been a problem: 1. Mortgage rates could have started rising, which would have been a storm cloud on the near horizon. 2. Property values could have started to fall, meaning if I sold then I probably wouldn’t be able to pay off the mortgage.

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3. Rental demand could have slackened off, leaving me with voids. If rental demand had fallen and interest rates started to rise, I would have found myself in a position where the rent didn’t cover the outgoings. Plus, they were single lets (let out to one family unit) so if one of the properties was empty, it meant I had no income at all for that property. I would have had to put my hand in my pocket for all that month’s outgoings. For a schoolteacher, this could very quickly have become catastrophic! The next step might have been that I had to sell a property which I was struggling to rent out. However, if the property market had started to fall, then I would very quickly become a motivated seller (something to avoid at all costs) who was trying to sell his property in a falling market. Ouch! Let’s be clear, I was lucky, as none of the above three things happened. Quite the opposite in fact. But they could have. So, when I started my second property journey in 2015, I did the exact opposite of my first excursion in 1998. Why? Because, I worked with a mentor and I learned exactly what to do, and more importantly what not to do! This time: 1. I didn’t buy any single lets, I only bought multi-lets, where I let the property out room by room. The advantage? If one room was empty, I still had rent coming in from the other tenants. Also, the amount of rent coming in was over twice the single let figure, and this meant that there was a much bigger difference between the money coming

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in and the bills going out. We will look at this in detail in Chapter 4. 2. I fixed any mortgages I took out for a minimum of three years. Some were five-year fixes. This gave me medium term certainty on what my outgoings were. 3. I negotiated on the price and tried to buy “off market” whenever I could, which meant I was always buying below market price, giving me immediate equity. 4. I did the research on the areas I bought, and made sure that rental demand was very high. This leads me nicely onto my 5 Top Tips. Following these will massively reduce the chances of any problems on your property journey!

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The Five Top Tips Buy with your head and not your heart. When you’re looking to buy your “forever home”, your emotions will play a part in the process. After all, it’s going to be your home. Whilst the numbers are important, they will not be the only consideration. However, when you’re buying an investment property, you need to remove all emotion and only buy with your head. Forget the colour schemes, the views and whether the garden will be big enough for tenants with green fingers! Not relevant. Do the numbers stack? Is there the required amount of cash flow? Make sure there is huge rental demand. You might find the deal of the century, negotiate a great price, and be giving yourself a big pat on the back, only to find that having bought the property you struggle to rent it out! And guess what, you need the rent to pay the mortgage. You may be thinking “How on earth could such a wonderful house not be in high demand from tenants?” Well, the reasons could be many, but it’s highly likely that it’s to do with the property’s location. If it’s in a small rural village, 10 miles from the nearest town, with no buses, then it’s going to really struggle to rent. If it’s in a town but on the “wrong side of the tracks”, with high crime rates or social disorder rife, it’s going to struggle to rent. Alternatively, maybe it’s just not close enough to bars, restaurants, bus or train routes. To avoid this situation, you must do a lot of research before you buy, to ensure that it will rent. If you don’t know the area, make contact with half a dozen letting agents and pick their brains. If it’s going to be a house share, also known as a House In Multiple Occupation (HMO), check out spareroom.co.uk –

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which gives you the number of rooms wanted compared to the number available for any town in the UK. This will give you the comfort to know that you’ve not picked a lemon! Make sure the monthly profit is what you need. We all have different criteria for what represents good monthly cash flow. My minimum is usually £800 per month, although I will lower this if it’s a lease option (see Chapter 6). I would recommend having £500 a month as a minimum figure. In the next chapter, when you work out your financial freedom figure, you will be working out how many properties you need to reach this figure. If you have £500 a month as the minimum profit acceptable to you, you will only need half the number of properties compared to somebody who will settle for £250 a month. A lot less work, believe me! Try and build in some equity from day 1. If you can buy a property for below the true market value, then you have created equity from the get go. There are lots of ways to find people who are willing to sell below market value (BMV), which I deal with later in the book. That is not to say you can never make a property work for you if you pay the full market value, as you can add value in lots of different ways. However, picking up a deal where you are buying 15% - 25% BMV is a great way to start, and it will help you accelerate your journey when it comes to getting you money back out. Build up a war chest! There will always be the odd rainy day in property investing, and the odd expense you weren’t expecting. The investors who have problems are the ones who don’t leave enough spare cash to cover off these expenses. I have had to replace two boilers in the last 2 months, costing me £3500. Thing is, the two properties in question cash

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flow at £1700 per month between them, so paying the plumbing bill, whilst unwelcome, wasn’t a problem. Imagine the consequences of not being able to afford to replace the boilers. They are both HMOs, where the requirement for hot water sits just below oxygen and high-speed broadband! As you move through this book, I will go into even more detail on the above, to show you how to make property investing extremely low-risk. Even if prices fall, if you follow my advice then you will never have to sell, which means you can ride out any storms. I will show you how to create great cash flow every month, helping you to leave your day job as soon as possible. Yippee! I will also show you how to build in equity from day one, by buying properties that are below market value. Follow my advice and you will be following an ultra low-risk strategy, which gives you fabulous returns!

Why don’t more people invest in property? There are a whole bunch of reasons why people don’t invest in property, and the main ones are as follows: They’re worried/scared/fearful. I’ve discussed risk and how some folk just don’t want any. Even those who aren’t averse to risk have heard a horror story or two about people who’ve hit the buffers, and this has put them off starting out on the journey. This is a great shame, as the reality can be so different, just as long as the correct checks and balances are put in place and the correct strategy is followed.

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They think it’s going to take up too much time. Do you have to invest time into property investing? Absolutely. Can you do it part-time whilst holding down a day job? For sure. The irony with people who say they don’t have enough time is that by taking action NOW, they are bringing forward the day when they no longer have to go to work – thereby giving them more than enough time to do exactly what they want! They’re not sure how to start. Many people realise that they ought to be getting “into property”, but they just don’t know where to start. However, there is so much information available today in the form of online courses, DVDs, seminars and mentors, that there’s no excuse for not becoming educated. As I already mentioned, I had to borrow the money for my training, but I considered this an investment and not a cost. It was an investment which has been repaid many times over. It took me a while to understand the value of investing in myself! Get yourself a mentor. The investment will pay for itself over and over! They don’t have much cash. This is the one I hear most, and I understand it – because I thought the same way 3 years ago. But what I failed to realise was how easy it is to use other people’s money for deals, and also to follow strategies which require minimal amounts of cash. A lack of cash need never be a obstacle to becoming a successful property investor! This is one of the main reasons I have written this book. Do any of the above resonate with you? If so, you need to understand that they are all barriers that you are putting in the way of your success. They can be dismantled very quickly. Throughout the rest of this book, I intend to show you just how easily this can be done…

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What sort of returns can you expect? I’ve just had a look at what the average house price is in the UK today, and a semi-detached house comes in at £215,000. For those of you based in London, I realise that this probably wouldn’t even buy you a 1-bedroom flat, whilst if you’re in certain parts of Northern England then it would buy a sizeable detached house! Let’s look at what sort of return we can expect on this “average” house, based on renting it out as a single let to a family: If we buy the house for £215,000, we will need to put down a 25% deposit of £53,750. Plus another £8,000 in buying costs (legals and stamp duty). Total money in is now £61,750. The balance of £161,250 would be lent by a bank in the form of a buy-to-let mortgage. If we work on a 2-year fix, they are available today at 1.78%. This means that we are paying an interest rate of 1.78% per year on the sum borrowed, which is £161,250. £161,250 at £1.78% = £2870pa or £239pcm I’ve also looked up the average property rental in the UK (outside London) and it is £800 per month. This is the money that the tenants will pay each month in rent. I need to make a few deductions from this figure. I would always take off 10% to allow for maintenance and voids (when it’s empty), which is 10% of £800 = £80. I also need to take off the mortgage interest, which is £239 a month, and this leaves a profit of £481 a month or £5772 a year. Pretty good.

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Now I need to work out the return on investment. This is the amount of profit compared to the amount of money that was put in the deal. Remember, there was a deposit of £61,750. I will add £8,000 to cover buying costs (legals, stamp duty). £5772/£69,750 = 8.3% Remember, this property hasn’t been cherry picked because it offers great value, or because we can add value. It’s “Mr average”. Simply by letting it out as a single let, we can get nearly 10% return on our cash. When you consider that the banks are giving about 1% a year at the moment, you can start to see why property is a great investment. And that’s before we start being creative and following a high cash flowing strategy like HMOs, or factor in the capital appreciation over time! It really is a wonder why anybody has any savings in the bank at all!

Exercise: Before going any further, have a think about what your financial freedom figure is. This is the figure which will allow you to choose whether you go to work or not. It’s the figure that will replace your existing salary, assuming this is enough to live on. Put a note of it somewhere. We will return to it later!

Chapter 2: How to Buy Property With None of Your Own Money

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The main reason people don’t get into property investing is because they don’t have much cash themselves. Given that property is expensive, they naturally assume that they can’t invest. They couldn’t be more wrong! If the above example applies to you, and you have very little cash of your own, this chapter (and Chapter 4) will explain why it needn’t be a barrier. In addition, Chapter 6 will show you how to raise your own funds very quickly through deal sourcing and packaging. Even people who have been investing for a while and started out with a fair lump of their own cash, eventually run dry! They will have used their cash pile as deposits for property, and when they have none left will assume (wrongly) that they have to stop investing. As a result, they feel their only option is to wait for prices to rise sufficiently for them to be able to re-mortgage, take out more cash and start the buying cycle again. This is fine, but the property expansion plans are put on hold while they wait patiently for prices to rise. And if the market starts to dip in the meantime, it could be a while before they start investing again! There are a number of ways round this problem. 1. Use the equity in your own house, or other people’s houses! 2. Buy outright using other people’s money, possibly as a joint venture arrangement. 3. Buy below market value, re-finance to the true value which allows the initial deposit money to be regained.

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Rinse and repeat! 4. Follow a different strategy, called Lease Purchase Options, covered in Chapter 4. The case study below is my first purchase. I had no cash myself and my credit still hadn’t fully repaired, so getting a mortgage was tricky. I needed to use OPM (other people’s money) and I had been teeing the deal up with a couple of potential private investors, one of whom had been introduced to me by my accountant. He was keen to get involved by lending cash, and it enabled me to get going in property again… Case Study – My first purchase: December 2015 This was a terraced house in Lincoln, which had been repossessed and was with an agent. It was on Rightmove and was listed at £99,000. Its true value was approximately £110,000. I had next to no cash myself and was using funds from a private investor to buy the property outright. Being a cash buyer can be a very powerful tool in property. It means you can exchange and complete in a couple of days, should you need to. On one of my purchases, we completed in 4 days! In reality, it will often be a few weeks. About one in three house purchases fall through in the UK, for a whole range of reasons. Often it’s because the buyer is in a chain which ultimately collapses, meaning the buyer can’t sell their house, which impacts on them making the purchase. To be chain-free as a buyer is an attraction to a seller, but sales still fall through because the buyer’s mortgage doesn’t come through. So, to approach a seller with cash funds sitting in the bank, without the need for a mortgage

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application, and be ready to exchange and complete the purchase in a couple of weeks, is a huge benefit. This is where some great deals can be had, as sellers will often accept a lower offer in the knowledge they can receive their money much quicker. I had an offer accepted on the house for £90,000, on the basis that it would complete in 14 days. Because I was buying for cash, this wasn’t a problem. I had a survey carried out, which was mainly to establish the true market value of the property at the point of purchase. This would be important when it comes to mortgaging out the property further down the line (see below). The property was three storeys high, with 4 bedrooms, two reception rooms and a separate kitchen. It had been used as a HMO (a house in multiple occupation) by the previous owner with 5 tenants (one of the reception rooms had been turned into a bedroom). He had not been able to keep up with the maintenance and the house had become less and less attractive to tenants. The result? Sadly, rather predictable. Tenants left and couldn’t be replaced, which led to the owner defaulting on his mortgage, as he no longer had the rental income. Eventually, the house was repossessed and placed with a local agent. This is not an uncommon situation, and it results from breaking one, or possibly two of the golden rules: not having a war chest to deal with maintenance issues and possibly not having the cash flow to allow a war chest to be built up! No structural works were needed apart from a new roof, however a full internal refurbishment was required to

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include new carpets, a full internal paint job and new furniture. Costs Purchase Price: £90,000 Legals and Stamp Duty: £1400 Refurb costs: £14,600 Total Costs: £106,000 Because I had borrowed the money from a private individual (not a bank), I also had to pay him the interest on the loan. I borrowed £105,000 for 8 months, at an interest rate of 8% p.a. which meant I paid £5,600 in interest. He agreed to the interest being “rolled up”, meaning that I could pay it when I returned the capital sum (which would be when I got a mortgage on the property). Revised Total Costs: £111,600 I had to wait 6 months before applying for a mortgage on the property because that is the rule at present – even if you buy for cash! One of the reasons why I bought this property was due to something called “Article 4” coming into Lincoln in March 2016. This is a planning restriction which has been brought in by many councils in the last few years, to restrict the number of houses which can be turned into HMOs. It tends to happen where there has been a concentration of HMOs in one part of the town or city, and a full planning application needs to be made if you want to convert a house into a HMO in that area.

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However, if you get in before the area has this restriction put on it, the major benefit is that the value of existing HMOs go up – as there are unlikely to be many more allowed in that area. I got in 4 months before Lincoln imposed Article 4, and benefited from an uplift in the value. The surveyor for the mortgage company valued the property at £150,000. I was given 75% mortgage, which meant that the bank advanced £120,000. This was an excellent result, as my total costs were £111,600 – meaning all of these were covered and I received extra cash of £8400. This is a good example of a deal where I didn’t have to use any of my own money to make things work. Plus I was able to pay back my investor, including all his interest, and still come out with £8400 in cash. The reason I had the survey carried out (at my expense) was to be able to show the bank who advanced the mortgage that even though I bought the property for £90,000, it was actually worth £110,000. I also kept all details of all money spent on the refurbishment, including lots of before and after photos. I made a point of driving up to Lincoln, when the mortgaging bank’s surveyor came out to value it in June 2016. I gave him a copy of the original survey valuing the house at £110,000, and a folder with all the refurb invoices and photos. This was important information for him to have, as it guided him towards a higher valuation. The Article 4 gave an added lift to the valuation, taking it up to £150,000 . This house gives me a net profit of £950 a month after all outgoings are paid. This is £11,400 a year. And the return on investment? Because no money was left in the deal, it is infinite! With very little cash of my own, it was important to

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be able to use other people’s money (OPM) to allow me to buy property. This is also an example of a great win/win. The investor was only getting 1% a year on his funds with his bank, and was delighted to get 8% by lending me the cash. It was a huge win for me, as it allowed me to own a house, pay him all his money back and still get cash out the back end! Needless to say, he has lent me a lot of money over the last couple of years… As a result of buying below market value, adding value through the refurb and with a little help from Article 4, I was able to recycle all the cash in the deal. This is the key to accelerating your property journey, as you then have the deposit for the next purchase. If you can’t get a mortgage because you have poor credit, or have just come into the country, many investors will be happy to leave their cash in the deal for 2 or 3 years. By this time your credit score will have changed, and a mortgage may be advanced to you.

A quick word on mortgages When you buy a property which isn’t going to be your main home, you will need a special type of mortgage called a buy-to-let (BTL) mortgage. This lets the lender know that you won’t be living there yourself, but that tenants will be paying you a rent. Back in the day, before the credit crunch, lenders were lending up to 90% of the value of the property. Now, the maximum is likely to be 75%, as lenders are being a lot more cautious.

