A recent post on our LandlordZONE Forums got me thinking about this question.
Beginners question: “My business partner and I are launching our real estate company in Birmingham, focused on BRRR [Buy, Refurbish, Refinance, and Rent], R2R [Rent to Rent] and development. We’re new to the industry and would love to hear from people with experience. What do you wish you knew when you first started your property business? Anything you’d do differently or avoid altogether?”
I wish they wouldn’t use those acronyms, but I get the gist and it’s a sensible question, how do beginners get started in property?
There are many ways to get started. Property is such a diverse industry there’s 101 ways of making money in property, in fact I seem to remember a book of a similar title I read many years ago.
The property “gurus” of this world will tell you that you need to attend one of their courses, as someone suggested in the replies to the question, learn how to do it their way! The problem is, in some cases one course leads to another and another at greater and greater expense. I’m not decrying the value of education courses per se, some offer good value (few and far between in my view) while others simply exist to fleece the unwary beginner.
If you are so unsure about your own abilities that you want handholding, then I would suggest that property investing might not be for you. I suggest you read books on property investing, there are lots of these and some are excellent, ask experienced people, attend one of the many property investors’ meetups, do some networking and join a local landlord group to get to know some other landlords, speak to property agents. These are inexpensive ways to gain knowledge.
My chief argument is that if you take a common-sense approach, do your homework, primarily by reading – there are many inexpensive property investing books on Amazon but read the reviews - do deep research locally, ask professional agents on the ground who will give free sound advice if deals are to be done, and you don’t need to attend expensive training courses.
The key to investing in rental property is to make sure there are renters where you want to invest - tenant demand is vital. Then if you build it, they will come.
Start by reading books by genuine investors who have done it all before, for example - How to Become a Successful Property Investor by Maxine Fothergill
Rent to rent (R2R) is a business model that involves renting a property from a property owner who perhaps doesn’t want the hassle of dealing with tenants but wants a guaranteed rental income. The rent-to-renter sublets the property to tenants (the more the better) at a higher rate. The rent-to-renter acts as a middleman, managing the property’s tenancies as if it’s their own, finding tenants, collecting rent from those subtenants, paying the owner’s rent and keeping the difference – a form of arbitrage profit.
The idea is the rent-to-renter convinces the owner that their rent will be guaranteed if they agree to the deal. They also agree to reinstate the property at the end of their tenancy. The real money will be made by dividing the property up into several rental units and letting to multiple tenants to maximise the rental income relative to what the owner gets.
Reconfiguring a property for this purpose is not something most property owners would want and because the property then becomes a House in Multiple Occupation (HMO) it is subject to planning rules, strict and expensive safety requirements and HMO licensing. The new legislation coming soon will also make the owner jointly responsible with the right-to-renter for breaches of the licensing rules.
What’s more, the legalities of the arrangement are complex involving both a commercial and a residential tenancy. When the Renters’ Rights Bill is passed a further complication will arise with the banning of fixed term tenancies and Section 21, so the owner will not only take full responsibility for the many letting regulations, they will also take on any tenants still in situ when the arrangement terminates.
In my view, despite the seemingly easy entry - the no money down mantra of the gurus - this is not for beginners. It requires experienced tenant management skills; these are far from passive investments.
Sound and substantial financial resources are needed to pay guaranteed rents and for the reinstatement of any multi-occupier conversion carried out. It means meeting all the expensive regulations and a proper legal structure is vital for the owner’s safety. So many of these arrangements have gone horribly wrong when beginners get involved, usually egged on by some no money down “guru”.
Ironically, with property investing your risk is highest when you are starting off with your first property. If you make a big mistake such as buying in the wrong location, buying a property with expensive structural issues, underestimating refurb costs or letting to a nightmare tenant (more likely when you are inexperienced) it could shut you out forever, whereas once you have a small income earning portfolio a mistake on any one property will not kill you.
You need to understand the risks you are taking and take measures to minimise them. There are many strategies you can use to minimise risk. My preferred method has always been to buy properties in need of some refurbishment at the right price, and properties with the potential for value adding conversions - Buy, Refurbish, Refinance, and Rent if you like!
