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Today's podcast is a smorgasbord of questions posed by Anthony, Matthew, Dominick, and David from the TPV Mastermind Community. 'Walk us through the numbers, how should we set our property strategy, tell us about investing overseas & how can you show skin in the game to a JV partner without money?' These are the topics that we will address in this week's show. If you like the concept of asking me anything, we can do it again...with me answering YOUR questions; just get in touch!
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Transcription of the show
Today's podcast is a smorgasbord of questions posed by Anthony, Matthew, Dominick, and David from the TPV Mastermind Community. 'Walk us through the numbers, how should we set our property strategy, tell us about investing overseas & how can you show skin in the game to a JV partner without money?' These are the topics that we will address in this week's show. If you like the concept of asking me anything, we can do it again...with me answering YOUR questions; just get in touch!
Property Chatter
Transcription of the Show
Hello and welcome to another episode of the Property Voice podcast. My name is Richard Brown and, as always, it's a pleasure to have you join me again in the show today.
Well, here we are, it's Monday evening. Well, you're probably not listening on a Monday evening, but it's Monday evening when I'm recording this, which is the deadline and day for getting the recording across to my production team. I was a bit stuck today because I didn't really know what I wanted to say and what I wanted to cover.
So what I did is I posed the questions to some members of my mastermind community who are working along with me throughout the course of the year in a sort of mutually supportive way. I said, "Well, what do you want to know guys? What's on your mind? What would you like to cover?"
Actually the content today is very much driven by a few questions and poses from our community, so I thought I'd share with you. They asked questions and I thought I'd just share off-script my answers to those.
The first question really comes from Anthony. It's all about numbers and he's struggling to get his head around it. There's so many ways of looking at them and, yeah, he never says it gets dull really so he wants to talk about working with numbers.
Here's the thing. We have what's called a special interest group where we're looking at a special interest and the special interest happens to be buy-to-let, BRR and flip transactions, so a single let properties. It's where people normally start. We're having a conversation and we're talking about doing the numbers and building out a spreadsheet, which will help us analyze a deal.
Now that's a good thing to begin with, so have some way of analyzing the deal. Before we get to the spreadsheet, I always start with having some sound investment criteria. What is it you're looking for? Obviously, you need to know what strategy you're aiming at and then what makes a good deal from a bad deal, perhaps by area, perhaps by tenant profile, its wrinkles, perhaps a good area that you can sell the property on a reasonable period of time if it's a flip.
You basically build out a list of criteria, investment criteria, that is suitable for you. Some of this is what I call soft criteria, so it's things like the location, it's things like supply and demand. And some of it's hard, what I call hard criteria, so this is the number side of it. So you should have both on your list.
In fact, I do. I actually have checklists. If you bought a copy of my book and you've got hold of the book bonuses, you'll see the checklists are available as a bonus if you just write in for that. So a bit of a pointer there, my book being the Property Investor Toolkit.
So, first of all, have some investment criteria. That investment criteria should, obviously, be aligned to the strategy you're following and it should suit your own investment wishes, what do you want, essentially, out of your property investment and what might be what I might consider to be acceptable might not be what you consider to be acceptable. So it's, obviously, from a personal perspective, what is it you're after and really making it work that way. Excuse me.
So step one, having investment criteria and have it written down as well.
Last week, I talked about one of the books that I read last year, which is Principles by Ray Dalio and he's very big into this idea of having rules, if you like, or principles and having them written down. So I suggest you start there.
The second thing, of course, is to have some kind of model to be able to analyze a deal. A spreadsheet is a good thing to do because you can manipulate the data. So have a spreadsheet and make sure you capture everything. And if you're not sure, we've probably got some samples that you can have. I'm happy to share those with you, where to start and build your own. As Anthony himself mentioned on the call last week, building your own spreadsheet sometimes gets you into the nuts and guts, if you like, of the model yourself. So that's a good idea sometime, but it's great to have something to begin with.
