The Property Voice Podcast - Series 2: Property Cycles - The Investment Property Lifecycle - Overview
We are gradually progressing through the different types of cycle in property investment. We started at the macro level by looking at the overall property cycle. Next, we looked at the ‘midi level’ with an insight into our personal property portfolio development cycle. Finally, we turn our attention to the micro level view of an individual investment property lifecycle. In simple terms the steps in this cycle are: acquire, finance, works & exit via a sale or let. Today, we take a look into the overall picture before drilling down a little further over the coming episodes. We also have our regular features of Your Voice & the Shout Out, so plenty to get your teeth into then...
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Resources mentioned
Property company to avoid in my opinion is Newbrick Consultants
Today’s must do’s
We move into the ‘micro level’ of property cycles with the individual property lifecycle. We examine the 4 key steps of this property life cycle ensuring each is in sync with our overall goals, strategy and portfolio metrics. Consider: do we have any gaps to plug here?
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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.
OK, so we are gradually progressing through the different types of cycle in property investment. We started at the macro level by looking at the overall property cycle and spent a couple of weeks examining this, along with some input from people like Akhil Patel and Ed Atkinson.
Next, we looked at the ‘midi level’ with an insight into our personal property portfolio development cycle and had some valuable insights from some subject matter experts, such as David Clouter and Tony Gimple, along the way.
Finally, we turn our attention to the micro level view of an individual investment property lifecycle. In simple terms the steps in this cycle are: acquire, finance, works & exit via a sale or let.
Today, we take a look into the overall picture before drilling down a little further over the coming episodes and if all goes to plan, we shall have a couple of guests on the show to help uncover some of the detail in this respect.
We shall wrap up the show with Your Voice and in the Shout Out, instead of a big up for a resource or some other useful tip for us property investors, we shall instead issue a warning against a particular turnkey property sourcing company after a salutary experience of mine over the past year or so.
Right then, let’s get straight on with the show and Property Chatter.
Property Chatter
Property cycles come in various shapes and form we are discovering.
There is the overall market cycle or house prices and rent levels, which we discussed at the start of this series – I call this the ‘macro level’ cycle of property. As we saw, we need to mindful of where we are in the cycle and adapt to market conditions accordingly.
Then, there is a more personal view of our collective investment properties or our portfolio cycle and it’s evolution, development and adaptation as we progress throughout another cycle: own lives. I like to call this the ‘midi level’ cycle of property, as it looks at our overall investments over time. Once more, our approach to property investment, or our portfolio, can change as we do based on our preferences, skills, resources, risk profile and even our stage in life.
Finally, there is another cycle, which is much more specific and often more short-term in nature…or at least the first stage of the investment property project will be. This is the property investment lifecycle and in keeping with my ever decreasing level of detail in this discussion I am calling the ‘micro level’ property cycle.
What are the stages of the Investment Property Lifecycle then?
Well, we may break this down into a couple of clear phases I guess. I always like to look at the first stage as following 4 clear & distinct steps:
- Acquiring the property
- Financing our investment
- Undertaking any necessary or improvement works
- Exit by sale or letting the property out
If we decide to retain the property and hold it within our portfolio, it will then form a part of our investment property portfolio. It will then be subject to regular monitoring and review, as a part of how we manage our own portfolio as we previously discussed. However, ultimately, we may decide to do something with an individual property later on such as further improvement or conversion works and / or a subsequent disposal, based on our assessment as to whether the property still meets our objectives and investment goals. I have an example of such a property right now, which I have held for a couple of years. However, as a long-term rental property it does not meet my minimum investment criteria and so I have decided to sell it on and reinvest the proceeds into another property that will provide me with a better overall return on my investment.
Returning then to our the initial project phase of an investment property, we will follow the 4 steps that I outlined earlier: acquire, finance, works & exit. We shall see that some of these steps may not always take place with each property, but let’s have a quick look at each stage now by way of an introduction before further elaboration over the coming few episodes.
- Acquire
We cannot have an investment property unless we acquire one. Note that I have deliberately used the word ‘acquire’ here, rather than buy. Whilst, in many cases we will actually buy an investment property to form a part of our investment portfolio or property business if selling it on, we could acquire control of a property without actually buying it.
Here are just some of the ways in which we can acquire property general speaking:
We can indeed buy it – there are on-market and off-market routes to buying investment property and we can buy directly, or via an intermediary or agent of some description as well. Whichever route we take, we will end up owning the property in one way or another. We shall explore the different types of ownership a little in the coming episodes.
We could also acquire a property or land through an option agreement instead. Here, we will not buy the property, at least not initially. We will however, secure an option to purchase it at some stage in the future by paying the Option Fee. We may do this with a view to gaining value by the time the option date comes around for example by getting planning permission, by adding value to the property, or simply by waiting for the market cycle to lift the value over time.