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Another difference between a BTL mortgage and a residential mortgage (one you would take out on your own home) is that there are lenders who lend irrespective of the level of personal income. These lenders tend to look at the rental income of the property you’ve bought, and they have a formula for working out how much they will lend. As I write this in April 2018, I have had a look at some rates available on BTL mortgages. I see you can get a 1.78% rate – which is fixed for 2 years with no tie in after the 2 years is up. This will be lent at 70% of the property value. Money is still very cheap out there…

How do I find the investors? One way of finding the investors for your deal(s) is to start networking. Property networking is an effective low-cost marketing method for developing opportunities and contacts. It should be a key component of all property investing toolkits! There are many people out there who are in the same position as the person who lent me the money, with large pots of cash sitting in the bank earning next to nothing in interest. In fact, these people are losing money. Since the inflation rate is between 3% and 4%, if somebody is only getting 1% interest then the value of their cash is being eroded every month. They just need educating as to what you do and how they can benefit! It’s really important to get to meet some of these people, so I would strongly recommend starting to network, either formally or informally. The more network events you attend, the more conversations you have and the greater the chance of coming across somebody who would like to get a better

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return on their cash. I joined two networking groups, with one group meeting weekly and the other fortnightly, as well as attending monthly property networking events. This meant I had lots of conversations and met many folk who were keen to know more about what I was doing. All my initial funds came from networking! Top Tip: Whenever I have a conversation with somebody about what I do, I always frame it as “inviting them to have a share of the pot of gold” as opposed to “here’s my begging bowl, can you help?” This is essential, as there is nothing worse than being seen as the desperate beggar looking for cash! This leads me nicely on to my golden rules for networking: 1. Be interested rather than just interesting. I always make a point of finding out what the other person in the conversation does, before telling them about myself. This is partly because I am genuinely interested in what different folk do for a living, but also because I want the chance to build a bit of rapport before telling them what I do. 2. Try and get hold of an attendee list in advance, and decide who you want to speak to, rather than wandering aimlessly round the room… 3. Try to have the conversation (see below) with at least 12 people during the event. 4. Aim to arrange to meet at least three of those people on

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a one-to-one basis over a coffee, sometime in the next two weeks. 5. Follow up by email, confirming what has been arranged. I guarantee that if you follow the above rules, you will have the money coming to you so much faster! So, what is the conversation that I recommend that you have? Let’s look at an example: “So Peter, what is it that you do for a living?” “Well, essentially I help people to get a great return on their cash.” This instantly arouses curiosity, and leads to their next question – “Really? Sounds fascinating. And how do you do that?” “I invest in a niche sector within the property market, where the risk is low but the returns are high. I share these great returns with private individuals, people who are getting very poor returns on their savings at the moment.” And that’s it. A ten second elevator pitch. One that leaves most people desperate to know more! And that, surely, is the whole point of an elevator pitch. Short, to the point, and leaving people hungry for more info! I’ve heard many people say that an elevator pitch should be 30 seconds to a minute long. Hmm, not in a face to face conversation. You can imagine their eyes glazing over as you wax lyrical about what you do, how it will be a great benefit to them, and why they should lend you money – preferably now!

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Ok, I’m being a tad unfair. In all seriousness though, if you’ve just met somebody for the first time then your main role is to find out more about what they do. Not only is this good business practice, but it’s common courtesy too. At the end of the exchange, there will always be the opportunity to drop a 10 second verbal pebble into the pond and watch the ripples spread. People are interested to hear more about the process, and it’s at that point that I say something along the lines of the following: “Now probably isn’t the time to go into too much detail, but how about we meet for a coffee where you can give me more details about your business and how I may be able to assist you? I can explain a bit more about how I help folk get a much better return on their money. I’m free Tuesday at 10am or Thursday at 3pm. Which suits you best?” The reason I approach it this way is twofold. Firstly, having just met the person for the first time, it isn’t the time to start out on a lengthy explanation of my business model, not least as there is a good chance we will be joined (interrupted) very shortly by somebody else introducing themselves. But also, because I would like to meet as many people as possible during the limited time available! If they are keen to hear more, they will usually accept the offer of a coffee. Notice how I have been very specific about the times. I will have checked before the meeting and know when I am available. Rather than suggesting a coffee “some time” which is very open-ended, they now have the chance to either accept one of the times, suggest their own, or make their excuses and move on!

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I try and come away with a minimum of three confirmed coffee dates in the diary. If you are at a network meeting where everybody has a turn to speak to the room for 30 seconds or 60 seconds, then yes, now there is a real need to craft a length of pitch which leaves the room hungry for more info… Check out my eBook How to Raise Private Finance For Your Property Deals for more info on these pitches… Case Study 2 Andrew, one of my mentees, followed my advice and started to attend networking events in his home town of Sheffield. He practised his chat-up lines on me, and we went through the presentation that he would make once he arrived at the coffee meet. After a couple of weeks, he had a successful meet. Over to Andrew: I had done some networking before, and it had never really appealed to me. I’m not an extrovert and being “salesy” made me feel uncomfortable. However, Pete made me look at the whole thing differently. I wasn’t “selling” anything. I went there with the mindset that I was looking to help people. This made it so much easier… Previously, I would try and work a 30 second pitch on everybody I met, but was getting frustrated as nobody seemed interested in investing with me. Now, I was spending time listening to them talk, asking questions about their business, and showing a genuine interest in them. This gave me a few clues as to whether they were likely to be able to assist me.

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I then kept it very brief, just saying that I helped folk get a much better return on their money, by working in a niche sector within property. When pressed to say more, I suggested getting together over a coffee to see how I could assist them, and I would also expand more about how I helped people. Instantly this change in emphasis started getting results. After a couple of weeks I met with a solicitor for a coffee. He described himself as “asset rich and cash poor” as he was paying for two sets of private school fees but had a large house with a small mortgage. I explained that there was a lot of equity in the house, which wasn’t working for him at the moment. By releasing some of this, and increasing his mortgage, he would get a good return on his cash. He had a mortgage of £180,000 on a property worth £850,000. I went through Pete’s presentation almost word for word, writing it down on paper, so it was clear for him to see, After I finished, the solicitor looked at me and just said, “Bloody hell, I’ve never seen that before. Amazing!” We met for a second time with his financial advisor (who initially didn’t really understand the HMO model but when he did was equally enthusiastic) and six weeks later he had released £140,000 of funds – which were lent to me for 9 months, allowing me to pay £88,000 cash for an auction property. He had first charge on the property as security on his cash, as well as a signed personal guarantee from me on the loan.

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The property was in a poor state, and needed £44,000 spending to get it into a lettable condition as a 5-bedroom HMO. The legals and stamp duty were another £3500. All the rooms let quickly, and I mortgaged it out on a valuation of £174,000. I received 75% of this, which was £130,000. My total expenses were: Purchase Price: £88,000 Purchase costs: £3500 Refurb cost: £44,000 Interest on the loan of £140,000 for 9 months, at 9% p.a: £9450 Total Costs: £144,950 I had to put £15,000 of my own money into this deal, as the mortgage only returned £130,000. However, the HMO gives me £930 a month net profit, or £11,160 a year. This equals an ROI of 74% (11160 / 15000). So, I get all my money back out of this deal within 17 months, which I am very pleased about. This guy has since lent me more cash, and I’m doing a joint venture deal with an architect whom I met at the same event. Andrew’s example is a great way of explaining to people who feel they have very little spare cash – that they often have plenty; it’s just sitting in the bricks and mortar of their house! Whilst I understand the reluctance that some people feel

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about increasing the debt on their own home, it is cash that can be heavily leveraged. For every £25,000 that is released, the bank are happy to put in another £75,000. This is the investor mindset!

Good debt and bad debt. This is a good time to discuss the difference between good debt and bad debt. Some things are worth going into debt for whilst others can leave you in a big financial mess. A good debt is one that is a sensible investment for your financial future, should leave you better off in the long-term and should not have a negative impact on your overall financial position. Releasing equity from your house to leverage and invest in property would be an excellent example of good debt. A bad debt is one which drains your wealth, is not affordable and offers no real prospect of “paying for itself” in the future. It will often be a debt which has no realistic payment plan, one that is run up making impulse purchases, or borrowing money to pay everyday bills. For the most part, borrowing money to buy property will be good debt, as long as you follow the 5 golden rules!

Very important example Let’s work through an example. Understanding this is important, as you can use it as an example when talking to potential investors. It’s also a great way to explain the benefits to friends or family members who have a decent chunk of equity in their house, and who may be open to sweating it!!

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In our example, we are using Andrew’s solicitor. He has a house worth £850,000 with a mortgage of £150,000. If he’s comfortable leveraging the money in his house to buy more property, then he can borrow up to 75% of the value of his house. This is an additional £457,000 on top of his £180,000 mortgage. This takes his mortgage on his own house up to £637,000. His residential mortgage interest rate could be as low as 1% or as high as 4% (unlikely), but we’ll say it’s 2.5% for this example. By extending his borrowing by £457,000, it will cost him an extra £11,425 a year, or £952 a month. Hold that thought and we’ll return to this number later! To keep the numbers straightforward, let’s assume that the buy-to-let properties he wants are priced at £160,000. This would buy you a decent 3 or 4 bedroom house in many northern towns. The bank will lend 75% of the value, so each house would require Andrew to put in 25% or £40,000. Allow £5500 for the costs for each purchase. Andrew’s solicitor could buy 10 BTLs at £160,000 each, and would need to put in 10 x £40,000 or £400,000 in deposits, plus another £55,000 (10 x 5.5K) in costs. The total comes to £455,000. Fantastic – £2000 left over! Let’s assume that each BTL makes a net profit of £400 a month, which gives him a total of £4000 a month and £48,000 a year. This is not unreasonable, as his mortgage payments at 3% on £120,000 will be £300pcm. Plus, I allow 10% of the gross rent for voids and maintenance which is £80. If the rent is £800pcm, this brings the net profit in at just over £400pcm.

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Remember, his increased mortgage cost on his own house was £11,425 a year. Once this is taken off the total profit of £48,000 this still gives him a net profit of £36,575 a year. Not bad… Now, he can sit and wait and watch the values of the houses increase. If history is a guide to the future, and the value of the houses double in 10 years, his portfolio of BTLs will now be worth £3.2m, whilst his debt remains the same at £1.2m. Over this time, he will have made a profit of monthly cash flow of 10 x £36,575 or £365,750. He now has equity of £2m in the portfolio (new value of £3.2m minus the outstanding mortgage of £1.2m). He may decide to sell off half the portfolio and completely clear his own mortgage of £637,000 (after taxes) or he may decide that having debt on his own home is fine because it’s “good” debt. He’s getting used to his profits from the BTL portfolio, so he’ll hang on to them, thanks very much. Of course, he may also decide to extend his borrowing on the portfolio, now that it has increased in value. If so, he’ll re-mortgage to pull out more cash to act as deposits for another half dozen houses…. I hope you can see that, from one house which had a fair lump of equity in it, a sizeable portfolio has been created – one which gives great cashflow and, over time, capital growth.

Even Better How about this? Andrew’s solicitor is extremely busy. He doesn’t have either the time or knowledge to source and purchase these BTLs. But you do! You could put the

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presentation together in a way that you do all the work, and set everything up for him. In exchange, you could either get a fee for doing so, or (preferably) take a share of the cashflow each year and/or the equity growth. It could be a JV arrangement allowing him to be completely hands off, with all the property being put into a limited company, specifically set up for this, and you each become 50% shareholders. How many of those arrangements would you need in order to bring in an excellent monthly cash flow, but also accrue equity for the future? Whenever I attend a networking meet, I am looking for 2 types of people. Firstly, those who might be interested in either lending cash into a deal, or becoming a joint venture partner of mine. The second group are the “facilitators”, those who can make the introductions to the first group. These will tend to be solicitors, accountants and financial advisors, people who have clients who they feel could benefit from what I am offering. You will have to have the coffee with the facilitator initially, but it’s well worth it, as they can make multiple introductions…

Private Lending or Joint Venture? I can hear you asking, “What’s the difference between somebody who lends cash and a joint venture partner?” The key difference is that the person who lends cash is lending a fixed amount for a fixed term, at a fixed rate of interest. They will have no involvement in the property deal – although if they are lending most or all of the money for the purchase then they would usually have the security of a first charge on the property.

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In contrast, a joint venture (JV) arrangement is more on a “risk and reward” basis. Here, the person will still be putting the money into the deal but for a share of the profit (usually 50%) as opposed to a fixed rate of return. They may or may not be involved in the project. In return for giving away a share of the profits, there won’t usually be an interest charged on the funds which are being lent into the deal. This has to work well for both parties in order for the relationship to be a success. My partners don’t want to be heavily involved in the business. They expect me to source good deals, organise the purchase, oversee any work to the property and find a good managing agent to look after the property (usually a HMO). And last, but arguably most importantly, they expect to get a good return on the money they have invested. My advice is to borrow the money in the first instance. Then, if all goes well, you can continue down that path. Alternatively, if the investor wants a share of the profits in future deals, you will know them a lot better, and will be able to decide if it’s somebody you are happy to JV with. There are always three components to a successful property deal: time, money and experience. Very few people have all three. When I was setting out, I was looking for money and was willing to put in the time and the experience (which is gained very quickly!) The investors tend not to have the time or the experience, and are happy to provide the third requirement – the money. As for the details of the presentation I make, you can either find them on my YouTube channel, where I have filmed a video to show this, or you can get a free copy of my eBook

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How to Raise Private Finance For Your Property deals which goes into this important area in considerably more detail. I role-play the whole investor/networker scenario at my Property Investors's Bootcamp so that everybody knows exactly what to do and what to say!

What if I’ve Got No Experience And No Money! There’s no doubt that this whole process of borrowing private investor funds is easier when you have a bit of experience. Approaching an investor with a model that’s working for you at the moment, rather than a theoretical model which you haven’t actually run with yet, will be far more compelling for them. The trouble is, how do you get experience when you don’t have the money? Don’t worry, I know it seems like a bit of a vicious circle, but there is a solution… When I started, I was working two strategies side by side. On the one hand, I was buying properties using investor cash, as per my Lincoln example above. However, I was keen to get deals (and cash flow) “under my belt, as well as building up the all important experience, so I started using a strategy called “Rent-to-Rent.” This will allow you to get up and running very quickly, and generate cash flow. Best of all, there’s no purchase involved!

Rent-To-Rent This isn’t complicated. Rent-to-rent is where you agree with a property owner to take the property off their hands for a defined period (usually between 3-5 years) and pay them

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a guaranteed monthly rent for it. However, only certain property layouts will work for this. You need to be looking for properties that can be let on a room by room basis, ideally for a minimum of 5 people. A 3-bedroom house with 2 separate reception rooms, a large kitchen diner, and a separate entrance hall can work. Here, the two reception rooms can be turned into bedrooms at minimal cost (remove sofa, add bed!) giving a total of five bedrooms. Better still is a 4-bedroom house, where one of the reception rooms can be used as a lounge for the tenants, and the other one as a bedroom – again giving 5 rooms in total, but the added lounge area will be more attractive to tenants. The single let rent might be £750 a month, whereas if the rooms are let out at £400 a month to separate tenants, then the total rent received will be 5 x £200 = £2000 per month. With rent-to-rent, the bills are paid by me and not the tenants. This is the gas, electric, water, broadband and council tax. The formula I use is £200 plus £40 per tenant. So, for 5 tenants, this is £400pcm. This needs to come off the total rent collected, lowering it from £2000 to £1600. I also allow for any maintenance costs and voids (where a room might be empty for a while) and take off 10% of the gross revenue. That’s another £200 to come off, which leaves me at £1400. There is still one other amount to come off, and this is the rent that I have agreed to pay to the owner of the house. Important point: Remember that I have offered the owner

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a guaranteed rent. They may well be getting a tenant to pay £750 a month for a single let (family) but the tenant won’t be paying for any maintenance. If the property is empty between lets, the owner won’t be getting any rent at all! Often, the owner will have been using an agent to manage the property, and they will charge 10% of the gross rent, so this has to be taken into consideration. By the time the owner has his monthly cash in the bank from a single let, where the tenant is paying £750, he’ll be lucky to be coming away with £550 a month. Once I explain this to him, and remind him that my payment will drop into his account every single month (meaning it’s as close to passive income as it’s going to get) my offer of £600 a month starts to look attractive! Remember, my running total was £1400, so removing another £600 from this gives me a final profit figure of £800 a month, or £9600 a year. Not bad for a property that I don’t own, haven’t needed a mortgage for, and haven’t had to find a chunky deposit to buy. Summary of Numbers Gross Rent Collected: £2000 Deductions Rent to Owner: £600 Voids/maintenance: £200 Bills: £400 Net Profit: £800pcm

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We all have our own “financial freedom” figure. Now, I want you to think back to when I asked the question in Chapter 1, and remind yourself of yours. Then, divide it by £9600. This will give you the number of rent-to-rent deals that you need to have under your belt. Most people need between 3-6 to allow them to walk away from their day job… And here’s the thing: •

You will have sourced the property.

•

You will have set it up as a HMO.

•

You will be managing it yourself.

What does this give you? Experience! And what was the potential investor looking for? Experience! Box ticked. The fact that you don’t own the house is immaterial. You are able to clearly demonstrate that you know what you’re doing. And it’s cash flowing well, which proves the model. Now you just need to persuade the investor to open his wallet and fund your purchase. I go into more detail on R2R as a strategy in Chapter 7.

