The Property Voice Podcast - Series 2: Portfolio Development
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Property Cycles: Portfolio Development
The whole idea of this series is to consider the different types of cycle within property. We introduced the idea of a portfolio cycle, or a portfolio development cycle last time. We saw that there is a natural cycle, as we progress through it based on time and experience. However, we also noted how our portfolio can also change based on our personal stage in life and in particular related to both our risk appetite and risk attitude. Today we look more closely at the early stages in the development of our portfolio cycle: Enter & Expand before completing this next time with Establish & Exit, which of course gives us the 4E model of portfolio development.
Resources mentioned
Protect Your Tech - Book written by Mish Slade & Rob Dix
Today’s must do’s
Where are you in your portfolio development cycle? Consider what are the characteristics prevalent in this stage are and what is likely to be coming up ahead to plan for?
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Transcription of the show
Hello and welcome to another edition of The Property Voice Podcast, my name is Richard Brown and as always it is a pleasure to have you join me again on the show today.
This week we shall take a closer look at the idea of a portfolio cycle or portfolio development cycle if you like. We touched on this last time with David Clouter, so let’s get to the heart of the matter right now with Property Chatter.
Property Chatter
The whole idea of this series is to consider the different types of cycle within property. We introduced the idea of a portfolio cycle, or a portfolio development cycle last week with David as I said in the introduction.
We saw that there is a natural cycle, as we progress through it based on time and experience. However, we also noted how our portfolio can also change based on our personal stage in life and in particular related to both our risk appetite and risk attitude.
I used to use a three-step approach when talking about portfolio cycles: growth, consolidation and exit. However, more recently I realised that there is a crucial step missing and that is the start-up phase, which precedes growth of course. After all, we can only grow once we have actually started can’t we?
So, along with my business partner, Damien Fogg, we have developed what we call the 4Es of Property Portfolio Development, which is part of a new property course we have developed called iKickstart or The Property Investor Quick Start.
What are these 4Es then? They are:
- Enter
- Expand
- Establish
- Exit
These are 4 clear phases of our portfolio development and evolution, which are marked out by different facets and characteristics in each phase.
For example, our focus in the Enter phase will be mostly about strategy selection, education and getting our starting investment funds together, whereas in the exit phase, we will more likely be concerned with issues such as tax planning, legacy and asset realisation say.
This is what I wanted to share a little more about today…how what these phases look like, what characteristics are on display and how we are likely to think and act in each phase also.
We shall go a little deeper into the first two phase today and so let’s start with the Enter phase then.
The Enter Phase
During this Enter phase of our portfolio development, by definition we don’t yet have a portfolio and so the focus will be on getting started. As a result, we will have a focus on identifying which property investment strategy we should follow. This can be very daunting and overwhelming, especially when you consider that there are at least 30 different property strategies that are quite common, although I recently heard of a couple of investors that had identified over a hundred different property strategies during their long investment careers! It would be easy to feel a little overwhelmed and confused if we had to choose from over a hundred different property strategies I would suggest. For this reason, I usually advise focusing on one or at most two strategies initially.
There is also the new, hot or in vogue property strategies of course. If you go to some of the property meetings and events at the moment you will hear phrases such as rent-to-rent, serviced accommodation and most recently lease & leverage being banded about. However, this does not mean that they are suitable for all, or indeed possible for the aspiring property investor.
At the Enter phase there will most likely be some form of scarcity and / or limitation. It could be limited funds, knowledge or skills. Finance is a big barrier to entry to starting with many property strategies, such as large deposits plus fees being required for traditional buy-to-let.
This is partly why certain other strategies, such as rent-to-rent to name but one, have emerged, which often require far less up-front investment to get started. The trade-off is likely to be time here though, so if you are in full-time employment, or have a business, this may not be a viable option to pursue, even if you wanted to.
Then of course there is the knowledge and skills gap, so we will have a focus on learning and development to understand more about the options and how best to go about deciding on our best way forward. Books and similar resources, training courses, mentoring and other learning resources are available to assist us here if we want to. However, it can also be very confusing, overwhelming and even a little bit scary to be honest.
Deciding on the right property strategy will vary from person to person and in my opinion, should be linked with our long-term goals and purpose. So, for me at least, it should not start with strategy at all, but with goals, vision and purpose instead. If we know what we are looking to achieve and by when, we will have a better idea of what direction, or strategies are likely to best get us there.
In addition to our goals, vision and purpose, we should also consider our skills, resources, capabilities and even lifestyle preferences before we decide on a chosen strategy.
