A few years ago I surprised even myself: I’d completed on one property, I’d another completing shortly, and had offers accepted on fourteen others. After a period of selling to rid the portfolio of the less-well performing properties, when all these purchases would be in the bag, I’d have doubled my property holdings.
Now compared to my brother, who my mum says has inherited my granddads cautious and careful nature, I probably appear reckless. It is true that when I decide to get involved in something I am very enthusiastic.
Even so, I had to convince myself on a daily basis that I was doing the right thing. Doubling the size of the portfolio so quickly was stretching even my comfort zone. I’d been careful to negotiate “below market” prices, and buy in areas with reasonable prospects of coming up. This gave me some leeway if the economy and the housing market were to turn the wrong way (which of course it did).
By contrast, a friend of mine had been thinking about investing in property for a long time. So long, that I thought it will only happen if I did it for him. His time had not yet arrived, and wasn’t not at the point where he felt comfortable enough to cross the line and commit himself and his money.
When I told him that I had 16 properties under offer, he was amazed, even though he knows that my goal then was to have 50 properties in my ownership within two years. Ironically, it’s partly his influence that accelerated the growth of my portfolio. Three things happened at once which together resulted in my buying spree:
Firstly, I undertook a periodic review of where I am in relation to achieving my goals.
Secondly, my friend’s enthusiasm for American self-made millionaire and self-help guru Tony Robbins, and his telling me about Tony’s philosophy of taking “massive action” to achieve one’s goals.
Thirdly, the rapid rise in the capital values of the properties in my portfolio at that time, meaning there was a large amount of equity available to draw out as further loans and to use to buy more properties and significantly grow the business.
There, I’ve used that word again – “business”. In an earlier article I explained how seeing my property activities as a business, and not as an ‘investment’, had far reaching effects on how I viewed and managed the properties. This, in turn, had a knock-on positive effect on cash-flow and profitability. I am now a convert to creating a “pro-active property business”, rather than owning a bunch of passive investments.
Anyway, I could see that my friend was uncomfortable about the numbers involved. I could see his point; looked at in money terms these transactions represented a lot of cash value. Without wanting to sound too cynical, in reality most of this money, in fact all of it, was the bank’s.
Still, I could see that my friend was worried for me. If I was just chucking money at any old property that happened to be for sale I would have understood his concern. As I had 16 under offer, he might have thought that was exactly what was happening, and having 16 offers accepted at the same time might have suggested to him I was offering too much! Of course, in reality, this wasn’t the case. He knew nothing about the other dozen or so properties where my offers had been squarely rejected. Nor did he know how much I had negotiated and squeezed the price on the properties where I had been able to agree terms.
Whether he had these thoughts in the back of his mind or not, I don’t know, but he did ask a good question: “So how do you decide which properties to buy?” When I first started buying I had allowed myself to be heavily influenced by emotion. I was after what I considered the perfect combination: nice houses in nice areas, with high yields and prospects of substantial capital growth. Yes, you can find this combination, but it’s unusual and hard to do. Under normal circumstances these criteria are mutually exclusive. If I had stuck dogmatically to this list I would not have been able to get close to achieving my goals within the time frame set.
Early on I realised that had to take a step back and think again about what I was trying to achieve. It had to be cash-flow. Anything else was a bonus. To get cash-flow, I had to concentrate on yield, and that meant buying in lower value areas. The idea of buying in areas in which I would feel uncomfortable living still bothered me. That last taint of emotionalism still had to be buried. Looking at property subjectively is unhelpful. As I said before, property is a business and requires an objective approach.
I might not like the areas I could buy in to achieve my target yields, but other people do. That’s why they live there. So as long as they pay me rent, what was the point in my concern? I finally made the breakthrough in mindset when I saw that successfully achieving my goals required seeing the entire venture from a perspective of being a numbers game.
Obviously declining areas were struck off the list as possible places to buy. That left areas that might stagnate, or even improve. Both were acceptable, as long as capital values didn’t decline. My first priority was the rent achievable. Any property I did buy had to have tenant appeal, or had to be capable of being made appealing. For my tenants I wanted a minimum of two bedrooms and a bathroom, as opposed to a shower room only, preferably close to local shops and transport into the city centre.
Properties in disrepair had to be capable of being bought at a suitably discounted price. Repairs and refurbishment should make the properties better than the average in the area, but at a keen price within budget.
The value of the properties once refurbished had to exceed the purchase price and the cost of repairs by a factor of at least 1.18. This meant that with an 85% mortgage (they were available at that level then) I’d be able to get all my money back out again, including the cost of repairs.
And the rent had to cover mortgage interest payments by a factor of 1.5. Under normal circumstances that guarantees positive cash-flow. Having said it’s a numbers game, that doesn’t mean that I think it’s wise to buy any property that shows a profit, although there is a school of thought which says, in effect, do the maths and if the property gives a positive cash-flow, buy.
That’s fine, but I like to balance that thinking about my exit strategy. What if I ever need to get my money back out? I want to own properties that I know will sell reasonably easily.
Some properties can give fantastic yields, but only because the market for potential buyers is limited.
That’s why I will only look at properties in stable areas. Then, at the worst, if I do need to “cash-in”, I should at least be able to sell on to fellow investors.