Chapter 3: Maximise Your Cash Flow Using HMOs

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HMO stands for House In Multiple Occupation. A HMO is basically a property which is shared by a minimum of three tenants. These tenants all come from different households, but share a toilet, bathroom and kitchen facilities. In short, a HMO is a house where a bunch of folk have their own bedroom, share some facilities, and aren’t related to one another. Using HMOs is a great way of maximising your cash flow. This is a very popular strategy, and for good reason. Cast your mind back to the first chapter of this book. Do you remember top tip number three? Make sure there is a healthy cash flow in every property that you buy. In other words, make sure that the amount of profit that comes into your bank account every month is maximised. The HMO route achieves this, with knobs on. Not only does it provide excellent cash flow, but it also results in a much higher return on investment. It means that your cash works much harder for you, and you’ll reap the benefits of this. “As I mentioned in Chapter 1, I invested in Cambridge property 20 years ago. The houses were single lets, and the difference between the rent coming in and the mortgage going out was minimal. This left me a hostage to increased interest rates, or voids where I had nothing coming in, but still had to pay the mortgage. It also meant that I couldn’t build a “war chest” for the inevitable rainy day. Most HMOs will cashflow at a minimum of £500-£600 a month and upwards. The highest cash flow HMO in my portfolio is a 7 bedroom property, which gives me £1900 a month profit. When there is this much “headroom” in a property, a rise in interest rates is a minor inconvenience rather than a potential

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catastrophe! Single lets, on the other hand, will average £300 a month profit after all costs. This leaves you more exposed to the winds of change! Back in 2015, I attended a “discovery” day put on by a lettings agency in the East Midlands. The agency sourced single let properties, and were keen to bring potential investors into the fold to buy their properties, pay them a fee for refurbishing it, and another fee for managing it. The selling point to the investor was that they could quickly build a portfolio – which gave them a passive income and an appreciating asset. The trouble was, the average profit from each of these single let houses was only about £200 after all costs. I was going to need a lot of houses to reach my “financial freedom” figure! The agency were sourcing the properties at a discount to market value, usually because they were in a poor state and needed work on them. This might have suited some folk’s strategy, but not mine. Interestingly, this same agency now concentrates on sourcing houses which would make great HMOs.

The Two HMO Models There are two ways of approaching the HMO model. The first is to buy a house which you can convert into a HMO with very little effort, save for turning a reception room or two into bedrooms. The second route is to undertake a refurbishment project, either minor or major, to add value to the house, and maybe increase the number of bedrooms and/or add en-suites. There are pros and cons to each route. For me, the determining factor as to which route I take will be the numbers. Which deal gives the best ROI?

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Model No 1 Let’s take a closer look at the first route. This is where there is no serious refurbishment involved. The house is bought “good to go” as a HMO, and it just requires minor reorganising to get it up and running. This model works very well with Rent-to-Rent strategy, where you can take control of a property from an owner and pay them a guaranteed rent in return. You reconfigure the property into a HMO and the profit is the difference between what you pay the owner and the rent you receive from the tenants. I go into more detail about this in Chapter 7. To expand of this, I’ll use an example of a house I bought in Gloucester. This is a standard, two storey, semi-detached, 4 bedroom house – with two separate reception rooms and a reasonable sized kitchen. This was bought with none of my own money, as I had joint ventured with a private investor who was putting all the necessary funds into the deal. Purchase Price: £176,000 Deposit needed: £44,000 (25%) Legals/Stamp Duty: £6500 Furniture: £3800 Total Money In: £54,300 This house was quickly let out to 5 young professionals, each having their own bedroom. The main bedroom had an en-suite, and the remaining 4 tenants shared the family bathroom. There was a separate downstairs loo (important when 4 people are sharing only one bathroom!).

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Now let’s look at the numbers… Gross Rent: £2125 (3 rooms at £400, 1 at £475 and 1 at £450) Deductions (monthly) 10% to cover voids & maintenance: £212 Bills (gas, electric, etc.): £400 Mortgage: £400 (we paid 4% on £132,000) Total: £1012 Net Profit: £1013 pcm, or £12,156 per annum Remember that the return on investment is the net profit each year divided by the amount of money that went into a deal x 100. Here, this is 12156/54300 x 100 = 18.5% This is about twice the ROI that you would get on a single let. However, I haven’t mentioned what the market value of the property was at the time of purchase. Remember, we paid £176,000. This was an off-market deal which I had sourced direct to vendor (no estate agent involved) and he needed a quick sale – having been involved in two previous attempts where chains broke at the last minute. Because my investor had cash ready for the deposit, and we had nothing to sell, a mortgage was arranged within 4 weeks. This allowed us to exchange and complete in 30 days. As a result of being able to move quickly, the seller was willing to drop the asking price from £218,000 and accept our £176,000. This represented a discount of 19%. The

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asking price was a fair reflection of market value, so this was a genuine 19% below market value. Twelve months later, we re-mortgaged the house to 75% of the value, which by then had risen to £246,000. This released £184,500. The initial mortgage was £132,000, and my investor put in £54,300, which made a total of £186,300. The re-mortgage was giving us back £184,500, which means that we only had £1800 left in the deal! In other words, my investor got back all of his cash, bar £1800. Now, the ROI was 12156/1800 x 100 = 675%. Hopefully this demonstrates the power of buying BMV to start with, and re-mortgaging further down the line to take out your cash. And guess what we did with the cash? Yep, we bought another house!

Model Number 2 The second model involves making substantial refurbishment works to the property – which will add value, as well as reconfiguring the layout to include en-suites to the bedrooms. Usually, this would mean building an extension or converting the loft area. Often, the intention is to work towards getting a commercial valuation. This allows most of the original cash to be pulled out of the deal at the time of mortgaging the property. If the rooms are big enough to allow for en-suites, putting them in will have three advantages: the rooms let more quickly, there are less voids, and you can charge more rent. However, the numbers have to stack… To demonstrate, let’s look at another example of mine. This was a house sourced direct to a vendor in Barnsley, West

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Yorkshire. I used a deal sourcer for this, and paid a fee to him for bringing the deal to me. It cost me £2500, but I was happy to pay this, as it was a great deal. The house was a 3 storey terrace, which had previously been a family home. My plan was to turn it into a 5 bedroom, all en-suite, HMO. Again, this was done with a joint venture partner who had the cash to pay for the purchase and the refurbishment. The plan was to mortgage the property out 6 months later. The house needed a lot of work on it – rewiring, re-plastering, reconfiguring some of the internal walls etc. The Numbers Purchase Price: £95,000 (Market Value £110,000) Legals, Stamp Duty: £4500 Refurbishment Works: £38,000 Total Money In: £137,500 It took 3 months to turn the house into a high-quality HMO, with a cracking kitchen/dining/lounge area. Following completion, the property was let out very quickly to 5 Eastern European workers, who were in Barnsley on a long-term contract. Monthly Gross Rent: £2100 (3 x £400, 2 x £450) Monthly Deductions Voids/ Maintenance: £210 Bills: £400 Managing Agent Fee: £210

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Total: £820 Net profit (before mortgage payment): £1280 We weren’t paying a mortgage on this property, as all the money had been put in by the investor. However, once the works were completed, we applied for a commercial mortgage.

What’s a commercial mortgage? Most single lets and HMOs will have a standard Buy-To-Let (BTL) mortgage. This is where the house is valued on what’s called a “bricks and mortar” valuation. It will generally be very similar in value to the rest of the houses on the street. A commercial mortgage is different. Here, the rent that comes into the property is considered, as it is being treated like a business. Most specialist HMO lenders will have a commercial mortgage available, and will lend on a multiple of the rent received. In Barnsley, the lender we used valued our HMO by working off a multiple of 8 times the gross annual rent, minus 20% to allow for bills, maintenance etc. Our gross monthly rent was £2100, which is £25,200 per year. Multiplying this by 8 gives £201,600. Finally, subtracting 20% gives £161,280. This was the valuation that the surveyor came up with. We were allowed to borrow 70% of this valuation, which gave us £112,900. The mortgage interest was 5% a year, which meant a monthly payment of £470. This needed to be taken off the above net profit figure of £1280, giving us a monthly net profit after all costs of £810. This was £9720 a year.

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My investor put in a total of £137,500, which meant that once the mortgage funds of £122,900 were advanced, he was leaving £24,600 in the deal. So, how does this look in terms of ROI? Net profit/money left in x 100 or 9720/24,600 x 100 = 40% This compares very well with most HMOs, and extremely well with single lets. Needless to say, my JV partner was very pleased, and we moved straight onto the next deal!

A word of warning A number of years ago, some investors were buying up large house in northern towns. They were doing this relatively cheaply (£150,000), and reconfiguring them to get as much rent as possible. One chap I know was doing this in Blackpool, and turning the houses into 10 or 12 room properties suitable for nursing accommodation. When he had a commercial valuation done, based on the multiple of gross rent, the valuation was coming out at £350,000 plus. While this allowed the investors to get all their money out, and then some, it’s not a strategy I would advise. If you take this approach, but then things go wrong and you need to sell as a residential house, then there’s no way you could ever get close to the amount that you borrowed from the bank. As a result, there would be a big shortfall. Once a house reverts to a bricks and mortar building, it can only be sold on as a residential property. Banks are now far more careful about how much they lend, even on a commercial mortgage. As a general rule, they will never lend more than the value of the property (on a bricks

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and mortar basis) just in case they ever have to repossess and sell on the open market. Commercial mortgages will only be given on a standard residential house when you have carried out substantial works on the property, and when it no longer represents a “family home” configuration. In the Barnsley example, I reconfigured the house so there was no longer a family bathroom, and the reception room downstairs had a large en-suite in the corner! It also needed a full license from the council, which assisted with the “commercial” nature of what we were doing. Comparatively, in my first example all I did was to put a bed in the reception room. There was no structural work involved. In that example, there is no way a commercial mortgage would be advanced. The valuation was a “bricks and mortar” one. Simple. Some deal sourcers will send their deal sheet out with a commercial valuation attached to the property, when it wouldn’t get one in a million years! They want the ROI to look impressive, so they bump up the valuation, which means the money advanced from the mortgage is shown as a higher number. This means that less money will be left in the deal. In reality, it will be impossible to get the commercial mortgage on this, and the ROI will be a lot less attractive! So, beware… When I consider the pros and cons of investing in property, for me it normally comes down to ROI. A chap I know in Leeds is buying 3 bedroom houses for £100,000, spending about £10,000 in total to convert them to a 4 room HMO. After all costs, he is coming away with £750 pcm profit. This is £9,000 a year. Since he put a total of £40,000 into the deal, it’s giving him a return on investment of c.22%. So, it works for him.

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Going up a level You can take things to another level completely by turning what was a commercial building into a large HMO. In 2017 I bought a large 4 storey period building in the centre of Gloucester, which had retail units on the ground floor and 3 storeys of office space. The current plan is to convert the existing building into 9 “pods” of 5 en-suite rooms, each pod with its own entrance. There are a total of 45 rooms. In addition, phase 2 will involve building a side extension on the land which came with the purchase, and then putting up another 4 storey building. This building will have 12 more pods of 5, 3 pods per floor, giving a total of 60 en-suite rooms. This is a big project to end up with – 105 rooms overall, but it isn’t 21 times the effort to end up with 21 x 5 bed HMOs! The project is in planning as I write, and we hope to start phase 1 in late summer of 2018. As with many of my deals, most of the money for this purchase has come from private investors.

How Do You Find Tenants? Susan, one of my mentees, had a small portfolio of 4 single lets. Unfortunately, she was finding that after all costs, the profit from each of them came to only about £200 a month. This gave her £800 a month, which wasn’t enough to get her out of her day job. To do this, she needed £3000 a month. Susan had thought about HMOs, but decided against them. She thought it would be much harder to find 4 or 5 tenants for a house than the one tenant that she needed for her single lets. It was a mental block, and we overcame it very quickly. She was based in Leeds, where I was certain that the demand for HMO rooms would be very high. So, with this in

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mind, I looked up www.spareroom.co.uk. Spareroom.co.uk is a website which people can use to find an available room in the area. Naturally, the site is popular with landlords, who use it to advertise. A couple of minutes of looking showed Susan that there was huge demand for rooms in Leeds, and that as long as she bought in the right area of town, she would have no problem filling the rooms. Within 6 months she had sold two of her single lets, and bought two houses in Leeds – which needed very little work in order to turn them into HMOs. These properties cashflowed at £920pcm and £860pcm, and she filled both of them within 2 weeks of putting the ads on the website! At the time of writing, Susan has just had an offer accepted on a third property in Leeds. If the profit on this is similar to the other two, she will have hit her £3000 a month across all her properties! So, you see, there is real magic in HMOs. When I was young, there were only two options for accommodation. You either lived with your parents, or you rented a flat. HMOs didn’t exist at all. Nowadays, there’s more options, but things are far more expensive. To be able to move into a comfortable room, preferably with its own en-suite, have a communal lounge and kitchen facilities, have all bills included in the £400 a month rent, and only have to buy their own food, is the dream of many young people. If you are sharing with friends, then this is a lot easier. However, if somebody rents their own flat, they don’t just pay the monthly rent (which is probably going to be £100 a month higher than a HMO room), but they also have council tax, broadband and all utility bills to pay as well. This could easily be another £250-£300 a month. The total outlay will be in the region of £800 per month – double that of the HMO room.

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It’s not difficult to see why HMOs are so popular with both the young, and the not so young.

How To Make every HMO a Raving Success! Location, location, location. This is so important! Demand is always strong for a comfortable, spacious room in a well looked after house, as long as it’s in the right location! Tenants want to be a short walk away from the centre of town, or at the very least a short bus/train ride away. Not everyone has cars, and as a result anything too rural is a non-starter. If you find a house which you think would make a great HMO, the first thing to do is to go to Spareroom and click on the “show in map” button. If there are no HMOs in your location, the chances are there’s a good reason for this. If you are buying in a town that you don’t know well, do some more research. Is the location on the “wrong side of the tracks”? If so, this might explain why you were getting what seemed to be a great bargain! Remember, you only get paid when somebody rents a room. You could have the best bargain in the land, furnish it exquisitely and have superfast broadband to boot, but if you have bought in a location where folk don’t want to live, then it ain’t going to work… Furnish all the rooms. It’s important that all the bedrooms are furnished, the lounge has seating and a TV, and the kitchen is ready to go with crockery, cutlery, white goods etc. You don’t need to spend a fortune here, as you can pick up some great stuff on eBay and Gumtree at low cost. However, there are a number of specialist companies who furnish HMOs and offer different price points. This is worth a look, as they will deliver and assemble too! If you’re looking to kit out a 5 bedroom

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house with one of these companies, I would allow £5000 to do the lot. If you want top end, then you’re probably looking at closer to £7000. Unfurnished is not an option! Think about hiring an interior designer. I had a real problem with one of my HMOs, which was 120 miles from where I live. The managing agent told me that they could organise the painting and decorating, as well as furnishing the rooms. They convinced me they knew exactly what the local market required, as they looked after 75 HMOs in the city. Ok, I said, go ahead. Result? One of the blandest interiors I’ve ever seen. Magnolia everywhere, no imagination and just not appealing. The rooms weren’t letting, and I was becoming more agitated. I phoned an interior designer in the city, explaining that I had a limited budget, and that I needed some assistance with colour schemes. She charged me £200 to come up with a scheme, which included feature walls in all the rooms, as well as sourcing items from IKEA – which really worked in the reception room. I hired a local painter, gave him the spec, and he had it finished within 3 days at a cost of £560 – what an incredible difference. Total spend: £1300. End result: full house within a fortnight, new managing agent, and a very happy landlord! You may be thinking that £1300 is a great deal extra to spend. However, if just 3 of the 5 rooms were empty for another month because of the drab interior, this would have equated to a £1200 loss, and that’s not even considering the ongoing difficulty of keeping the rooms filled. I went on to use the same colour scheme across other HMOs, so I got my money’s worth! This was my second HMO, and I was still a bit green.