Then you should query that, understand the formulas and understand what you should change, what you can't change because it could ruin your whole model. If you over type a formula, for example, and forget you've done it and then, oops, you've committed to a purchase. You've overwritten a formula with a hard number and it just doesn't work anymore. So just be careful about that.
So that's the principles, that's the spreadsheet.
Then I have a couple of financial criteria. So, first of all, I have some return criteria. Lots of people talk about yields, gross yield. Gross yield is a calculation. It's the gross annual rent as a percentage of the purchase price or, indeed, the property value depending on whether that's changed over time. Usually, the most recent is the best one to go with that.
But I think gross yield is a very crude measure. It's not the most effective investment measure by any means for a number of reasons. One is it doesn't take into account your costs and, two, it doesn't take into account your cash utilization, either. So, for me, it's very crude, not that useful. But it's a guide, something you can use perhaps to filter and, indeed, I do.
I was going to talk about some of the rules I have. I have one rule I call the 160 Rule. If you multiply the monthly rate by 160, in my world, that will produce a potential buy-to-let property that is capable of delivering a 10% return on investment.
It's a rule I've developed, it's just tested over time. It kind of translates to about an 8% gross yield as it happens, but it's there or thereabouts and that's just ready-reckoner that you can do or I tend to do. You, obviously, you could flex the 160 depending on what kind of return on investment you're actually looking for. So you need a bigger multiple for a bigger return and a smaller multiple for a lower level of return. That's just one example.
Similarly, I have a rule for flips. When I'm looking at a flip transaction, I do a very crude analysis. What could I buy this property for, times it by 140% or 1.4, compare it to the local sale comparables for A1-condition properties. If this property can get into that sort of target space or, indeed... Sorry. If it can get under that number, then it's potentially worth looking at to see whether it's worth assessing in greater detail. So it's just a rule of thumb, really, and I've developed there, so there's one for buy-to-let and there's one for flip as well.
When you're looking at development types of deal, again, I do a very crude number. I've got some average costs per square meter or per square foot to build out a property. It's usually in the 1200 pounds per square meter or 120 pounds-ish for a square foot. Add in some other costs, normally 10% for professional fees, normally an allowance for a service provision or utility provision and you get kind of a gross development cost when you add that to the land value or the property value. That's called the gross development cost.
If you multiply that by 1.2 or add 20% onto it, that'll give you a minimum number, if you like, of what the gross development value needs to be to make the project anywhere near viable.
Once you know this is the general equation, work backwards as well. So if you know the gross development value and you know your costs, then you can work it back to work out the maximum price you pay for the property. So it's just having some general rules of thumb that you can work with so I don't get out the spreadsheets for every single opportunity that crosses my desk and, believe you me, it's quite a lot. So I have some general rules.
I do have some key metrics as well. So I mentioned return on investment. That's one I use. In fact, return on investment is a misused term, in fact. The strict definition of return on investment is not the same as the one we use in the property industry. The one we use in the property industry would be better known as return on capital employed or return on cash employed.
But we use the term return on investment and that stuck. It's not a strict definition. But if I say it's basically how much money you make as a profit, as a percentage of the actual cash you've invested into the transaction, that's what I mean by return on investment, return on capital employed here.
The good thing about that measure is it tells you how well your cash is working in the property you can use leverage or mortgages, which means we can use less cash. So it can be a more effective model for cash utilization than some other forms of investing just because of that simple fact. So return on investment is something I'll look at closely.
The other one I look at closely and particularly with smaller properties is the monthly or actually the annual net cash flow. When you're looking at cashflow, it's always putting all of your costs assumptions, even if they are not necessarily going to happen in year one.
In other words, make a provision for the costs and deductions, like letting agent fees, like your mortgage, like your insurance, et cetera, but also make a provision for void periods where the property might be vacant and, indeed, an allowance for maintenance.