Another way to acquire property is via some kind of lease, management agreement or other sub-letting type of structure. Rent to rent, and variations of this strategy, is one such example here, where we reach an agreement with a property owner to use their property for a period of time in return for paying them some sort of regular payment.
I could elaborate, for example, an assisted sale may mean that we do not acquire a property using any of the above routes and instead have an agreement to participate in the sale proceeds based on another type of agreement structure…a commission or profit share arrangement for example.
You are probably getting the picture then, that there are several options available to us when looking at acquiring property. The mainstream method is a purchase, however, there are alternatives and as we shall explore, there may be some merit in considering some of these under the right circumstances. But more on that one later…
- Financing the investment
Given that an investment property comes at a significant cost, we either need to, or at least should, give some consideration to how best to finance the acquisition.
There are four main methods of funding our acquisition:
- Cash
- Institutional financing
- Alternative financing
- Creative financing
Starting with cash, this is pretty straightforward, we acquire a property and pay for it using our personal cash resources. We often generate the cash to fund our acquisitions from our earnings, through savings and bonuses say, through other businesses, such as trading profits, through investment returns, such as dividends or through capital gains from asset disposals.
However, as we shall explore a little more later, paying cash has some pros and cons.
Another common method of acquiring investment property is by using finance from one of the mainstream financial providers. This could be a buy-to-let mortgage or remortgage, commercial finance or bridging finance at the simplest level. We may look at this type of financing in stages, for example using one form or finance initially, such as bridging finance say, and another one later once we have undertaken some value-adding work to the property, such as a BTL mortgage or remortgage.
It is important to match the correct finance product to the right property project as we shall also explore further.
In addition to cash and institutional financing, there is a growing supply of new, alternative or disruptive providers of financing that we can tap into to help us to acquire our property investments.
This could come from sources close to us, such as friends and family. It could also come from some of the new financing providers, such as crowdfunding and peer-to-peer lenders. Finally, there are some private individuals and small boutique corporate lenders that can be used to fund our property purchases, through joint venture partnership, private loan providers or equity partners like business angels and the like. This is a fairly untapped source of financing but a growing one all the same.
Finally, there is creative financing. We have already started to explore this when we discussed acquiring property earlier. Rent to rent and lease options, for example, are forms of creative financing in property. As too is assisted sale, instalment contracts, delayed completion, vendor finance and so on.
Whilst these are advanced strategies and not to be taken on without a full and complete understanding of how to structure them and avoid some of the risks and pitfalls that can arise, they are nonetheless another form of financing our property investments beyond the mainstream sources.
Hopefully, I have wetted you’re appetite to join me over the next few episodes to explore these different forms of financing in a little more depth then.
- Undertaking necessary or improvement works
Next we shall take a look at undertaking works to a property. Sometimes this could be either no work, or at least a minimum level of works.
Even if we buy a property ‘ready-to-rent’, such as an off-plan or new build property, or an existing rental property, we may need to undertake some works. This could at the simplest level be installing smoke alarms and CO detectors, or a cosmetic redecoration / facelift to improve its rent or saleability.
Alternatively, we get involved in more substantial programmes of works, in increasing degrees of extent and complexity, such as:
- Light refurbishment
- Heavy refurbishment
- Structural improvements
- Conversion works
- Development works
The decision over whether we will undertake any of these programs of works will depend on our investment strategy and goals, but equally our capabilities and resources. How we finance any works is also something that we may wish to consider and so there is a clear linkage with the other components of the investment property lifecycle. Finally, engaging with builders and other trades comes into the mix, as does different types of contractual structure. We will return to this theme in a later episode then.
- Exit – via rental or sale
The final stage of our investment property lifecycle is the exit phase. Even if we plan to retain the property, we are exiting the initial acquisition phase.
It could simply be buying a new property, making sure it is suitable to rent and then letting it out – that could be our exit.
However, it could also be refinancing after an initial programme of works, or indeed a sale to realise a profit based on our adding value activities.
As I mentioned earlier, we could sell an existing investment property later based on our investment criteria as we review our portfolio. However, it could also be a planned mid-term disposal, such as if we had a joint venture partner to repay, planned to sell after say 2-3 years or had targeted a fast growth area to capitalise on a rising market.
The exit phase is typically therefore anywhere between a few months and a few years in the majority of cases at least. It could be longer, say with a long lease option period where we may sell or refinance the property at the time the option date arises.
However, I like to have a clear timeline for my initial property project and then I can measure my success over this time period. It may mean breaking down our returns into capital and income returns over this investment project period therefore.
The specifics of our exit, will once again be governed by our goals and strategy and it would be prudent to have in mind at least one alternative exit option just in case our first choice of exit gets blocked for some reason. I had this a while back when a planned flip exit route got less attractive to me when the next door neighbour advertised their property for sale soon after I had bought mine. I had a plan B to hold the property for a couple of years and that’s exactly what I decided to do here – hold and then sell after a couple of years.