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The key lesson I learned from this was in having better due diligence on the managing agent! Get the fastest possible broadband speed. High speed broadband is situated just below oxygen on a tenant’s list of requirements. I now assign managing agents to all of my HMOs, so I don’t meet the tenants anymore, but in the past I used to do this quite a lot. Often, the prospective tenant would stand in the hallway and check the broadband speed on their iPhone/iPad. I have had tenants turn round and walk away, before they’ve even seen the room, because the broadband was too slow. An extra £25 a month to go from 50mb to 100mb will be money well spent! Hire a cleaner for the communal areas and a gardener in the summer. This keeps the communal areas up to spec. The cleaners do a deep clean of the kitchen and lounge once a fortnight, and it stops things sliding too far! They are the “eyes and ears” should there be maintenance issues which the tenants haven’t bothered reporting. A fortnightly visit by a gardener in the summer keeps photosynthesis under control, and stops the garden turning into a jungle. The reality is that the tenants won’t cut the grass even if the Flymo is right under their nose. Hey ho… Speak to the neighbours. If you’ve had an offer accepted on a house that you intend to convert into a HMO, introduce yourself to the neighbours. Explain what it is you are thinking of doing. This can prevent a campaign of misinformation spreading. I always tell them that I am renting to young professionals, who will be at work all day and cause less disturbance than a traditional family household (with dogs and screaming kids!). Most people don’t know what a HMO

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is, and those who think they do will have had their perception shaped by TV programmes showing benefit tenants or asylum seekers. Don’t misunderstand me – everybody needs somewhere to live. Just because a house is being let to these folk, doesn’t mean there will be problems. However, reality TV being what it is, producers will inevitably find the houses where there are problems, and from these form stereotypes. If planning is required for the HMO (necessary if you are letting to 7 people or more) the neighbours will be alerted and have the opportunity to object. This is where you must gently educate them. I once had a project in Nottingham, where we were converting a 3 bedroom house into a 7 bedroom en-suite HMO, and I made the mistake of not educating the neighbours. They made the application process a nightmare, which resulted in me having to speak to the councillors at a public meeting defending my proposal. All of the neighbours were in the public gallery giving me the daggers look. When I won the councillors vote by 6 to 5, the neighbours started booing and chucking their paperwork down into the main chamber. Somebody had spread the word that the HMO was going to be used for ex-prisoners!

Licensing Some HMOs need to have a licence from the local council. If the house is over 3 storeys high, and has five people from two or more households, it currently needs a license. Councils have the power to impose additional licensing, so it is essential that you have a check on your council’s website before going ahead. That said, I am writing this in April 2018, and this is the month that mandatory licensing was due to

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come in across all HMOs, irrespective of how many storeys or people. So, watch this space... Personally, I wouldn’t be too concerned about having to spend extra to bring houses up to specification, as the legislation will have the effect of removing landlords who are operating sub-standard houses, and don’t have either the will or the finances to bring them up to speed. This will present some great buying opportunities in the future. However, there is a cost implication, in that you will need to have a fire alarm, fire doors and smoke alarms as a minimum – to tick the various boxes. This will involve a few thousand pounds, which needs budgeting for. I have brought all my HMOs up to specification, irrespective of size. Not only did I want to future proof them, as I suspected this mandatory licensing would be implemented, but also because I have a clear responsibility as a landlord to protect my tenants.

Planning At present, you will only need planning permission for a HMO in two circumstances: if you intend to have 7 or more people living in the HMO, or if you are planning to set one up in an Article 4 area. Let’s take the first circumstance – where you have 7 or more people. This is a standard requirement, and you’ll need to submit a full application. I’ve done a few larger HMOs and I’ve always used a local planning consultant to put the case to the council and prepare the application. It costs me about £500, and is money well spent. Often, the planning consultant is an ex-planning officer from the council, so they know the score.

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Article 4 applies to towns and cities where there is a concentration of HMOs, where the council want to limit their spread. You may remember that my first deal was in Lincoln, where Article 4 was introduced in March 2016. If you get in before it’s introduced to your town, great. Otherwise, you’ll have to show the council that there are either no other HMOs on the street where you are building, or that the number falls below whatever threshold they are working on. The application can be hard work! The best thing to do is pick up an existing HMO from a tired landlord, as it will have “grandfather rights”, and will be able to continue as an HMO under new ownership with no problems from planning…

Chapter 4: The Best Kept Secret in Property Investing!

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How would you like to live in a property that you don’t own, paying a rent well below market value, and have the option to buy the house anytime in the next seven years for today’s market value? Alternatively, rent the house out and build up a large monthly cash flow. Either way, you’ll also build up a large equity pot for the future.. How would that sound? Impossible, right? Wrong! All of the things I have mentioned are truly possible, and all by following one strategy. It’s the most creative, flexible strategy available to property investors, and is perfect for people who have very little money themselves. So, what exactly is this, and how does it work? Buckle up, because I’m about to give you some information that has the potential to change your life! You may of heard of something called a purchase option. This is a legal agreement which gives somebody the right to buy something, but not the obligation. It’s often used in land deals, where somebody is keen to buy a plot of land to build on, but they haven’t got planning permission yet. With this in mind, they approach the land owner to see if they would be interested in giving an option on the plot of land. This would be the option to buy within a certain time-period, for a fixed price.

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If the land owner agrees, the purchaser can head off and try to get planning permission. If successful, he can trigger the option and buy the land. If not, there’s no obligation to purchase, and he can walk away. Simple, right? Here’s where the magic comes in: If we extend this, and add an agreement where the “buyer” can use the asset (land or house) in return for an agreed monthly payment (a lease payment), this is called a Purchase Lease Option (PLO). This takes me back to my opening sentence, where a PLO can be signed with the owner of a property for a fixed period of time, agreed by both parties (in my example I gave 7 years), and the “buyer” has control of the property during this period – meaning they can live in it or they can rent it out. To summarise, a Purchase Lease Option has 4 parts to it. 1. A defined time-period during which the option to buy exists. 2. A fixed price which needs to be paid if the option to buy is exercised. 3. The amount needing to be paid each month (the lease fee). 4. The upfront fee (which can be as little as £1). The beauty of this strategy is that you can control the house and rent it out as a single let or a HMO without having to pay a chunky deposit or get a mortgage. Even if you have poor credit or have only recently arrived in the country, this won’t impact on your ability to use the strategy. You can perhaps understand why people are a little sceptical when they first

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hear about PLOs, and cannot think of any reasons as to why the seller would grant this option. However, there are many reasons, and we will look at them a little later.

Case Study 1: My first lease option I placed an advert targeting frustrated landlords in the local freebie magazine. I was specifically looking for people who were suffering one or more of the three landlord pains: tenants who weren’t paying their rent, endless maintenance bills, and the dreaded voids. The advert was aimed at me picking up some more rent-to-rent property. A lease option would be a bonus. Within a few days, I had a lady on the phone who had a 3-storey property in Gloucester, which she was renting out as a HMO. Although her work had taken her to Scotland, she thought she would still be able to oversee the property, as she had a pal who agreed to look after the tenant viewings, plus a handyman in Gloucester who would sort out any maintenance issues. It turns out this was a tad optimistic. Almost as soon as she moved, problems started. Two of the rooms were empty, as the friend who had agreed to do tenant viewings had changed her mind, and the maintenance man wasn’t keen to add this job to his list… In my advert, I mentioned the promise of guaranteed rent each month, irrespective of voids or tenant issues. This was aimed squarely at the pain point of landlords, and it had the desired effect. The woman called from Scotland, and we had a discussion in which it was made clear that she was at

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the end of her tether. Key Facts •

The house had 5 bedrooms, a lounge and a kitchen, and was in excellent condition (modern townhouse).

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It was fully licensed with the local council as a HMO, which meant it was kitted out with fire doors, smoke alarms and a fire alarm.

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The rooms were let out for a monthly total of £2200 when full.

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Her mortgage on the property was £380.

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With two empty rooms, after paying all the bills the owner was currently getting about £900 a month profit.

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It would let out for approximately £800, as a single let, to a family.

The woman liked the idea of being able to “walk away” from the problem, and was very interested in handing it over to me. She had a number of options. I discussed all of them with her: •

She could try and soldier on, bringing in somebody local to do the viewings – not attractive.

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She could put it with a local agency who looked after HMOs. She’d tried this a year previously, but “they were useless”, so she took it back to self-manage.

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•

She could let it out as a single let to a family. She was actively considering doing this before she saw my advert.

•

She could sell. Because there wasn’t much equity in the house (she’d bought at the top end of the market in 2007) she would rather have the monthly income as her mortgage was quite low. The market value of the house was £190,000.

I always exhaust all the options in this situation, as I don’t want somebody to do something which they will later regret. Also, this can be a stressful time for people, so giving them time to make the correct decision is important. I explained that I would not only like to take control of the house, but that I would like to buy it from her. I understood she wanted cashflow from it, and didn’t want to sell immediately, but what about if I offered her the full market value of the property today? Would she consider giving me the option to buy some time in the next 7 years? If this was acceptable, I would pay a guaranteed rent of £800pcm, every month, come rain or shine. This was £9600 a year, or £67,200 over the 7 years! I don’t think she had realised quite how much cash would come her way over the terms of the option, and she was seriously interested. I suggested she sleep on it, and we agreed to a chat the next day.

Offer The Fully Repairing and Insuring (FRI) Lease Whenever I negotiate a lease option, I am aware that the real appeal to the owner is the ability to walk away with the

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knowledge that they have a guaranteed amount of passive income dropping into their account every month. Consequently, I make the deal that much sweeter for them, by suggesting a full repairing and insuring lease (FRI). This means that I am liable for insuring the property, and any maintenance that needs carrying out – fixing the roof, the boiler, etc. Because I offer the FRI lease, the owner understands that they really can walk away and forget about the property. This can be quite liberating for many tired landlords, and gives me more room for negotiation of the monthly lease fee. In the example above, I was happy to offer the owner the full single let rent of £800. If she did let it out as a single let, after all costs, she would probably bank £650 a month, so my offer was fairly generous. Of course, my calculations were based on the rent coming in as a HMO. She did the maths, and agreed to a 7-year term. I took over the property and within 3 weeks had let out the remaining two rooms, giving a gross rent of £2200. After taking off the owner’s lease fee of £800, bills at £400, and £220 for voids and maintenance, it left me with a profit of £780 per month, or £9360 a year. Over 7 years, this is £65,520. And the best part of it? This was on a property which I didn’t own, hadn’t had to get a mortgage on, and wouldn’t have to buy if the market crashed! In terms of equity growth, I don’t have a crystal ball. I can’t tell you where the market will be in 7 years’ time. However, the best way to predict the future is to look at the past. Historically, prices have risen by 10% a year. There have

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been peaks and troughs though, so I work on an average of 5% a year going forward. Over 7 years, a 5% compounded annual growth is an increase of 40%. The market value at the time of signing the 7-year lease option was £190,000, and this was the option price agreed. If the value increases by 40% over the next 7 years, the new value will be £266,000. This is an increase of £76,000 and represents my equity profit from the deal. Total profit: Cashflow of £65,520 and Equity (projected) of £76,000 = £141,520 Think about your own situation. How many of these deals would you need to do each year, in order for you to either leave the day job, or if you love the day job just increase your monthly cash flow, and also provide a great nest egg for the future? Let’s say you only did 3 a year, every year, for the next 7 years. In reality, you could do far more, but let’s be conservative. In year 1, your cashflow would be £28,000. In year 2 it would be £56,000, and by year 7 it would be £196,000. In 7 years’ time, should you decide to sell the house on the open market, pay back what is owed to the owner and pocket the difference, you would benefit from a windfall of £228,000 a year for the following 7 years. Not a bad return! Let’s not forget that the owner, in each case, will have entered into this agreement once you’ve been through all the other options with them. This is solving a real pain for them. The guaranteed rent will almost certainly be greater than any interest they would have received if they had sold the house and banked the money!

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Why geography can play a part Property prices in the South of England have recovered since the financial crash. In the vast majority of places, houses are worth more now than they were in 2007. However, in many parts of Northern England this is not the case. In the North, many towns and cities have house values which are similar to or even below where they were in 2007. This means that there are a lot of property owners in the North who have a mortgage which is very close to the market value of the house. In some instances, the mortgage is greater than the house value. If the owner doesn’t need to sell, and they can keep up with the mortgage payments, there is no problem. Eventually, the house will increase in value and they will have some equity again. However, if they do need to sell, a problem quickly arises. As an example, let’s say that somebody in this position has a house worth £120,000, but their mortgage is £117,000. They can’t accept an offer below the full asking price, as they won’t have enough to clear the mortgage. Even if they get the full market value, by the time they have paid legals and possibly an agent, they will only just have enough to clear the mortgage. At which point, you might ask why they are selling. The reasons are many and varied but will often be linked to the mortgage payments. They may be struggling to keep up with the mortgage due to a change in their circumstances, they may be in arrears – with the bank threatening repossession, or they may just wish to relocate to another part of the country. The trouble is, unless they get the full asking price, they are going to have to put their hand in their pocket to find

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the difference. For some people, this may not be an option. This is where you may be able to help them out. You could offer the full asking price for the property (or possibly more) but would need to have the option to pay this over the next few years. During this period, you would cover all the outgoings (mortgage, insurance etc.) allowing them to walk away from their monthly debt commitments. You may even strike a deal where you “babysit” the mortgage to the end of the term, at which point you take over ownership of the house. Now, take a look at some thoughts from Gavin, one of my mentees: Case Study 2 I started some mentoring with Pete and copied one of the strategies that was working for him. I put some fliers out in Darlington, in the North East. One side of the flier was aimed at people who were needing to sell quickly, and the other side was for those who were looking for a guaranteed rent on their property. I had a call from a guy who had been trying to sell with an agent, but because his mortgage was almost at the same value as his property, he couldn’t accept low offers. Unfortunately, low offers were all he was getting. It turned out that he had been made redundant 8 months ago, and was now 6 months behind with his mortgage. The bank were on the verge of repossessing. He knew that if this happened he risked bankruptcy, and a major issue with his credit file for years to come. To begin with, I asked him what the best outcome for him

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would be. He told me that he just wanted to walk away from the house, move back to Newcastle and start again. He owed the bank £2200, and he had other debts of £3250 – so a total of £5450. I offered to pay off his debts of £5450, and take over the mortgage payments. There were 11 years left to run on an interest-only mortgage, which was costing him £324 a month, plus £21 insurance, totalling £345. The property was a 3-bedroom semi, and needed a new internal paint job, but was otherwise ok and would fetch a single let rent of £580. It had 3 decent sized bedrooms and 2 reception rooms with a galley kitchen, so it would make a 4-bedroom HMO, as it was very central. The cashflow would be greater, and it needed very little work. All we really needed to do was buy the furniture. We signed a lease option agreement for 11 years. I paid all his debts off, and he was over the moon. The HMO revenue is £1290pcm. After all bills, this drops to £550pcm or £6600 a year. Over 11 years, this will be a profit of £72,600. Plus, I should have some equity in the house. This set of fliers have got me 3 deals so far, and I am speaking to another landlord this week. I used the wording that Pete gave me, and he also helped me set up my two websites – one for motivated sellers and one for the guaranteed rent option. With all of my mentees, I constantly stress the importance of trying to identify the pain point of the property owner, and finding the best solution for them. If you can relieve their pain, there’s a very good chance that they can benefit you

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too. In Gavin’s example, this was a classic win/win. The owner was able to walk away from his problems (which were debt-related), escaping repossession and a major impact on his credit file. Gavin would take just over a year to recoup his initial cost, and then have £65,000 profit over the term, with the likelihood of a decent bit of equity in 11 years’ time. Whilst the wording on the fliers is very important, the relationship you build with the motivated seller is the key (see chapter 6). There are other ways to find deals than putting out fliers, and I look at some of these in the next chapter. You’ve probably worked out by now that for a lease option to work, the owner must not need the money from the sale. The majority of people who sell a house need the cash to buy another one. These people are not lease option candidates. However, many landlords will be trying to sell a house which is causing them pain, and they won’t necessarily be looking to buy another with the cash received. If they were going to put the money in the bank, it would make more sense for them to get the guaranteed rent money, in the form of a lease option.

Case Study 3 One of my early lease options was on a large, detached house in Gloucester, which was on the market for £365,000. It was an investment property and had been rented out for the previous 5 years. However, the owner was working in the Middle East and had put it with a local agent to manage.

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Two successive families had caused headaches with the rent – the second one had needed a court order to evict them! Thus, the owner had reached the end of his tether and put it up for sale. However, he also had it up for rent, which is what grabbed my attention. If a property is up for both sale and rent, this immediately indicates that the owner probably won’t need the money from a sale immediately. After all, they are happy to rent if they can’t sell. These are great lease option candidates! I made contact with the owner, having gone through the agent (important not to cut them out) and negotiated a 7-year option with him. The single let market rent was £1200 a month, but he was seeing a net rent of about £900 after all costs…and this was when the rent was actually being paid! As usual, I offered the FRI lease, allowing him to walk away with no worries. We agreed a monthly lease fee of £800 and a 7-year term. The owner had a mortgage of £190,000. So, if he had sold for the full asking price (£365,000) it would have given him about £170,000 after sale costs. If he had put the money in the bank, he might have received 1% interest on this, which would have given him £1,700 a year or £142 a month. Instead, the lease option was giving him £800 a month. After his mortgage cost of £340 a month, it still left him £460 a month profit. This is a difference of £318 a month, or £3816 a year. Over the 7-year term, this is £26,712 – not to be sniffed at! When I make my full offer letter (a really important part of the process), I highlight all these numbers, as I need to

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stress the major benefit (for them) of entering into a lease option. To do this properly, I need to have all the numbers, including their monthly mortgage payment. It is often this letter which leads to the agreement taking place – so it’s extremely important to get it right. As with any service, you need to sell your proposal to the buyer. Think of your offer letter like a sales pitch.