Now the property may not be vacant and it may not need any maintenance or repair work if you're lucky, especially if it's a newly refurbished or it's a brand new property, for example. But make the provision anyway because over the long term, if you got a long term buy-and-hold, on average, you're probably going to need roughly 15, 20%, that sort of range for those two numbers alone of the rent that is. So always make a provision there because sometime in the future, even if in the first few years you don't utilize that money, you'll find that you might utilize it later on, for example, with a large upgrade or something like that.
So that's the next thing. Have some general criteria, have a spreadsheet to be able to crunch numbers and then know what you're aiming at in terms of the metrics or the return expectations.
The other thing to keep in mind is numbers are just part of the story or they help you tell the story. This was a discussion we had on the call.
There's other ways you can tell the story. You can show a property, you can have diagrams. There's lots of ways. You can have video, words and graphics, et cetera. This is an investment and so there's always numbers involved. So numbers are parts of the story, but they're not the whole story.
The other thing to keep in mind is different parties or different stakeholders, as they're called, might have an interest in the numbers in a slightly different way. We talked about the idea of a lender might not be so concerned about your actual annual insurance policy, but they will be more concerned about the property value and the percentage against which they are lending and the return they're going to get on their money. So it's a completely different way of looking at the same proposition through their lens, if you like, as a stakeholder.
That's one on distinction. If you've got a joint venture partner they'll be looking at profitability. They'll also be look at risks. They'll also be looking at your capability to deliver on the project, for example. If you are selling the property on to someone else, they may have different criteria, different measures. And they may not need all the detail. They may not need the headline survey to begin with. So different people have different lenses and they view the property through their own lens.
So we need to understand what about lens looks like and to be able to present the information in the most compelling way. We talked about having the spreadsheets to do the numbers and all the nuts and bolts, but maybe having a separate type of presentation pack.
I guess that's the sort of overview of the numbers, Anthony. Thanks for raising that question. I hope you found that helpful.
The next question I wanted to cover, it comes from Dominic and his question was about investing abroad or investing from abroad.
This is distance investing and is particularly distance investing in a foreign land. So the key part of being in a foreign land is there are some clear distinctions from your home country, let's say.
First one is legal differences. Usually, if you're investing overseas, you're going to have a different legal system to your home country. Obviously, I invest a lot in the UK. I also invested a lot in the USA. By the way, the USA doesn't seem to be one country. It seems to be 50 with the different states so there are different laws that prevail in different states in America. So don't forget that sometimes in certain countries that you can get local or regional differences as well. So you've got different legal system.
Sometimes you've got different currency, obviously, so you've got US dollars, you've got euros, you've got pounds, et cetera. So take that into consideration.
You've got different business practices. For example, again mentioning the States and some parts of Europe, like Portugal where I also invest, you've got the heavy use of notaries, notary publics, which is hardly ever used in the UK. In fact, I was speaking to a notary recently and she was saying that the number of notaries registered are reducing year on year because there's just no real demand for it.
But if you go to America, you can go into a bank and literally get someone to notarize your passport for $5. In the UK, I think last time I did it for two documents, it costs me 160 pounds. So there's a distinction. I've also done the same procedure in Brazil and it costs about, I think it was about 10 pounds, something like that. So there's local customs and practices that you need to consider as well.
There's not just the legal side and the currency side. There's also the tax rules or the accounting rules. I'll give you a little example of that. In USA, for example, you can actually depreciate a property asset over 27 and a half years. You can't do that in the UK. I believe there's a similar provision in Australia as well, so you can get some distinctions in the tax treatment. Sometimes that works in your favor and sometimes that works against you, so it's something to be aware of. What are the local tax laws and accounting rules that apply?
Somewhat related again to money is banking rules. If you open a bank account in the USA, for example, it's really difficult if you're not a resident, a US resident. It's quite painful. But just as a quick tip on that front, transfer-wise, do a borderless account, borderless US dollar account and that would get you through 90% of what you need to get through in terms of banking arrangements in the USA.