For example, I mentioned rent-to-rent earlier, however, in order to execute this strategy effectively, we will need to be very good at identifying property owners and landlords that do not necessarily need to sell their property but are happy to receive a guaranteed rental income instead, whilst agreeing to let us investors sub-let the property out. This will involve a lot of marketing, negotiation, legal and commercial skills as a minimum. In addition, it will require quite a lot of time in identifying the properties and dealing with the owners. Furthermore, there is the ongoing management of the property & tenants, which is likely to be on an HMO or short-term rental basis in order to create the required profit margin. This then makes it more of a job or small business venture and that may not suit everyone.
The point I am making, is that certain strategies will become suitable for some investors whilst others will not be suitable. It will depend on our aims, time availability, resources and crucially our lifestyle preferences as well.
Needless to say, whilst we should take some time to understand the options and teach ourselves more about them, the Enter phase can actually be quite quick, unless we determine that we need to start saving up for a few years before we get going.
However, there is also another risk that we may face at this stage: procrastination. We may get so overwhelmed with all the information or want to try and be so well prepared for our new property investing journey that we fail to take any action. Therefore, this could mean that we fail to progress into or beyond the Enter phase if we fall into this procrastination or perfectionism trap.
The Expand Phase
The second phase in the portfolio development cycle is the Expand phase.
Once we have started out or entered the world of property investment, we may wish to expand the portfolio beyond the first property, if that is relevant to reaching our desired goals. For some people, having a single investment property could be sufficient to realise all we ever need from property. This could mean that the Expand phase never happens and instead the focus would be either on the Establish and / or Exit Phases instead.
However, many of the people that I speak to are looking to grow their portfolio, even if it means with just one or two more properties. For some, it could mean lots more properties or different income streams to support or even replace our incomes potentially.
One of the characteristics in this Expand phase are likely to be a lack of expansion funds, especially of we sank our life savings into our first property. There could be a significant threat to our property business here too…a lack of liquid cash resources.
Often when we start in property, we end up sinking everything into the first or second deal and, at the same time, our profitability will typically be at the lowest point in the first five years. If something were to go wrong with our first properties, such as a boiler breakdown, an interest rate rise or an absconding tenant, then we could be under severe pressure here. Therefore, we can be quite vulnerable at this stage if we do not have an adequate buffer in place to protect against these shocks. It is wise therefore to keep some funds aside just in case, despite how tempting it may be to throw caution to the wind and simply go all in instead.
There is also a risk of frustration setting in here in this phase. We may have been all pumped up and full of enthusiasm after deciding on what direction we want to take and ploughed into our first property investment project, only to find ourselves stuck as we try to repeat the process with our next investment. For example, we may need to save up another deposit. Therefore, we could find ourselves with a case of a walk, run and then stop feeling here to overcome.
It is helpful to ready ourselves for this potential dip in our property journey. This could at the simplest level just be a case of preparing ourselves mentally for a wait between property investments. Alternatively, it may mean seeking out alternative strategies that will allow us to keep going instead.
For example, in my own case, I adopted this idea of recycling my cash by adding value to properties to release most of my initial investment funds from a project to put into the next one. This can accelerate the rate of expansion but it is just one way of doing this.
In terms of our thinking at this stage, we could lose focus and get distracted or even disheartened. Equally, we could be more exposed to risk by having a lack of cash or higher debt levels say. So, we should be careful and make some deliberate plans if we are to avoid some of the potential pitfalls that could arise here.
That covers the Enter and Expand phases then. As for the Establish and Exit phases, we shall take a look at these more closely next time and leave it there for this week I think. Also, next time, we shall take a closer look at this idea of how our portfolio development can change as we also change throughout our lives. We shall return to this theme next time then.
In the meantime, let’s see what we have to share in Your Voice this week.
Your Voice
This week, we have yet another 5-star review, this time from Prakash-Shah who says:
Great Resource 5 Stars Prakash-Shah from United Kingdom
"Anyone in property should listen to these. Great presentation. Thank you"
Short & sweet but this is very much appreciated thank you Prakash, who I know to be both an experienced property investor and a very nice chap to boot!
Next up, the Shout Out
Shout Out
Today’s shout-out is a book resource. I recently read the book written by Mish Slade & Rob Dix called Protect Your Tech. It’s all about staying safe with our IT and in our online world.
I have to say, it is an easy and very practical read, which contains many tips and simple applications designed to keep our online lives safe and sound. Some of the ideas I was aware of, however, there are several that I was not really and so this easy-to-digest book allowed me to simply assess my security risks and plug any gaps quickly and effectively. Well worth a read I would say, so look out for that in the Amazon store.
There we have another week of property content as we unravel another layer in this idea of cycles in property – this time with our property portfolio cycle. Drop me an email personally podcast@thepropertyvoice.net if this discussion has sparked any interest or curiosity in you. I had a great exchange with a listener this week about avoiding a recession following that show, so I do love to get your feedback and start a dialogue with you. Meanwhile, the show notes will be over at the website www.thepropertyvoice.net
Thank you very much for listening again this week and until next time on The Property Voice Podcast…it’s ciao-ciao