The Numbers and the Result The above project didn’t take a lot of work to convert into a 6-bedroom HMO, not least because I’d negotiated as part of the deal that the existing furniture should remain (he’d let the house furnished). The master bedroom was en-suite, there was a family bathroom, and downstairs there was a separate shower room and a toilet – plenty of facilities for 6 people (5 beds, plus one reception converted to the 6th bedroom). Gross rent: £2600 Costs Lease fee £800 Bills £450 Voids/maintenance £260 Total: £1510 Net Profit: £1090 This cashflowed at £1090 a month, or £13,080 a year. Over the 7 years, this was £91,560.

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Working on the 5% compounded increase in value, this made 40% over 7 years, so the property (which was worth £36,000 at the time of signing), could well be worth £510,000 in 7 years’ time. This represents an equity increase of £146,000. You may remember me mentioning in Chapter 1 that the average pension pot in the UK is £45,000. So, this one lease option could well provide a “pot” three times as great in seven years’ time. Truly a powerful investment strategy!

Rent To Own There are many people in the UK today who would love to be able to buy their own house. However, for a variety of reasons, they can’t do this. They may not have the cash to stump up a chunky deposit. Alternatively, their credit may be poor, or they may be new to the country – both of which will prove difficult when applying for a mortgage. At the same time, there are many landlords in the UK who would bite your hand off if you could offer a permanent solution to the three landlord curses. For any landlord, the dream is to find a solution which ensures that they’ve got tenants who always pay the rent on time, who look after all maintenance bills and never leave the property, so no voids. Sounds like paradise, right? Some of these landlords will be planning on selling up at some point in the next few years, but just not yet. Or, maybe they have a portfolio of properties and need to sell them off one by one over a number of years, to minimise their Capital Gains Tax bill. All they need is a willing tenant, who wants to buy. Hmm, I think we may be able to help…

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Here’s the thing: Lease options can be the perfect solution for both of the above groups of people. The person who wants to buy but can’t, can move into the property that the landlord wants to sell (but just not yet). Perfect! Once this person moves in, they become the tenant buyer. They have the lease option attached to the house. The rent would usually be below market rent, to reflect the fact that they will look after maintenance, always pay the rent and never cause a void… In terms of the option price agreed, it’s usually market value at the time of signing the option, with an annual increase of 4%. It’s about striking a balance between the landlord – who wants to maximise the price, and the tenant buyer – who wants to keep it low. I have found 4% to be about right. I structure these deals so that it’s a fabulous triple win. My win is that the tenant buyer pays me a fee for sourcing the property for them. The landlord will also pay a fee for finding them the perfect tenant. The tenant buyer’s win is that they are in their “forever home” and are paying below market rent for the property, safe in the knowledge that they have the option – but not the obligation – to buy at any time during the option period. In the meantime, they can repair their credit or raise deposit funds in readiness for getting a mortgage. As for the landlord, they finally have their dream tenant – one who looks after all maintenance, pays the rent on time, and there are no voids. Nirvana for the landlord! Not only does the tenant buyer look after maintenance issues, but they also start treating it like their own house. They redecorate, and I’ve even known them to replace kitchens and bathrooms! They have a homeowner’s mind set, even though it’s not

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legally their home yet. Like I said, it’s a triple win. I also help to set up a monthly payment from the tenant buyer into a solicitor’s escrow account, usually £200 a month, which builds up over the years and goes towards their deposit. On a 5-year option, this would be £12,000. If they decide not to go ahead with the purchase, it is returned to them. Finally, there is the letting agent – the person with the large list of landlords, some of whom will fit the bill above. I work with letting agents and split the fee with them. The big win for them is that they get to manage a property which needs next to no management, but still get their monthly fee from the landlord. Hopefully, you can see how flexible the PLO is, and how many problems it can solve!

Overseas PLOs From 1996-2007, a lot of people saw the value of their property increase by 300-400%, which is a pretty mighty increase. Suddenly, they had the opportunity to pull out equity from the property, to act as the deposit for that Spanish villa they’d had their eye on for a while. A lot of overseas holiday homes were bought during these years, at prices which have fallen a long way since then. Many people who bought these villas would now like to sell. The trouble is, the price they would get is well below what they paid, which could mean they are in negative equity (the mortgage is greater than the property value). This would mean them putting their hand in their pocket for the difference.

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This is prime lease option territory, where the owner would take a monthly lease on the property and hand over control for the term, with an agreed price paid at the backend. The owner gets a guaranteed monthly income, and the option holder can combine the use of the property with renting it out to bring in the required income. At the end of the agreed option period, they would also have an asset which is likely to have increased considerably in value. There are many people in the UK who would love to have a place in the sun, but couldn’t afford the 30% deposit which Spanish banks are asking for at the time of writing. Having a lease option on a property where the monthly payments are often under £1000 would work brilliantly for them. Often, the weekly high season rent would cover the monthly payment. Many of the mortgages have still got 10-15 years to run, and I’ve brokered a number of deals involving “owner finance” – a situation where the agreed purchase price is divided by the number of months agreed at the outset. Once the last payment is made, the legal ownership of the property transfers. With owner finance, the new owner has a property with no debt attached to it – a fabulous result! Case Study Property: 3 Bedroom Villa in Malaga. The owner had bought this property in 2006, on a capital and interest mortgage, and had 8 years left to run. His monthly outgoings, including service charges, were 1100 euros. He hadn’t used the villa himself for two years – instead he had been renting it out. He had used a local rental acency to

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manage this, who proved pretty hopeless, and now he was just looking for somebody to take over all the monthly payments. In return, the new “purchaser” would own the villa outright in 8 years’ time. It had been purchased for 465,000 euros in 2006, and was worth 180,000 euros at the time the deal was negotiated. In 8 years’ time, the value was likely to have increased substantially, as the Spanish market was starting to move again. If the owner sold at the market value of the time, he would have sustained a loss, as the mortgage was higher. Consequently, he was delighted to have somebody to take over the monthly payments. I very quickly found a willing “buyer” who paid a £10,000 fee to me for finding him the deal. There is a lot of money to be made brokering these deals, and there are thousands of them out there!

What happens at the end of the option? As I’ve already mentioned, it’s very important to use a specialist solicitor for all lease option agreements. It’s equally important to make sure the structure gives you flexibility. You need to make sure the following are all possible throughout the period of the option: 1. You have the option to purchase at the agreed price. 2. You have the option to hand the house back to them at the end of the agreement. 3. You are able to assign the option to a third party.

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4. You can sell the property on the open market, and pay them the agreed price from the proceeds. The only reason you would hand the property back would be if the market had dived and the property was worth less than the agreed option price. It’s important to be able to assign the option to another person, as your circumstances may change, and you may decide to sell the deal on to another investor. This raises an interesting question on the deal that I outlined above. How much do you think the fee should be for a deal which brings in £91,000 over 7 years, and has a likely equity increase of £146,000? I’ll re-visit this question in Chapter 6. You also need to be able to sell the property on the open market, rather than just be restricted as the purchaser. You may wish to purchase it, which is fine, or you may not be in a position to do so at that point in time. If you don’t have this in the contract, you may not be able to realise the equity that has accrued. I hope you can now understand why I titled this chapter “the best kept secret in property investing”.

Chapter 5: Finding The Right Property

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“Nothing in this world can take the place of persistence.” Calvin Coolidge. One of the biggest keys to your success as a property investor, is being able to find the right property for your strategy. There are many thousands of properties for sale each week, but only a small percentage of these will fit with your strategy based on price, area and internal layout. There are also many properties where the owner wants to sell, but which aren’t advertised on traditional online portals such as Rightmove. In fact, they may not be advertised at all! With this in mind, it’s often not so much about finding the property, but more about finding a person who is motivated to sell. If you can make contact with the seller directly, the chances of finding a great deal are considerably higher. If multi-let investing becomes your strategy, which is something I would strongly recommend, then we have already discussed the need for a minimum of four lettable rooms (five is better) plus a communal room. Thus, the property must be of a minimum size to tick this box. In addition, we also need it to be fairly central within a town or city, or on a major bus, tram or train route. These two factors will narrow our search down.

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Estate Agents and Letting Agents I still hear people say that you never get any great deals from estate agents, or that you have to go “off market” to find the real gems. Whilst I recognise that there are some cracking deals available by going direct to vendor (D2V), building relationships with the agents is also vitally important. Agents have a level of insider knowledge which can be really useful. Estate agents will often know the reason behind the sale, having built up a relationship with the seller. This includes whether they need a fast sale, which means that they will be likely to take a lower offer if the sale can be completed speedily, or whether they would consider a long-term rent (the first criteria of a lease option). Letting agents have hundreds of landlords on their books. When they fully understand the deals that I’m looking for (and I make sure I spend time educating them) they can be of great help in brokering the deal. Here’s the thing – the agent’s main priority is to get paid! Thirty-one per cent of sales fall through every year in the UK, for a host of reasons. Usually, it’s because of chains breaking down or mortgage applications failing. Even if a sale goes through, the average time taken is 13 weeks. When I sit down with agents and explain the key principles behind a lease option, one of the first things I tell them is that they’ll usually get paid within a fortnight, as the paperwork for options can be completed very quickly. When the penny drops, they are keen to know more! I sometimes hear people say that you should cut the agents out of the deal, and go behind their back. This is very short-term thinking. Why build barriers, which will guarantee getting no deals from them, when you

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could be nurturing the relationship and making it a win/win? Most agents understand HMOs and the sort of property and location that will be needed to fit that profile. However, lease options are often a mystery to them, not least because they can’t begin to understand why somebody would sell their house anytime in the next 3/5/7 years, at today’s value. To start off with, I normally arrange an initial appointment with the agent, and explain that I have something to discuss which will be to their advantage. This gets their interest. It then takes me about 20 minutes to run through all the key points with them, to make sure they know exactly what I am looking for. To illustrate how I negotiate lease options on properties with agents, I will run through the details of a recent lease option attempt: I organised a meeting with the owner of an upmarket independent agent, somebody who had been a director at Savills for years, but had left to set up his own business at the high end of the market. The aim of the conversation was to discuss lease options and how these deals would result in a great win for all three parties: him, the property owner, and me. He admitted that he’d heard of them, but didn’t really understand them. I went through my usual presentation, and by the end of it he was sitting there nodding with a big smile on his face. He fully understood that this could indeed be a triple win! Now, here’s some background on the project itself: A house I had driven past many times in Cheltenham had

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been up for sale for 10 months. The original asking price was £1.2m, and it was a fabulous period building. It had 5 large bedrooms, two big reception rooms, a large kitchen and a separate three bedroom flat in the basement, with its own entrance. It had been on sale with 2 agents previously. On three occasions, the sale had progressed close to exchange, but had fallen through each time. The price had been reduced to £1.05m. Eventually, I knocked on the door of the house. I explained to the owner that I had noticed his house had been on the market for a long time, and wondered whether he would be interested in a long-term rental on the property, preferably for a minimum of 5 years. He told me that they had already thought about letting it out if they didn’t receive an acceptable offer in the next month. This was encouraging news. It turned out the reason for selling was that the whole family were moving to the USA. However, his company were going to provide rental accommodation, so he didn’t need the money from the sale to buy another house. These were perfect conditions for a lease option. I went on to explain that I would like to buy the house, but couldn’t do so at the moment. I could offer him the original asking price of £1.2m, but would need to agree a minimum option term of 5 years, preferably 7. In the meantime, I would pay him a guaranteed monthly lease payment on a fully repairing and insuring basis, which would free him up completely. This was ideal, given he was going to be out of the country. The owner told me that he was definitely interested, and would give my proposal some thought. I explained that I wasn’t trying to cut the agent out, and would go to them to

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explain my proposal and put the offer in writing. Then, if he wanted to take it forward, the contract could be drawn up on a timescale to suit him. As for my plans if I was successful, I thought that the house would make an excellent HMO. It was very central, with plenty of parking. The main house could take six tenants, with three in the basement flat. They were very large rooms, and I was confident they would fetch a rent of £550pcm. Proposed numbers (monthly) Gross rent of 9 x £550 = £4950 Minus £495 (voids + maintenance) £650 (bills) £2500 lease payment Profit: £1305 Because there were separate entrances, the main house and the basement flat would be considered separate dwelling houses, meaning no planning permission would be needed. A full market rent for this property would be £3000 a month, but I would offer £2500 as a guaranteed payment. If accepted, the numbers above would give an annual profit of £15,660. Ideally, I would want an option of a minimum of 5 years, giving a total profit of £78,000. The actual market value was about £1.1m, so an offer of £1.2m was fair. If a 5-year option was agreed, working off a 5% annual increase, the new value would be approximately

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£1.45m, and a 7-year option would give a new value of £1.54m. This would give me between £250,000 and £350,000. Either way, a decent equity increase. I would pay the agent a fee of 1%, plus a promise of business at the back end if I put the property on the open market. This meant an upfront fee of £11,000, which is quite chunky. However, going back to what I said about building relationships with the agents, I hope you can see the power of dropping a fee of £11,000 to the agent just a few weeks after seeing the property. This is guaranteed to keep you “top of the list” when potential lease options come along! The fee only represented about 7 months’ profit, so it would be well worth paying. Not only would it help to secure this deal, but it would also help me gain access to other deals. This deal went to the solicitors for the contracts to be drawn up based on a monthly lease fee of £2600 and a 6-year term. However, just before they were signed, I had a call from the owner to say that his marriage had broken down and they were separating! As a result, they would need to sell to allow the profit to be split between them. So close to signing a cracking deal…it sold three months later for £915,000. Suddenly, they became very motivated sellers, and somebody picked up a bargain! I was gutted. Another reason I put this example in, is to show that expensive houses work for lease options. It’s not about the house, it’s about the circumstances of the seller. I have completed many options on houses below the £500,000 mark, but am now actively seeking options on high-end properties. I recently had a long conversation with the owner of a £2.5m detached regency house, who was moving to the South of

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France. He had no mortgage on the house, and didn’t need the money from a sale. He was thinking about offering me an option, but sadly we couldn’t agree terms that worked for both of us. Also, at the time of writing, I am in the process of negotiating a 6-year lease option on a large, 7-bedroom period house, worth £1.6m. This was brought to me by an agent. Again, I don’t mention this to impress you, but rather to impress upon you that lease options can work with top-end houses. Develop your relationship with agents, show them that you are looking to work in a kind of joint venture capacity, and the deals will come. I often entertain agents at Gloucester Rugby Club, which includes lunch or dinner before a game, and decent seats at the game. It’s a good opportunity to build rapport in a relaxing environment!

Online Agents If a property that you like the look of is being marketed by an online agency, such as Purple Bricks, the owners will almost certainly be doing the viewings themselves. This gives you immediate contact with them, and allows you to start building the relationship. You can find out whether there is the flexibility for a rent-to-rent, or possibly a lease option. Depending on their situation, it might be the case that they are willing to take a lower offer for the sale. You may get some of this information from the agent, but there is nothing better than meeting the owners to drill down a bit further into their circumstances.

Using The Property Portals The two main property portals are Rightmove and Zoopla.

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Rightmove is the biggest, with over 800,000 properties at any one time! It has a map listing option for the area you are searching, making it easier to see where the potential deals are situated. You can also set up email alerts, by applying filters. The site will alert you as soon as something matching your criteria comes along. In addition, there is an option to look up historical price data, which allows you to see the sold prices for all property in the last 20 years or so. If you find an off- market deal, and want to see what the likely market value of the house is, then you can use the data on both portals to bring up some reliable comparables. You can also check to see which houses are for sale and/or rent at the same time, which is perfect lease option territory. Plus, there is a date listing option on Zoopla, which allows you to see the houses that have been up for sale for the longest time. Again, this could indicate a motivated seller or somebody who is willing to look at a more creative solution to their problem.