There'll be similar arrangements in other countries in Europe and other countries as well, So the banking arrangements comes into play.
Then you've got lending. Lending requirements differ as well. In the UK, it's a very mature market as, indeed, the USA. So there is what I call a primary lending market and also a secondary lending market.
A primary lending market is usually what I mean here in this context is where you borrow money on an initial purchase spaces. So think of a buy-to-let mortgage. You buy a property, you put a buy-to-let mortgage against that property. That's what I mean here by primary lending.
Secondary lending is where you refinance or you remortgage your property and so there's a secondary lending market. For example, one of my strategies is BRR. I buy the property, I add value to it, and then I refinance that property at a later date to extract some of that value once I have tenanted it. That makes it work really effectively for me. I can carry out this same strategy in the UK. I can carry out the same strategy in the USA.
But lo and behold, I cannot carry out this same strategy in Brazil, for example, where I do have some property interests because there's no secondary financing market or not a major one and so it's restrictive in that sense. Brazil, keeping on the theme, has currency controls as well, particularly if you're a resident. So depending where you live and where you're willing to invest, there may be currency restrictions.
Then sort of somewhat related point, there could be tax treaties as well, which come into play. In other words, you're looking for a tax treaty. A tax treaty basically says, "We'll offset tax against one another, so you won't pay tax in two locations." That's kind of what it means. But not all countries have what's called a tax treaty, so you could actually end up paying tax in both places. And even if there is a tax treaty, basically it means you'll end up paying the highest rates of tax wherever it may be. For example, if you're a UK resident investing in USA, your taxes are higher in the USA and your investment is in USA, you won't get a rebate when you come back to the UK.
However, if it was the opposite way around and taxes were higher in the UK, you pay more tax when you brought the money back to the UK, so tax treaties also come into play. So we got lending, we've got currency, we've got legal issues, we've got tax and accounting issues, we've got local customs as well. They all come into play.
There's so many subtle things that branch out of that. There was a big hoo-ha a decade ago when a lot of people who bought in Spain found that they didn't actually own the land in which their property was built upon. There's claims against the land and people having homes taken away from them because there wasn't a clean title.
I've seen the same issue in Brazil for that matter. I saw a really cheap property in a really nice area. I thought let's have a look at that one. I asked my attorney to have a look into it and he said, "No, don't touch it with a barge pole. It hasn't got clean title." So there's that, too.
So in the UK, you have a buyer and a seller will be represented by two separate solicitors. One represents the buyer, one represents the seller.
In USA, that isn't necessarily the case. You have one title company who are actually both parties. That's a bit strange to get your head around to begin with, but it's a local practice and it works pretty well. And it's safe because you have this insurance-back to policy. Whereas in the UK, you have this more indemnity-back policy. The solicitor is backing you up saying we've done a good job seriously if not. Whereas in the States it's basically here's an insurance policy saying this has clean title. So distinctions in that sense.
But I think if you're investing overseas, it's all about doing your due diligence as everything always and especially so when you're investing in a foreign land, don't take anything for granted. So you do your desktop research, you find out as much as you can remotely. Try and go to the country. I would say do go to the country. Don't try and invest at arm's length without going. People have done it, but it's very difficult.
Try and have some local representation in various fields. Definitely have legal representation and choose your own legal representation. So as far as possible, at least qualify them really hard. If you're being recommended to use somebody specifically for legal purposes, same with accounting, anything to do with law, anything to do with money, do your own research and try as far as possible to have your own representation.
So there's a number of top tips just rattling off the top of my head. I've probably got some articles which back that up, but I just thought I'd share that with you now. So that was the second question.
The third question that I was asked is all about strategies and how best to decide what is the best path to pick. This comes from Matthew. For example, he's saying, "How do you know if HMR, BRR, service accommodation, et cetera is the right strategy to take? And whether or not you should blame them or you should specialize in some way to either focus or reduce risk?" So that's Matthew's question in a sense.