As we shall see, things do not always go according to plan, so it is best to have a couple of alternatives wherever possible I have found.
So, there we have it: the investment property lifecycle in outline form.
We shall return to the individual steps over the next few episodes as we uncover more of the details behind these individual stages of the investment property lifecycle. However, let’s leave the discussion there in the meantime and join me next time as we take a close look at the acquire phase.
Next up, it’s Your Voice
Your Voice
I may have mentioned previously that Damien Fogg and myself have collaborated on a training programme for property investors. The result is a foundational course, which we call iKickstart. It consists of 7 core training modules with 7 hours of learning content on matters such as strategy & goals, criteria and KPIs, financing, personal development and so on. It is a holistic and very practical approach to property investing that would suit new and early stage investors, or those looking to have a refresher or change of direction equally. In addition, we also have a couple of sessions where we critique your deals and strategy and finally, perhaps the surprise package comes in the form of both mentor-driven and peer-to-peer engagement in our property student community.
Here is what one of our attendees, Jay had to say about the course:
“iKickstart with Richard and Damien was a fantastic experience. Much like their podcasts, each module was considered, well structured and smoothly delivered in easy to digest chunks. The nice bonus I hadn't considered beforehand is the fact you get direct access to their giant property brains full of useful information and in that respect I found them to be responsive and extremely helpful with any questions I had. That alone is worth the course fee! Jay”
We would like to say a big thank you to Jay for sharing these very kind words with us and in turn you.
We have just completed the second iKickstart and will be starting our third iKickstart course in late January, which will be delivered via a combination of on-demand and live sessions, to enable our students to work at their own pace and time through the material, whilst maintaining direct access to us and the peer-to-peer learning as well.
If that sounds like something you might be interested in, then by all means drop me a line podcast@thepropertyvoice.net and we can see if there are spaces available for the next course starting in January.
Thanks Jay for sharing your views and judging by our most recent exchange of messages, with 3 property projects either completed or close to being, it certainly does look as though you have seen a kick start to your property investing journey!
And now, the Shout Out
Shout Out
I usually reserve the Shout Out to share resources, tips or other information to positively assist my fellow property investors. Today’s Shout Out comes as a cautionary word of warning with regard to a specific company that provides services to property investors – they go by the names of Newbrick Property Consultants and Newbrick Property Management with offices in St Albans and Nottinghamshire.
I may provide a detailed blog post on my full experience with this company at a later date once I have finalised my contractual dispute with them. As a snapshot, I shall share with you that the post-works snagging list had over 50 separate items within it, with the large majority accepted but nearly all incomplete within their maximum contractually stated remedy period of 28 days and with several still outstanding some nine months or more later. Agreed works and compensation amounts have been withheld by them and the company now fails to respond to my communications or pay the agreed compensation sums. Sadly, I have no option but to seek legal recourse against this company therefore.
There is more I can and will eventually share with regard to these companies but that should give you enough fair warning should you be thinking of using them. I had previously recommended them after a mostly positive experience with a transaction they managed on my behalf, however, the experience on this most recent transaction is so consistently bad and their approach so poor that I unreservedly withdraw any support or recommendation for Newbrick Consultants & Newbrick Property whatsoever. I would urge extreme caution in dealing with this company therefore.
I will keep you posted as to my progress, which sadly will be following unnecessary court action to remedy. However, it does go to show that despite our best endeavours, things can sometimes go awry in our property projects, when engaging third parties. I managed to mitigate the damage and risk involved in this project by enlisting the support of my own trusted advisor. Without having such support, things could have been pretty bad I think. Due diligence is the watch word here. Make sure you do your full and thorough checks on the people you work with, including seeking recommendation and referrals – both good or bad.
The good news that comes out of this for me, was to strengthen my systems and processes even further than I had done. It is difficult to predict whether a contractor will behave poorly, however, as a minimum having regular project inspections by your own appointed contracting agent is certainly well worth incorporating into your projects I have found. I am also extremely confident that I will be recompensed through enforcement of the contractual provisions and so I always try to ensure that the contract is sufficiently enforceable should it need to be relied up.
Trust is great, but must be earned and follows confirmed adherence to at least the minimum of contractual commitments.
And on that salutary tale, we shall leave it for now, I will keep you posted.
That’s another week from The Property Voice podcast in the bag. Join us next time as we unravel the investment property lifecycle in a little more detail.
By all means, drop me an email personally to podcast@thepropertyvoice.net if you would like to hear more about iKickstart that Jay mentioned in Your Voice, or simply to start a conversation. 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
[…] We are gradually progressing through the different types of cycle in property investment. We started at the macro level by looking at the overall property cycle. […]