Going Directly To Property Owners Whilst agents can be worth their weight in gold, there’s no substitute for being able to go directly to the property owner. The below is not an exhaustive list, but it will certainly get you started! HMO landlord letters. Every council within the UK keeps a list of all licensed HMO properties and the licence holder for these properties. You can contact the council and request this list, who will then give you the information that you need to write to the owners. Most owners will be happy with their investment and have no intention of selling. However, there will always be some frustrated landlords looking to sell, or

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who would agree to either a rent-to-rent or a lease option, to remove themselves from the management role. If they are looking to sell, it may be possible to negotiate a good price, particularly if you have funds yourself or through a private investor and can proceed quickly. Because this list is only for the licensed HMOs (3 storey with minimum of 5 people) there will be many HMOs where the council don’t have details. However, as universal licensing looks like coming in this year for all HMOs, the council will soon have details for all properties. In my letters to landlords, I explain that I am a property investor looking to add to my portfolio, and that I am in a position to proceed quickly, as I’m not in a chain. I also open the door to a R2R or a PLO, as I explain that I would be happy to take over the property for a minimum term, during which I pay them a guaranteed rent. These letters have to be sent out regularly, as it can often take more than one letter before the owner reacts! Facebook Targeted Ads. You can set up geo targeted ads on Facebook, where you can have your ad appear within a certain radius of a city, town or even a postcode. You can also target the interests of people who can see your ad, to include property. The aim of the advert is to secure an email address from a landlord, and some sort of “lead magnet” will be required to get this. The ad has to be worded to entice them to click, and then give their email information. It has to be fairly irresistible. For example, “The 5 things every landlord must know in 2018 to save you a small fortune.” As a landlord, if I saw this then I would struggle not to click! Needless to say, the information should be of a high standard, as this is meant to be the beginning of a trusting relationship! Once you have

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their email address, you can now begin to explain what you do and how it may solve the pain that they are experiencing… Newspaper Advertising. Placing a small ad in the property section of the local paper can work wonders. I have benefitted greatly from this approach. In my ad, I’ll state that I am looking for property to rent for a minimum of three years, for corporate clients. Any landlord who sees this might be tempted to make contact, to offload their property to you. At this point you can start to build the relationship, discover what their current problem is, and try to provide a solution. Connect with local tradesmen. Many local plumbers and electricians will do work for landlords. As a result, they’ll know whether these landlords are looking to sell or are just having a difficult time with their properties. I would suggest incentivising them to come to you with any relevant information. I offer £500 for information which leads to a deal. Don’t forget, a deal will only happen if the property owner is getting a win, so the tradesman is assisting this process and deserves to be rewarded for their efforts. Interestingly, once they receive payment, the referrals start to flood in! Join the local landlord association. Apart from being a useful source of information about all things relevant to landlords, joining the association will give you the opportunity to meet other landlords and build relationships. Some of these landlords will have problems that you may be able to solve. Gumtree. Because this is a direct to vendor site, you will be making contact with the owner. There are properties for sale and properties for rent. Some of the sellers will be motivated, and need the money, so may well be up for a lower offer – if you can guarantee speed and certainty. Those looking to rent

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their property may be open to a conversation which leads to a rent-to-rent, or possibly a lease option. Fliers. I often hear property investors moaning that “fliers don’t work”. Hmm, interesting that I continue to receive these through my letterbox every week. From Chinese takeaways to tree surgeons, carpet cleaners to estate agents, fliers are used by a wide range of business people. Like all strategies, they will have a return on investment, so it’s foolish to turn your nose up at this. The problem that most people have is that they give up too quickly. You need to be consistent. Use the fliers/leaflets as part of an ongoing strategy. Send them out regularly. When I started, I put out single-sided A5 fliers with a “name, rank and serial number” layout. The fliers contained my company name, a brief word about me buying “any house, any condition”, and my contact number. At first, I had very little response. No surprise there. I researched into different strategies, and found a man in the USA who was having great results. He was sending out a double-sided A4 flier on different coloured paper. It worked on the usual AIDA principle (attention, interest, desire and action), but he had also included lots of useful information concentrating on the potential pain points of property owners, and the benefits that he could offer in helping to solve them. This approach changed my return on investment overnight! Each of these different methods will have a different success ratio. The key to getting lots of leads is to experiment with a number of the above, until you have enough information to decide which ones offer you the best results.

Chapter 6: Making money from sourcing and trading deals!

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Two years ago, I put out my usual bunch of fliers looking for BMV, R2R or lease options. I had a call back from a guy who had a 2-bedroom terrace house, in a rough part of Gloucester. He had been renting it out, but the previous tenants had trashed it, and now he didn’t have the cash to bring it back to a great lettable condition. As a result, he hadn’t been able to let it, so he put it with a local estate agent to sell. All of this had occurred roughly 6 months before he called me, and in the meantime he had been messed about by 2 buyers. He’d accepted offers from both, only for them both to pull out. One of them couldn’t raise the funds, and the second had his mortgage refused. So, the owner had to pay the monthly mortgage whilst getting no revenue. He was frustrated and motivated! I went to see the house and was shown round by the owner. It was originally on for £125,000 with the agent, but I felt this was optimistic. My due diligence prior to having the viewing suggested a true market value of £115,000, in good condition. Given that this property needed approximately £10,000 spending, the value in its present condition was closer to £105,000. In fairness to the owner, he appreciated this, but also realised that if he wanted the cash as soon as possible then he would need to be realistic in his expectation.

It’s all about the seller It’s important to understand the priorities of the seller. By the time I was speaking with this man, he had already been royally messed about by two previous “purchasers” and was now needing two things: speed and certainty. Putting the house on with a local agent offered neither. As I mentioned

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earlier, 31% of sales fall through in the UK. Even if successful, a sale can take months to complete. The house didn’t fit my strategy for HMOs, as it was always going to be a single let. However, if I could negotiate a lower purchase price, I could do one of three things: •

Buy myself.

•

Refurb and flip (sell on).

•

Pass on to an investor with a more suitable strategy, and get a fee for brokering the deal.

In the end, I chose the third option. In these circumstances, it’s vital that you can demonstrate to the seller that you are able to proceed in the time frame that has been agreed. To do this, I always bring a screenshot of “proof of funds” with me, which shows that there is money in the bank account, ready to be transferred. I offered £75,000, based on a 21-day completion, knowing that if I didn’t find an investor who could complete in that time frame then my JV partner and I could do so. I was honest with the owner, and said it would be bought for £75,000 within 21 days, and it would either be bought by an investor whom I introduced or I would buy it myself. Either way, he would get his money! As I mentioned in Chapter 1, I feel strongly that sellers should never be messed about. Make sure you are certain about what you can and can’t do, as they are in a stressful position. Empty promises will only make things worse for them, and will destroy your credibility at the same time. In this case, the owner accepted my offer. This is what

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happened next: •

I emailed him a Heads of Terms document, and a copy of a lockout “option’ for 21 days, which he signed and returned.

•

I then telephoned 3 estate agents, who had their “black book” of cash buyers, and explained the deal to them. I was explicit that I only wanted them to talk to investors who could show proof of funds and who could complete in 14 days. The first one to offer the asking price of £75,000 had the deal.

•

Three investors turned up to view, and one of them was clearly serious, bringing proof of funds and his solicitor’s details. He ended up buying the house for £75,000, seventeen days after I had shaken hands with the seller to confirm the price.

Everybody Wins This worked out well for me, because the buyer paid me a £5,000 sourcing fee. From this, I paid the estate agent £1,000 for introducing the investor – which left me with £4,000. A decent return for brokering the deal. As part of my fee, I progressed the deal through to completion, making contact with both solicitors to explain the urgency and helping to move to completion in the agreed time frame. What often holds up a solicitor’s work is waiting for local searches to come back. However, these can be indemnified (insured) against for a small fee. As long as the property title is “clean”, the purchase can be completed in a couple of days if necessary. The seller was really pleased to get rid of the property and

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have the cash in his bank account, just 17 days after calling me. I had solved a long-standing problem for him, and he was very grateful for this. The buyer was chuffed, as he would spend £10,000 getting it back to a good condition and then rent it out – another single let added to his portfolio. After buying costs and my fee, he had spent £86,500 which gave him about £18,000 equity in the house from day 1. Even if he never took a mortgage on the property and just left cash in the deal, he would still get about a 7% yield on this single let. This was better than keeping the money in the bank, and he would gain equity over time… The “buy to flip” option can be a great strategy when working with a JV partner, as funds are only tied up for a short while. The usual benefits of having cash come into play – namely that the seller will accept a lower price, and completion can be very quick. This allows work to be done on the property if necessary, and the property can then be sold on for a profit.

Auction? Another option is to buy for cash and immediately put the property into auction. It sounds counter intuitive, but it’s better to do no refurb work at all. Many people who attend auctions are looking for a “project” to put their stamp on, and properties in poor condition sell well! The advantage of auctions is the 28-day completion period (can be 14 days if you make this a condition) so you will get your funds back quickly (assuming you have pitched your reserve price correctly and it does actually sell).

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There’s always a fee available Once you start to invest in property, and start sourcing your own deals, you will come across properties that don’t fit into your strategy. However, if it’s a good deal, you will be able to move the property on for a fee. It will always fit somebody’s strategy! When looking for the signs that a property can be moved on, always check to see whether it meets one of the following four criteria: 1. Below market value. The larger the BMV %, the better the deal. 2. Can value be added? This may mean turning it into a high cashflowing HMO, or perhaps it has a large garden with a side access road. Alternatively, maybe you’ve worked out the price for work on a back, side or roof extension, and the end value allows it to be sold on for a big chunk of profit. There are so many ways to add value! 3. Does it have the size and internal layout to be a rent-to-rent property, something for which you will always find a ready buyer? 4. Is there a lease option available on it? This will work for any property! After you’ve received your first fee for a deal, you will probably start thinking that you can do this as an additional cash flow strategy to fund your purchasing! If so, you are totally right! There will always be plenty of takers for a good deal. The main steps involved in this process are as follows. I am the sourcing agent in the points below.

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1. I find the deal, either working towards matching an existing investor’s strategy or putting the deal out to all his investors. If he has no existing list, the deal will usually be promoted on social media. Without doubt, the best way forward here is to build a list of investors, all of whom should complete a detailed questionnaire about their investment criteria, to include geography, budget, type of property required etc. Proof of funds should always be requested to avoid time wasters. You can then source to order. 2. I negotiate the price with the property owner. This process should never be carried out by the investor. 3. Once an investor has agreed to run with the deal, I email them a copy of the contract, which they sign if they wish to proceed 4. They pay a reservation fee to me to reserve the deal. 5. They then have a period of time to do their own due diligence on the deal, to make sure my numbers are realistic, and that it stacks for them. 6. The deal is handed across to the solicitors, who progress it to completion. 7. I would then receive the balance of my fee. Point 5 is worth expanding upon, as it’s important for the investor to be given a bit of time to do his own research and make sure the deal is everything I have painted it to be. In truth, once you’ve completed a couple of deals with the same investor, trust is built up and they start to know what to expect.

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I’ve mentioned before that many deal sourcers overpromise and underdeliver. Disappointing, but true. If you’re ever buying from a sourcer, the numbers will always need checking very carefully. In particular, you should pay close attention to the level of BMV that they are claiming is built into the deal. You will need to go onto Rightmove or Zoopla, and look at comparables, as well as recent sales in that postcode. If I don’t know the area, then I will also call three local agents to get some local knowledge. Always speak to the valuer, and not the first person who answers the phone, as there is a big difference! Be careful not to give the exact address, but instead I would say something along the lines of, “I’m negotiating the purchase of a 3-bed semi-detached in x street, and would be grateful if you could give me a likely ballpark value. The condition is poor/fair/good.” If they know their patch well, you will often get 3 numbers close to each other. This will soon let you know whether the sourcing agent is on the money! Here’s an example to demonstrate the above point: A couple of years ago, when I was looking for deals, I came across an advert from a sourcing company in one of the national property magazines. It was aimed at investors and was offering a month’s free membership to receive their various deals. If you liked the service, you could pay the ongoing monthly subscription. I ran with it, and duly received half a dozen deals in the first week. There was enough information in the deal sheet to assess the deal and decide if the level of BMV advertised did stack up. They guaranteed 15% BMV, which wasn’t a great

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starting point. They were generally houses in northern towns, where 10% could be haggled off the price via the estate agent without too much of an effort. Two things then happened, which killed the “deal”. Firstly, my own due diligence showed that the “market value” they attached to the properties was inflated. Not by much, but enough to adversely affect the final ROI. Secondly, there was a double sourcing fee to be paid. A fee of £3000 was payable to them, and another £3000 was payable to the sourcing agent which they used! That’s right, they were buying in deals from other sourcing agents and then passing on the cost. Another £6000 of costs to be added to the spreadsheet. The result? I was finding that the costs of the deals were similar to me paying full market value! Needless to say, I cancelled my subscription. Be careful out there!

Hire a Virtual Assistant In the previous chapter, I mentioned a number of different ways that you can find properties and motivated sellers, which you will need to spend time on if you’re thinking of packaging and selling deals yourself. And it does take time, believe me. However, once you are familiar with the process, I would seriously consider farming out this “data scraping” to a virtual assistant. I currently use one in the Philippines, and have previously used one in India. If you get the right one, they can be worth their weight in gold. Virtual assistants are responsible for filtering all the leads down to a shortlist, which they present to you each day. This can save you many hours of legwork! There are a number of websites out there for finding

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virtual assistants, including: www.peopleperhour.com, www.upwork.com, www.fiverr.com and www.onlinejobs.ph You will generally pay an average of £3-4 per hour, which is a good wage in many of the countries where the VA is based. My advice is to take out a month’s subscription on a site like onlinejobs.ph. Once you plug in the fact that you are looking for a VA, all the prospective candidate details are available for you to inspect. This will allow you to draw up a shortlist, and I would then set them a task to complete in a specific time, involving a site like Rightmove. This will assist you in making your final choice. Once hired, I use screen capture software such as Camtasia to make a video, where I go through the exact steps that they need to follow for each task. They can watch this video, copy the instructions and very quickly become proficient at bringing you all the data that you need to find some great deals!

How much should you charge the investor for the deal? This is a question my mentees ask all the time, and there is no hard and fast answer. As a guide, packaging up a deal that is available on the portals (Rightmove and Zoopla) would be a fee of around £3,000. However, I’m not just sending an investor to Rightmove! The following steps are important: 1. I will be working to specific criteria, and I will have my VA searching the portals and applying these criteria. 2. Once a shortlist is formed, I will then take over and

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make contact with the estate agent to start building the relationship. 3. I am upfront with them. I explain that I have a cash investor, and we are interested in property x, but that the asking price is too high. 4. I will have done my DD and have a cash price in mind, which I’ll use to test the water with the agent. 5. The agent will usually know the circumstances of the seller quite well, and often give good feedback at this stage. I am quite happy working with the agents, and it’s only if they are un-cooperative that I will attempt to go direct to the seller. 6. I do all the work to get the best price on the property. 7. If my investor wishes to proceed, I provide proof of funds to the agent, and insist that the property is taken off the market, as we will then instruct solicitors. 8. If I hand things over to my investor at this stage, the fee will be around £3,000. 9. However, if I take things through to a successful completion, liasing with the investor’s solicitor and surveyor, the fee will be approximately £5,000. From the investor’s viewpoint, they will be getting a great deal – which will match all their criteria. The fee represents excellent value for money. If I am sourcing a lease option, the fee will be highly dependent on the monthly net cashflow, and the likely equity increase over the term. A lease option in the north of England, with

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£250pcm cashflow from a single let, and low projected equity, will be about £3,000. On the other hand, a southern lease option HMO, cashflowing at £800pcm, and high backend equity can realise a fee of £10,000 to £15,000. Bear in mind some of the examples in the earlier chapter, where 7 years’ net profit could be £60,000-£70,000, along with £70,000£150,000 equity. Suddenly a fee of £10,000-15,000 doesn’t seem too steep!

When can you leave your day job? I asked this question in chapter 1, and it’s worth re-visiting, as you can hopefully now see how sourcing and packaging deals can bring in a decent income. I don’t know what your financial freedom figure is – but let’s pretend it’s £50,000 a year. We’ll also assume that each deal you source and package sells for £5,000. This means that you need to do 10 deals a year to hit your figure. Less than one a month! Suddenly, financial freedom doesn’t seem so far away… A number of my mentees have found this to be a great strategy. It really helps to bring in the funds to build your portfolio. If you can find a great deal, there will always be investors prepared to pay a fee – guaranteed.

Compliance Put simply, this means staying within the law! You will need to do the following, as a minimum: 1. Register with one of the three property redress schemes: the Property Ombudsman, the Property Redress Scheme or the Ombudsman Services. There is a fee to be paid of approximately £250 a year.