Here's my take on this. Strategy is the wrong place to begin. If you're interested in property, many people would come talk to me. I had a conversation literally earlier on today. I was talking to an overseas person, so it's quite contextual actually.
This person is a Chinese resident and they're living in Australia and they want to invest in the UK. So there is a lot of complexity already, right, and we are talking about some of these points. But in terms of strategy I said, "Well, do you know what you want to achieve?" "Well, we want to invest in property." "Okay, that's actually not the right question when I asked the question I was really have in mind. So let me ask a better question, which is ultimately in life, where are you heading? What do you want to achieve in life? So forget property for a moment. What do you want to achieve in life?"
It turns out this particular person was looking to replace their income in a period of time because they're in a stressful environment. They could get shipped around the world and it was disruptive for their family. So they want a better quality of life. They wanted a more of a passive income stream through property or an alternative income stream through property. In fact, it would need to be passive because of the overseas element because they found that the returns were better in the UK than they were in China or, indeed, in Australia for them. So they were looking to overseas investment. They wanted to have an income replacement strategy, as I call it. And so that led us to talk about different strategies that might be relevant and appropriate for them.
First thing is they're not local, so whatever they do, it needs to be extremely passive for them. So it needs to be like a pretty straightforward investment that doesn't touch the sides. So a buy-to-let, perhaps a fairly new property, perhaps have a property manager or letting agents in place. That would be one example.
But as I asked them what kind of goals do you have, and they gave me a number in terms of income replacement and what type of funding do you have to begin with, they told me the number of savings they have now or the money they could get hold of and then in what sort of timeline, I could then triangulate from that information that perhaps the passive buy-to-let type of strategy wouldn't get them to where they wanted to go to. So we had a bit of a gap, gap analysis as I call it. So you've got this much money to begin with and you want to achieve this much income in this period of time, it's not enough basically to achieve your objective.
So you've got a couple of choices, either lower your sights or you change your strategy accordingly. So the strategy element falls out of the direction you want to take in life, the goals that you want to achieve, the resources that you have available, not just money, it could be skills, knowledge, time, et cetera that come into the mix and the timeline in which you want to achieve it and how active or passive you are prepared to be and, indeed, your risk profile. And really just to add a bit more mix into the pot here, also your skills, your preferences, your non-negotiables, your lifestyle choices.
When I'm talking to people about strategy, I have that conversation before we talk about any type of property investing. So you piece all this together and you design essentially a plan, including a strategy for someone to follow, which brings all those components together.
So I would say if not any two people are saying that's not quite true, but everyone is different and has differences, which are relevant and particular to them. So the strategy that people would follow has got to be designed according to them. I call this 40 Ways to Profit from Property. I wrote an article out for YPN magazine some time ago, so if you'd like that, just drop me a line and I'd be more than happy to share that with you. But if there's 40 ways to profit from your property and some people claim there's a lot more than that, I mostly get 40 without kind of heavily duplicating the possibilities then, obviously, there's a lot of permutations. If you are doing active versus passive, having money versus not having money, having some knowledge versus not having knowledge, being good with people versus not being good with people, et cetera. You can see how this could be quite a complex process.
For me, though, it's very much a case of what I call a designer strategy. So you take the goals, you take the aspirations, you take the resources and the preferences and you put all that into the melting pot. Then you kind of build that, plan out the strategy out from there.
One thing you definitely don't do it just go for the flavor of the month, go through whatever the gurus and the trainers are peddling at this point in time because it might not be appropriate for you. You could end up being a square peg in a round hole and that probably just makes you a little bit miserable in life.
I've got one extra bonus question I probably wanted to throw in if you stick with me another few minutes.
Now this comes from David and asking the question, we were sort of extending the conversation, if you like, around skin in the game. So this was a particular conversation we're having the other day, skin in the game, particularly if you're working with, let's say, a joint venture partner. Often the joint venture partner is providing money, let's just put that on the table, so that's the big thing a joint venture partner can bring if you're an active property investor or developer. So somebody brings money to the table and what do you bring? What's your skin in the game was the question that was posed and we were kicking around the answer to that.