I take a long-term view. For this you need capital of your own, cash is king and the firepower it gives you enables you to make those amazing deals. Distressed sales or sales with family members who are selling an estate, are often best. These sellers are either in urgent need of cash or not so particular about getting the maximum price, they just want a quick sale. Having a friendly solicitor who works fast is an advantage too.
Dividing homes yourself into flats or multi-lets, and buying mixed use commercial / residential are good risk reduction strategies as the more tenants you have in any one property, the more your risk is diversified.
If you have some building skills you can do some of the work yourself to cut costs but don’t take too long over it, you need to get the building earning if you are paying interest on a loan. Remember though, any work you do yourself cannot be claimed against capital taxes later.
If you stretch your finances without any resources to fall back on, and if you don't think you would sleep at night, a high-risk approach probably isn't for you. I have heard some so-called “gurus” advising their mentees to max out as many credit cards as they can get their hands on to raise finance, not a strategy I would ever feel comfortable with.
Being in too much of a hurry can prove fatal. You can't assess risk if you don't understand what you're doing, so I suggest starting off small, gaining experience as you go and building up gradually. Growing your rental business organically, that means ploughing back earnings over a period of time so you get the power of compounding, but it does take time.
Property investing is relatively risk free if you go about it the right way, unlike investing in the stock market. You can never eliminate risk completely, but you can get pretty close to it with property if you can get to the stage of having a diversified portfolio.
Refurbishing is a great way to do this. If you have some basic skills and you’re willing to get your hands dirty you can achieve a great deal with less money. It’s often hard graft but very satisfying.
Refurbishing older property stock is also an environmentally sound way to provide desperately needed new housing compared to the heavy environmental cost of new construction.
Commercial to residential conversions is one strategy that can pay big dividends if all the regulations can be met without too great an expense. There are lots of commercial buildings lying idle either because demand is not there for commercial use or meeting the new energy efficiency standards is not viable. One thing is for sure at this time, there will be demand for residential, either for rent or for sale.
“Government targets for new housing are welcome, but they are only part of the answer. With demand continuing to outpace supply in many parts of the UK, it is no longer enough to focus solely on delivering new homes.” So says Andrea Glasgow, sales director of specialist mortgages and bridging, Hampshire Trust Bank - www.htb.co.uk
To provide the types of properties people need to live in, we need to make better use of the stock we already have and across the country, there are properties that are either sitting vacant or no longer fit for modern living. Some are structurally sound but dated while others need significant refurbishment to meet the latest energy standards, tenant expectations or broader planning requirements, says Andrea Glasgow.
The traditional older terrace property, so popular with landlords, often has solid walls (no cavity) which means either internal or external wall insulation, underfloor and loft insulation and double-glazing upgrades. The gas, LPG or oil boiler may need an upgrade to the latest most energy efficient model, or a full heat pump system installation. These works will futureproof the property and will cost less to do, all at once, at the time of the refurb.
Environmental legislation (MEES) for reduced pollution and running costs and the changes coming under the Renters’ Reform Bill mean that to be successful as a property investor / landlord in the future you need to meet these higher standards of both comfort, economy and safety.
This is where heavy refurbishment comes into its own, says Andrea Glasgow. “Whether converting commercial units into high-spec flats, reconfiguring HMOs to maximise function and compliance, or extending existing footprints to add value, these are the projects that can make a meaningful difference both for investors and for the market more broadly,” she says.
I’m not of the view that these projects can be done on a shoestring, by maxing out 12 credit cards as I said above. No, you do need some capital of your own and when necessary structured support, managed risk and the backing of lenders who understand the nuances and timescales involved.
Hampshire Trust Bank, for example, has a heavy refurbishment product with a maximum of day one LTV increased to 75% of the property’s value in line with a standard bridging product.
For cases where the loan-to-GDV (Loan to Gross Development Value, a calculation that helps developers, investors, and lenders assess project viability and risk) is at or below 65%, the bank can fund up to 100% of the property’s day one value for refurbishment costs.
Done well, refurbishing existing property stock will play a role in improving the quality and liveability of the UK’s housing stock that’s there already, in an environmentally productive way. It provides an opportunity for investors to create something of real value for the community.
[Main image credit: Tima Miroshnichenko]
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