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2. Because you will be collecting people’s data, you will need to register with the Information Commissioner. This costs £35. 3. Have a written anti-money laundering policy. Property is one of the ways in which “dirty” money is recycled, and the government are keen to ensure that all transactions involve clean money. All investors need to provide proof of identity, proof of address and proof of funds from a bank account. If you set all this up, as well as ticking the compliance box, you are seen as a professional by investors. This adds to your credibility, and makes it far more likely that people will want to work with you.

A Word About Ethics “Ethics and equity do not change with the calendar.” D.H. Lawrence Property can be a stressful business, particularly for the seller. Deals fall through, people can act dishonourably, and timelines always seem to slip. If you want to stand out from the crowd and be somebody who is referred on to other sellers, then my advice is simple: just do what you said you were going to do, when you said you would do it, and always have the other side’s objective in mind. It’s not complicated. Property deals have to be a win/win. Both parties must come away with something, otherwise it’s a poor deal. I’ve seen investors take advantage of highly motivated sellers who are in difficult situations, and it doesn’t make for pleasant viewing. Act honourably and it will come back to you – maybe

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not immediately, but eventually. More specifically, I would suggest the following: •

Don’t give the seller false hope. Set a realistic timeline and try your best to stick to it.

•

Once a price is agreed, stick to it. Don’t be tempted into brinkmanship at the 11th hour, by dropping your price in the hope that you make more money.

•

Keep the lines of communication open and update regularly.

•

At the initial fact-find meeting, once you have all the information, try and understand exactly what it is that the seller wants to achieve. By having empathy with their situation, you are much more likely to be able to structure a deal which is going to work for both of you.

•

If there is a better option for the seller, which they may not have thought about, explain it to them. It may lose you a deal, but it is the right thing to do.

Chapter 7: Other Ways To Create Cash flow: Rent-to-Rent & Serviced Accommodation

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“Own nothing and control everything.” John D Rockerfeller

Rent-to-Rent Rent-to-rent (R2R) is a creative strategy for developing cash flow. If you don’t have much cash, but still want to get into property, then this is a great option. Rent-to-rent can be used to generate deposits for purchasing property. I know it well, as I was running this alongside the “buy HMOs with investors’ cash” strategy! I touched on R2R in Chapter 3, as it’s a strategy that sits well alongside the HMO model. It could also be described as a lease option, but without the option to buy at the end of the agreed term. However, there are some differences, which I will come to later. It’s technically possible to operate this with a single let model, but it will be much more difficult to get a return. If you have a void with a single let, then there is NO money coming in – which will be a huge drain on your finances. Secondly, the difference between what you are paying the owner in rent and the rent you receive from your tenant will be minimal, thus generating little profit. There is a national chain of estate agents working the model on a single let basis, where they offer the landlord a guaranteed rent. However, these agents rely on having a large number of properties on the scheme at the same time, and high management costs – to which they charge the owner. One of the key principles of the R2R model is that the owner of the property is presented with a seductive offer, which is

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partly linked to them not having to constantly put their hand in their pocket! So, only work this strategy on a multi-let basis. If you are going to be managing the properties yourself, rather than putting them with an agent, then R2R is – in its simplest terms – a property management business. The rent to renter is managing the property for the property owner, whom they are renting the property from. They then put their own tenants into the property, almost always on a room by room basis. Rent-to-rent is about controlling an asset, rather than owning it. The money is made by paying the property owner amount x, and renting it out for amount y, with the difference representing the profit. As I mentioned in Chapter 1, the UK has been experiencing substantial immigration into its larger cities, which has resulted in a huge shortage of housing. This is growing year by year, and the banks are requiring larger deposits for people to buy property, with ever more stringent criteria to fulfil to pass the mortgage application. The result is a massive increase in the demand for rental property, particularly for rooms in shared houses. This is why R2R can work extremely well as a strategy. It’s not affected by any fluctuation in interest rates by the banks. As long as you work your numbers carefully before committing yourself to a deal, it can very quickly result in a decent sized portfolio, large enough to replace the day job income. Some people refer to this as a no money down (NMD) strategy. Whilst there is no purchase taking place, and thus no deposit is required, there will be some money needed, not

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least for furniture if the property is unfurnished. This may be your money, or it may be an investor’s money. So, it is more realistic to call it a “some money down” strategy (SMD).

Why would a property owner let me manage their property? Hmm, good question. Why not use the local letting agent? Of course, many owners will do exactly that. However, as you can see from the table below, the actual amounts falling into the owner’s bank account each month are often considerably less than the headline rent. Managing Agent

Rent 2 Rent

By the time you take off agent fees, maintenance and void periods, the number shrinks fast! Many owners decide to self-manage their properties. They might have heard about the multi-let model, and tried it themselves, but are having a tough time managing all the

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tenants. Unfortunately, often the usual landlord headaches of maintenance bills, voids and problems with late rent prove too much for them, and therefore they’re rather keen to hand these issues across to somebody else! Most landlords just want a hassle-free life, with passive income. It will be a minority of owners who are happy to run with the proposition, but that’s fine, because there are thousands out there to talk to and persuade that this is a sensible route to take…

What are the criteria? How do you start looking for properties which tick all the boxes? The first thing to consider is location. Pretty much the same criteria I applied in Chapter 3 to the HMO areas, applies here too. Rent-to-rents are HMOs, and therefore need to be central or close to transport links, and preferably close to decent bars and restaurants. A top tip here is to have a walk round the student rental parts of town. These have the advantage of already being set up as HMOs, which means there should be no requirement for you to put in fire doors, alarms and smoke detectors. The owners of these properties start to advertise in January for tenants to take over in the September. If a house hasn’t been let by Easter, there is one seriously worried owner, as the consequences of having an empty house come September could be catastrophic! Keep an eye on those houses still looking for tenants, as this is prime R2R opportunity. The properties must be able to house 5 tenants, unlike HMOs which you own and have a mortgage on, where you can get away with 4 tenants (because the mortgage repayments on an owned HMO will be a lot lower than the rent required by

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an owner on a R2R deal). In a R2R, if you only have 4 tenants, this will rarely leave enough profit to make the whole exercise worthwhile. Just as with HMOs, the bills are all paid by you, and this includes council tax, water rates, gas, electric and broadband. The ideal tenant/bathroom ratio is 3 to 1, but 4 to 1 is acceptable. There will often be an en-suite to the master bedroom, and a separate bathroom, allowing 4 to 1 to work just fine. There’s no doubt in my mind that an en-suite will always let quicker and get a higher rent. I have persuaded owners to contribute to the cost of putting an en-suite into a large bedroom, on the basis that it’s adding value to the house. A typical en-suite can be put in for £2500. Nothing fancy – just shower, loo and sink. If not an en-suite, then just an extra shower room in the house, allowing you to keep to the ratio of 1 to 4, can add lots of value. This leads nicely into my next subject – the art of negotiation…

Negotiate Hard The old saying “always ask for twice as much as you think you will get” is worth bearing in mind. Remember, you don’t own the property, and you don’t have an option to buy where you can lock in equity for the future. Your only source of profit is the monthly cash flow. It is therefore very important to reduce the amount that you spend getting the property ready for the tenants, as this is all coming off your bottom line. Negotiate hard with the owner before you sign any paperwork! Ordinarily, I would start by asking the owner to pay the full

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costs of bringing the property up to specification. If they moan, my first line of defence is to mention that no estate agent in history has ever paid for a house to be brought up to spec! Ok, I’m not an estate agent, but you get my drift. The thing is, I fully realise that they are unlikely to pay for all the work, and I’m prepared to go 50/50. However, if I make this seem like a concession on my part, that builds a bit of credit when we start discussing rent. C’mon, Mr Owner, I gave ground on the refurb costs, your turn to give ground on the rent! And guess what? This strategy works. Ultimately, it is about give and take. Some of the houses that you will be offered will be in a very poor state of decorative repair – structurally sound, but in need of quite a bit of TLC. Certainly, many of them will need a full paint job and often new carpets. The chances are the owner doesn’t have the money to do this work himself, which is probably why you have been offered the property. This is where you really do have to take a view, and work through the numbers very carefully. As a rule of thumb, your total “in” costs should never exceed the profit that you will make from your first year, and this is where a 5-year term is agreed with the owner. For example, if your net profit is going to be £650 a month, don’t go beyond £7500 in total spend. This means that while year 1 will be spent recovering costs, you will then have 4 years of profit. In the scenario above, if the owner isn’t able to contribute to the refurb, they need to be flexible on the rent, at least for the first year or two. Most things can be negotiated. Let’s say their contribution for the refurb would have been £3000. This can be recouped by reducing the rent by £150pcm for the first 20 months. If that works for the owner, job done.

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Because compulsory licensing is coming in for all HMOs this year (2018), there can be a fair old cost attached to bringing the property up to speed. The sort of things that will need to be included are interlinked smoke alarms, fire doors and a fire alarm system – which can set you back £3000-£5000 depending on house size. This all needs to be brought into the discussion with the owner. It’s unlikely that they will pay for more than half the cost, but you never know. If the deal is sweet enough, and the pain they’re currently experiencing is acute enough, strange things can happen… If you don’t have the funds yourself to allow for this level of spend, go back to Chapter 4 and work on bringing private investors into your business. A £20,000 loan paid back with rolled up interest over 2 years at 10%, would give your investor £24,000. This could give you the funds for 5 R2Rs. If these give a net profit of £600 each, they’ll bring in £72,000 over 2 years, allowing for a good chunk of profit for you. Plus, if they are 5-year deals, you then have £36,000 a year from these three for the final 3 years, which makes a total of £108,000. After all that, it’s fair to say that your investor will be keen to re-lend you some funds. So, be creative!

Case Study I had a call from a landlord in early 2016, who had received my A4 flier advertising “guaranteed rent”. We arranged to meet at his property. It was only a 5-minute walk from my house in Cheltenham, welcome news and the first box ticked! The property was an impressive three storey semi-detached Edwardian house, with 4 bedrooms on the first floor, two

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more (en-suite) bedrooms on the second floor, two large reception rooms and a big kitchen breakfast room on the ground floor. I was trying hard not to show my excitement… The owner had bought it 6 months earlier, and hadn’t skimped on the refurbishment, spending £160,000 in total. The market value of the property was £750,000. He had originally decided to let it out via an agent as a single let to a family, but having seen my ad, was keen to discuss the concept of a “walk away” arrangement – where he had his guaranteed rent coming in every month. He had suffered voids before with other properties, and having spent quite heavily on the refurb, was keen to avoid a repeat. He was also in the process of getting rid of a tenant on one of his other properties – via the courts, so the thought of the “no hassle, have a passive income” route had its appeal. As a single let, the property would command £2300pcm. The owner understood that after the agent’s fee, at 10% plus vat, he would be down to approximately £2000, before the impact of maintenance or voids. The issue I had with the house’s layout was the tenant/ bathroom ratio. There was potential for 8 tenants in total. There were already 6 bedrooms, and both reception rooms could be turned into bedrooms. I would usually keep one of them as a lounge for the tenants, but the kitchen was very large – allowing for a large dining table, plus a TV/sofa area, which in turn removed the need for a separate lounge. The biggest problem was the lack of bathrooms. There was only one main bathroom, and two en-suites in the attic rooms.

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This would mean the remaining 6 tenants sharing one bathroom, which was not an option. I was really keen to take this house on, as I knew it would be very profitable, but I had to find a solution to the bathroom situation. What it needed was for en-suites to be added to the two largest first floor bedrooms, and a separate loo to be put in under the stairs on the ground floor. I had my plumber price it up, and it came to £8000. I discussed this with the owner, and pointed out that it would add at least £8000 in value to the house, so would he consider stumping up? Err no, he wouldn’t. Hmm, ok. He had already spent a lot of money on the refurb, and was happy to discuss the R2R option as long as it didn’t require him to spend any more cash on the house! If the numbers worked, I decided I would pay for the works myself.

My projected numbers Money required to be spent prior to taking on tenants: En-suites and WC: £8000 Fire doors, interlinked smoke alarms and emergency lighting: £4500 Furniture (house was unfurnished) to include 2 fridges and large TV: £7000 Total spend: £19,500 (He had already installed a decent fire alarm, so I was spared this cost.)

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Revenue projection: These were large rooms, and the house was a 5-minute walk to the centre of town. It had a decent garden and parking for 4 cars, so would be in great demand. I was confident the rooms would get £550 a month for the en-suites, and £500 for the rest. Total revenue: 4 x £550, plus 4 x £500 = £4200 Outgoings: Rent to owner: £1800 Bills: £600 Voids/maintenance: £420 Total: £2820 Potential profit: £1380pcm I negotiated a guaranteed rent of £1800. The owner would get this come rain or shine, and I felt this was a good deal for him. He wanted a minimum of £2000, but when I pointed out that I had picked up all the costs for the en-suites and WC, adding value to his house, he relented and settled on £1800. This left a profit of £1380 per month. In reality, there would be little spend on maintenance on this recently renovated property, and I would expect little or no voids, as it was in such a prime area with great facilities. Thus, the £420 figure allowed for V/M would probably be a lot lower. Total profit per year came in at approximately £16,560 (in reality closer to £20,000).

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My total “in” spend was likely to be £19,500. This is a lot for a R2R, but the profit was good. If I could sign a 5-year deal on this property, the total profit would likely be 5 x £16,500 or £82,000. Taking off my initial spend of £19,500, this still left me with £62,500. Plus, if the arrangement worked well for the owner, there was a good chance he would extend the term beyond 5 years, increasing my ROI. All things considered, I was prepared to break my rule of not spending more on the property than my first year profit. The owner was a bachelor in his 50s, and was never likely to want to live in the property. He made it clear that the income would be a top-up on his pension. So, whilst he was happy to sign the 5-year initial term, he confirmed that he would be happy to extend if all was going well. The win for him was the £1800 dropping into his account every month, and not having to do anything himself. We signed, and it’s a great house, which so far has had no voids and minimal maintenance.

Important Point At first, I tried to get the owner to agree to a lease option, but he wasn’t interested. I wasn’t surprised at this, as he ticked none of the boxes which I described in Chapter 4. He wanted this house as a pension, and had no intention of selling. Had it been a lease option, I would not have worried about spending the extra on the en-suites, as it was an investment in a property that I would either own myself one day or would be selling and benefiting from the added value.

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A word about planning: Once the number of tenants rises above 6, you will need to get planning permission from your local council. As I had 8 tenants in this house, planning was required. It’s a full application, but as long as you can demonstrate that there is adequate parking along with areas for bin and bike storage, it shouldn’t be a major problem.

Maintenance and Insurance With a lease option, you’ll remember that I offer the full repairing and insuring lease (FRI), which means that I’m responsible for all maintenance. With a R2R, I generally have an agreement with the owner where I pick up the maintenance bills to an agreed monthly limit, usually £100 a month. The owner will be responsible for anything over this amount, such as a boiler failing or a cooker that needs replacing. There have been very few occasions where I’ve had to approach the owner to put their hand in their pocket to pay for anything substantial. A top tip is to email the owner every 3-6 months with a brief overview of how everything is going, and always include photocopies of all maintenance bills paid. Psychologically, this is very powerful, as it shows you taking care of their property! If I have a deal where the profit is over £800 a month, and the owner is negotiating hard on the maintenance being all-inclusive, I will consider accepting the responsibility. With this amount of profit, you’ll build a mini-war chest in no time at all, which is vital for those rainy days. Building insurance should be the responsibility of the property owner. They need to make sure the insurer knows it will be used as a HMO. You may decide to take contents

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insurance out, but this will only cover what you own within the house. I tend not to, as it’s mainly furniture and kitchen essentials (crockery, cutlery etc), and by the time I’ve paid the first £100 of a claim and then had my premium raised as a result of making the claim, it’s hardly worth the effort or the expense. A kettle or a toaster only costs £20, so I’m happy to run the risk! You also need to think about Public Liability Insurance, as you will be running a business. In theory, anybody could make a claim against you (tenant tripping over an uneven carpet in the house) and being insured will cover this scenario. Like all things in this book, I can’t offer any professional or legal advice, so you need to talk to an insurance broker who will guide you. I take it out for my property business, and it’s not expensive.

Running the numbers As with all property deals, you have to “run the numbers” to make sure that the deal stacks! If you’re not completely honest with yourself at this point, or you haven’t carried out the necessary research, the actual profit on a deal can be a few hundred pounds lower than the expected profit. It can be tempting to massage the numbers to try and convince yourself that you’ve got a cracking deal, when in reality it’s plain average or worse still, a lemon! I’ve seen this so many times, particularly with people who are early into their investing journey. They are so keen to “get a deal under their belts” that they can blind themselves to the numerical reality!