I said basically if you think about a property transaction or property project or developments, in essence, you've got a number of different components, haven't you? You've got the money side of it, but that's not all. You've also got time. You've got the money, you've got the time, you've got the contacts or your network, you've got your know-how, skills and the knowledge, you've got your systems and your processes. They're the sort of core five areas.
In fact, you can actually extend this. You could look at track record and reputation, which underpins know-how. You could look at the team that you have working for you, which is a subsection of contracts, sorry, contacts and network. You can de-risk the property investment because of the value of know-how you have that leads on to a benefit. You can have multiple exits because of the contacts you have, because of the know-how that you are able to deploy. You can sometimes provide secondary security. So, for example, personal guarantees, alternative assets to secure against to soften, if you like, or reduce the risk to, let's say, a lender if they're lending money, rather than just taking a profit share. And, indeed, if you get more experience you've got the opportunity to share your knowledge and teach or train people as you go. So I don't know high up I got to there. I think I've got to maybe about 10? 10 different components.
The context of this particular question came from a private investor who was maybe looking to put some money into a deal and, from their perspective, money was the biggest thing. It was the most important thing and the biggest share, if you like, of the project. But I've just demonstrated that there's around about 10 different components of which money is one, so it's 10% of the mix.
Now I'm not saying it's an equal weighting because you can't do that project without the money. So it is kind of essential, it's an essential component. You probably can do the project without some of the other components, like a track record for example. You probably can do a property project without having a track record. You can't really do it with having some money often.
So, yeah, money is an important consideration, but it's not the most important consideration and other things can play a part, too. So the time that you can put in, local knowledge that you have, contacts, the know-how, the systems that you operate also play a part, too. So the conversation I always have if someone asks me about skin in the game is along these lines.
Then the question really is, "Well, do you valuate it, Mr. or Mrs. Private Investor? Do you value these other components?" Perhaps you're earning good money in a business or in employment and you want to put it to good use, but you don't have the time, you don't have the contacts, you don't have the know-how how to do these projects. So actually you get all of that benefit in return for some sort of financial reward, whether it's fixed-rate return or profit share, for example.
When I have this conversation about skin in the game, it's important to translate, if you like, and explain to the partner you're talking to these components to the deal, to the project and they carry a value. And if that person can't see the value, well, that's okay. Probably, they're in the wrong place. Maybe they should just invest their shares in some sort of deposit account arrangement. It's money in, money out and nobody needs to worry too much about it.
But oftentimes with property, the returns can be better. You can use leverage that we talked about earlier. So it's attractive to people to get involved in. But it isn't always the case that you have to bring 50% of the money together to have genuine skin in the game. Indeed, you don't have to bring any of the money because I strongly believe that the other components I've been talking about have a value as well.
So there were the things I really wanted to talk about today, and I just want to thank the guys who contributed these questions. Hopefully, you found it handy. I guess it falls into the category of Ask Me Anything or Ask Me Something. If you'd like some questions-answering, perhaps I'll do another session like this, maybe once in a blue moon, maybe more frequently. Drop me a line. I'd be happy to hear from you and let's see if we can build them into the podcast in a future episode. So you can reach me at podcast@thepropertyvoice.net and, indeed, the show notes for today's show will also be over the website, www.thepropertyvoice.net.
I guess just to wrap up, all that's left to say is thank you very much, once again, this week for listening. And until next time on the Property Voice Podcast, it's ciao, ciao.
That's all from me this week, remember if you want to talk about anything from today’s show, or just talk property investing more generally, email me at podcast@thepropertyvoice.net, I would be happy to hear from you! The show notes can be found at our website www.thepropertyvoice.net
Thanks very much for listening again this week, so all that left to say is ciao ciao!