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The best way to avoid this trap is to use a deal sheet, where the emotion is taken out of the deal, the numbers go in and the ROI pops out! However, the deal sheet is only as good as the criteria you include. As an example, I’ve recently started mentoring somebody who had been following a rent-to-rent strategy that has gone seriously wrong. Their “deal sheet” was more like the back of an envelope, and the numbers weren’t accurate – on three counts: Firstly, he had been optimistic regarding the rent he thought the rooms would attract. A bit more research on the website Spareroom.com would have given a reality check. He was expecting £400 a room per month, and was getting £350. Across 5 rooms, this is a chunky £250 less than expected. Secondly, he had underestimated the bills that would need paying. For 5 tenants in a HMO, he needed to be allowing £450 a month, but was only allowing £350. Another hundred pounds off the projected profit! Finally, he wasn’t allowing for any maintenance or voids (empty rooms). I would suggest allowing 10% of gross rent. His gross rent was £1750, so he should have taken off £175 to cover this. Had these all been in a spreadsheet, my mentee would have seen that the net profit each month was closer to £225, rather than the £750 he had projected! These errors were repeated across his portfolio of five rent-to-rents. He was managing these himself and was clearing between £800 and £1000 a month before tax, instead of the £3000 he had anticipated. Not only that, but he was locked into the deals for another

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two years! Not catastrophic, but not great either. All of this could have been avoided by checking the numbers more carefully at the outset!

How to work out the rent to offer the landlord This is a straightforward calculation, and involves knowing four figures: 1. Gross rent from the tenants. 2. Monthly bills total. 3. Voids & maintenance allowance (10% of gross revenues). 4. The minimum monthly profit you want from the deal. Add 2, 3 and 4 together, and then subtract from 1. The number you are left with is the maximum rent you can offer the landlord. Taking my case study above, I am looking for a minimum profit of £800pcm on a R2R, (with no lease option attached), so I would have been able to offer the owner £2420 after running the numbers. It’s important to remember that this is the maximum rent you can pay, not the rent you have to pay! I negotiated a fair rent on the property, taking into account market rent for a single let, but also taking into account the large expense incurred by me up front. A great way to become proficient at this is to practice! Head across to Rightmove (properties for rent) and start searching for properties in your area that would make great R2R opportunities. Run the numbers on them, and you’ll soon get an idea of the ones which are likely to work. The clue here is when the rent you can offer the landlord isn’t a million miles

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away from the rent that they’re looking for on Rightmove!

How To Work Out The Rent to Charge For Each Room I mentioned the website Spareroom.com in Chapter 3, when discussing HMOs. Once you’ve put your town into the search bar, you’ll see that you can search for “Rooms Wanted” and “Rooms Available”, which will give you three insights: 1. What landlords are charging, and what people are willing to pay. 2. The ratio of rooms available to rooms wanted. 3. The standard of accommodation. Most ads have photos, so you can gauge room size, en-suites or not, quality of décor, etc. This tells you a lot about your competition! Easyroommate.com is also worth a look, although it doesn’t have the number of properties that Spareroom has. You can also have a look at Rightmove to see the rent being asked on 1-bedroom flats or studios. This will act as a marker, as you don’t want to exceed this, even though people renting a flat don’t have all their bills paid.

Top Tips These are powerful platforms for finding tenants, and it’s worth spending time getting to know how they work. For example, on Easyroommate, once you’ve posted your first advert, you can send out a mass email potentially contacting hundreds of people to let them know about your room. Be proactive, don’t just wait for tenants to stumble across your ad! You can also download the app for both platforms,

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making it easier to manage whilst on the move. Consider paying a premium for having your ad appear in bold on Spareroom, as it will then appear higher up the listing, and your main photo will appear on the search results page. Bold ads get twice the enquiries of a free ad. It’s only an extra £12 a week. If you’re advertising a room for £400, and it takes a couple of weeks longer to fill because you aren’t generating traffic, that’s a loss of £200! An extra £12 is small beer by comparison. Take a video of your room, and put this on Spareroom and Easyroommate. This will make your advert stand out, because so few people take the trouble to do it!

Secret Shopper You can only see so much from a photo, so why not respond to a few ads and book in a viewing? Depending on your age, you will either be looking for yourself or on behalf of your son/daughter! This will give you an excellent insight into what your competition is offering, and will build on the perspective that you gained by researching Spareroom. You will thus be better informed about where you need to be pitching your offer to all these prospective tenants.

Test The Demand Before you commit yourself, why not put a dummy ad up in Spareroom, just to monitor the response rate? A bit naughty perhaps, but it will very quickly give you an indication of demand in your chosen street! If you’re almost ready to go with a property and this is your final testing ground, maybe tell those enquiring that you will have another house on

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the same street in a few weeks, and see if they would be interested. There is so much more detail which I could dive into with R2R. However, hopefully the above should be enough to get you started. Rent-to-rent is understandably very popular with new property investors, who have limited funds.

Serviced Accommodation (SA) This strategy has become very popular over the last few years, and is worth considering if you are just coming into property investing. It refers to fully furnished properties, which are available for both short-term or long-term let. The accommodation may also offer facilities similar to those offered by hotels. The most popular (and arguably most profitable) property type for this strategy is a city centre apartment. You can buy them and run with this strategy, or you can operate them on a R2R model, similar in principle to that described for the HMO model. Most SA operators describe their properties as “units”. This could range from an en-suite room in a shared house, more likely to be aimed at blue collar contract workers, or possibly overseas students in the country for a short period learning English. The latter model works well when the property is close to the college, as they probably won’t have the budget to stay in a hotel for the weeks or months involved. A friend of mine, who has a large portfolio of HMOs, has turned some of them into SA units – where he now rents the en-suite rooms out by the night, although most are taken for

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a period of a week or a fortnight at a time. As a HMO he was getting £90-£100 per week for the rooms. As a SA unit, he gets £40-£50 a night. His occupancy level is less, but he only needs to fill it 2 nights a week to equal the HMO income! I am presently converting a large commercial building in Gloucester into 110 en-suite rooms, in 22 pods of 5. This will be part HMO, but almost certainly a section of it will be SA. We will experiment with the different income streams and adjust to suit. A complete house could also be a SA unit, and people turn large guest houses and hotels into SA unit. However, the most popular unit is the 1 or 2-bedroom apartment. As you can see, there is huge flexibility in terms of what constitutes a SA unit!

Research Your Area & Your Market As with all strategies, a thorough understanding of your target area and your target market is essential before you dive in! That being said, the first port of call before doing this research, is to contact the local council’s planning department. Different councils have varying requirements with regard to SA units. Some won’t require any planning permission, while others will see it as a “change of use” when a property starts to be used as an SA, and may require prior permission. You need to find out what the situation is before you get started. Technically, a standard residential house or flat falls under planning use C3, but many councils will deem a SA unit to be planning class C1, which is for hotels, boarding and guest houses. Once you’ve clarified the planning, head across to Booking.

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com and Airbnb to find out what’s already available in your chosen area and what prices are being charged. This will quickly give you an idea of whether there is enough demand, and also allow you to do some projected cashflow calculations. If you’re planning on targeting the short-stay holiday/tourist market, the weekends will be most popular with visitors. Have a look and see what’s still available on a Thursday for the coming weekend. If there are still lots of empty SA apartments, this suggests that the market is close to being saturated. The better route may be to look at short-term corporate lets, which will mean building relationships with local businesses. Whether you’re buying the apartment yourself or operating it on the R2R model, you must check to see whether the lease allows short-stay accommodation on a commercial basis. Many leases will only permit a standard tenancy agreement, which allows you to rent the property out for a minimum of 6 months at a time.

The Numbers If I owned a 2-bedroom apartment in a smart area in my home town of Cheltenham, the monthly rent I could charge to a tenant on a standard tenancy agreement would be between £700-£1100 a month. My only outgoings would be mortgage, insurance and possibly ground rent and service charge. The tenant would be responsible for the payment of council tax and all utility bills. If I decided to put the same apartment in my SA portfolio, I would be able to command between £90 and £140 per night,

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depending on the time of year, and whether it’s midweek or weekend. If I can achieve a 70% occupancy rate, which is the average figure nationally for SA accommodation, this would give a monthly gross income of £2310 based on a rate of £110 per night. From the £2310, there are a number of deductions each month: •

Council tax, Wi-Fi and utilities.

•

Cleaning and Laundry.

•

Booking fees payable to Booking.com etc.

•

Credit card commission fee.

For a one or two-bedroom apartment, council tax, Wi-Fi and utilities will be approximately £200pcm. This is a fixed cost (assuming gas and electric usage are approximately the same each month). However, the big variable cost is the cleaning and laundry. The amount will depend on how often the unit has to be “turned around”. This is a crucial point with SA. If you have 5 single people staying one night each in a unit, compared to a group of 4 people staying for 5 nights, the difference in cleaning and laundry costs will be huge! It may only cost £30 for the group stay, but could be as high as £90 for the five single people. This will impact heavily on the bottom line. This is why you shouldn’t become too obsessed with occupancy percentages. In the above example, the occupancy rate is the same. However, you can charge more for the group, as it’s wise to have an “additional person” charge, and your overheads are less. Regarding booking fees, there are many online travel agents

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(OTA), with Booking.com being the biggest, and Airbnb is also very popular. They have a different operating model, with Booking.com charging the owner 15% of the booking price, whereas Airbnb will charge the owner an admin fee of 3%. However, Airbnb also charges the guest 12%, which makes the booking more expensive for the guest compared to Booking.com. For example, a £100 room being booked through Booking. com will cost the guest £100, as the guest pays no admin fee. Through Airbnb, the guest pays an admin fee of 12%, so the cost to them is £112. However, the owner only receives £85 from Booking.com, due to their 15% commission charge, compared to £97 with Airbnb, who only charge the owner 3% commission. In addition, Airbnb won’t release your money until the guest has checked in, whereas Booking.com will allow you to collect your money at the time of booking – once you build up a “Trust Score” with them). As a new SA provider, you will rely heavily on Booking.com. As much as 85% of your business will likely come through this OTA.

Stress Test Going back to my original numbers, I would always stress test the proposed SA unit using the worst-case scenario figures. By this I mean that 50% occupancy for one night stays with a single person. You need to be breaking even at this point! Once you’ve computed all the numbers into your spreadsheet with this test, you will be clearer as to whether it’s a runner.

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Using my example above on a 2-bed in Cheltenham, this would give the following approximate numbers: Revenue for £90/night for 15 nights = £1350 Mortgage: £400 Utilities, Wi-Fi and council tax: £200 Cleaning/Laundry based on 14 changes : £280 OTA fees based on 15% of £1350: £202 Credit card fees @ 2% of £1350: £27 Total expenditure: £1109 Profit: £241 This unit passes the stress test. However, this is with a mortgage costing £40pcm. If it is R2R, you may be paying a higher guaranteed rent to the owner, so this would have to be plugged in. The next thing to do is to run the numbers again at 70%, but assuming an average of 2 people per stay for a stay of two nights. This is more realistic in terms of your likely results, and for the above example will give a profit of approximately £950 from a total revenue of £2100. Using the R2R model, you could quickly acquire half a dozen of these over a 12-month period, each giving an annual profit of £10,000. Would this £60,000 reach your “financial freedom” figure? When you make a success of the first unit, and decide to expand, try and keep your units as closely together as

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possible. This will reduce your operating expenses. If you’re trying to turn around several apartments on the same day, it’s going to be a headache, especially if travelling distances are significant. Eventually, when you get to 5 or 6 units which are all close to each other, you will start to benefit from economies of scale, and profit percentages will rise. It’s another great “some money down” strategy!

A different model within SA A friend of mine operates an interesting variant of the SA model. He takes over apartments from owners in the same way as one would with a R2R, except that he offers no minimum rent. However, the owner gets all the revenue from the SA unit, minus his 20% management fee. This is a way of de-risking the R2R model, as he doesn’t have to hit a monthly figure. However, in reality, he runs a very slick business and the owners get great returns. Remember, they have nothing to do with the apartment and all their income is passive. My friend even takes on completely new blocks of flats for investors with deep pockets. The average unit in his managed portfolio has a gross revenue of £2100 per month. His fee from this is 20% or £420. He now has 75 units under management, which gives his company £31,500pcm in revenue, and he only employs 3 staff. I told you it was slick!

A Joint Venture model With the above in mind, think about joint venturing with an investor. Choose somebody who doesn’t want to be involved

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in the running of any property, and just wants to get a decent return on their cash. When you explain the above model to them, you’ll need to run some numbers as an example. We’ll assume the investor has £200,000 to put into any deal. Let’s say that 2-bedroom apartments in the right area of town, within the SA model, are on the market for £160,000. The investor’s £200,000 will allow 4 deposits of £40,000 to be paid, plus purchase costs and furnishing of all 4 apartments. The total loan with the bank is 4 x £120,000 = £480,000. Mortgages are at 75% loan to value, with each loan being £120,000. I’ll work off a 3% interest rate, although as I write, there are 3-year fixes available at 2.24%! The monthly interest payment would be £300 @ 3%. I’ll use the numbers from my earlier example at 70% occupancy rate on a 2-bedroom apartment. Here, the gross income each month was £2100, and the profit £950. If you agree to split the profit 50/50, there would be a total profit of £950 x 4 = £3800 per month. Your share would be £1900. A good return on your efforts, no? Alternatively, you could set up a limited company together, where the responsibilities are transparent. This is what I have done with 2 of my investors, and it’s my responsibility to source the property, negotiate the lowest purchase price, set them up ready to rent and be responsible for managing them, or bring in a competent management agent (I do the latter as I don’t want to be a property manager). My JV partner’s role was to provide the initial cash pot. All profit goes into the company and will be used in due course to increase the

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portfolio. We are each 50% shareholders in the company, which means that I also have 50% of the equity. This model will suit some people, but not all. I hope this brief foray into R2R and SA has helped you to see how these two strategies can be utilised to quickly accumulate monthly cashflow, and move you closer to the day when you wave your boss goodbye!

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If you’ve made it this far, well done! I’ve tried to explain the main strategies you can follow to make your property journey a success, in as short a time as possible. Many of these strategies don’t require a lot of cash, which opens things up to pretty much anybody in the UK, regardless of background, income, gender, race or nationality. Property investing used to be seen as the preserve of people with surplus funds and a high income. Not anymore! Investing in yourself is, without doubt, the best investment you will ever make. For the majority of the population, their education ended the day they walked out of the school gates. You’ll remember from Chapter 1 that formal education does nothing to lift the curtain on financial understanding and investments, not to mention personal development and goal setting! I had to borrow the money to pay for my property mentorship in 2015, but I made this £18,000 back on my first deal. In terms of return on investment, it has been repaid many times! In fact, without this investment, I wouldn’t have had the knowledge or indeed the support to build up my £4 million portfolio in such a short space of time. The thing is, there’s nothing special about me. A schoolteacher who had a business collapse in 2011, and went on to clean carpets for 4 years before deciding it was time to make a change, my own beginnings are no different to any other person. I sought out a mentor because I didn’t want to learn by trial and error, making mistakes which could have been avoided. I wanted to work with somebody who had been there and done it – somebody who had walked the walk! I am still very much an active purchaser and trader of

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property, and continue to build my portfolio. I also continue to invest heavily in my own personal development and am a current member of two mastermind groups, neither of which is directly linked to property. One is in personal development and the other is in business and digital marketing. But here’s the thing: there is always an overlap into property, as the skills needed are interchangeable and complimentary. As I mentioned in Chapter 1, understanding the different strategies in property is relatively straightforward. However, you will need to be mentally tough on your journey, as there will be speedbumps. If I was asked to name the most important trait required to ensure success, it is persistence – the ability to keep going in the face of adversity. Take comfort in knowing that many have succeeded before you, and there’s no reason why you can’t copy that success! As well as the one-to-one property mentoring which I offer, I now offer a completely free day with me. Here, I share tonnes of information with people starting out on their property investing journey, to try and help them make progress quickly. I urge you to take action and book yourself on this course. All you’ll need is an open mind, a notebook and a willingness to build on the learnings from this book! It would be good to hear about your circumstances. As an ex-teacher, I still get a kick out of sharing stuff which enriches lives! Just go to www. propertyinvestorsbootcamp.co.uk You can also subscribe to my YouTube channel, where there is lots of useful content about all aspects of property. Plus, head across to my website for even more tips! To your success, Peter Rowan