Property Cycles: The Investment Property Lifecycle – Undertaking Works (Part 2) | PVP S2E15

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The Property Voice Podcast - Series 2: Property Cycles - The Investment Property Lifecycle - Undertaking Works Part 2

Today we take a look at the subject of undertaking works from my own point of view as more of a hands-off, remote investor. There will still be some common themes, but equally a few differences to our show last time, so make sure you review both of these episodes to get a rounded perspective on undertaking works in property. We will define the different types of works projects, explore some common principles, share some of my ‘golden rules’ and discuss how to go about undertaking works from a distance. Plus, we have no less than FOUR great resources in today’s Shout Out related to undertaking works in property.

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Resources mentioned

LNPG – the Landlord’s National Property Group is a syndicated buyer’s club where discounts on common items for refurbishment works can be sourced.

The Building Sherriff – a great resource that helps make sense when it comes to job costing works in property

JCT Suite – The Joint Contracts Tribunal has a selection of contract templates to suit nearly all types of works in property

Build Cost Calculator – Jewson have produced a simple calculator to estimate the cost of building a property in different regions using different approaches

Today’s must do’s

Have a listen to both episodes on undertaking works in a property project and apply the principles that most relate to your style and approach on your next project. Explore the resources mentioned and set your own ‘golden rules’ for undertaking works in property.

Subscribe to and review the show in iTunes…and while you are at it please help us to spread the word by telling all your friends too!

Send in your property stories, questions or moans to podcast@thepropertyvoice.net and we will try and feature YOU on the show too!

Property Investor Toolkit – here is the book link on amazon.co.uk & amazon.com in case you would like to get yourself a copy to accompany this series

Get talking!

Join in the discussion, either here in the comments section below, or by emailing us at podcast@thepropertyvoice.net

Start a conversation on Twitter with us @PropertyVoiceUK or on our Facebook page

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.

Last time out, we had the views of a Chartered Building Surveyor, as Damien Fogg joined me on the show to share his experience and expertise. I don’t plan to repeat and rehash all of what Damien said last time. However, I did want to take a look at the subject of undertaking works from my own point of view as a more hands-off and remote investor. There will still be some common themes to what Damien shared, but equally a few differences, so make sure you review both of these episodes to get a rounded perspective on undertaking works in property.

What do we have to look forward to in today’s show then…? We define the different types of works projects, explore some common principles, share some of my ‘golden rules’ and discuss how to go about undertaking works from a distance. We have another great 5-star review in Your Voice and not just one but FOUR great resources related to undertaking works in a property project under the Shout Out segment.

So, let’s get cracking then!

Property Chatter

When undertaking any work on an investment property, there are different types of project, here is a brief summary of the main ones:

1. Refurbishment & renovation – where we bring a tired property back into a decent condition based around its existing use and layout
2. Conversion & extension – where we alter the entire or a part of a property to turn it into something else or add usable space instead
3. Development & reconstruction – to create or rebuild something altogether
4. Repairs & maintenance – to maintain elements of a property over time to ensure it remains in a reasonable habitable condition

Whilst there are different types of works project, there are some relatively common principles that I would like to share with you.

Some common principles:

• Assessing & scoping out required works
  • Extent & scale
  • Finish required for your purpose
  • Time & budget
• Estimating the cost & return of undertaking works
  • Essential / desirable
  • Adding value / Return On Works Investment (ROWI) / opportunity cost
  • Keeps ongoing maintenance costs down
• Acquiring the necessary approvals and permissions
  • Planning permission & building control
  • Freeholder / management company permissions
  • Lender & insurance
• Appointing & contracting trades and builders
  • Main contractor / individual trades
  • Fixed price / variable cost e.g. price and materials
  • Contract: informal / formal
  • Payment: milestones / progress payments / incentives & penalties
• Project managing the works
  • Total time & critical path
  • Organising materials & services
  • Decision-making / overcoming obstacles

Some of my ‘golden rules’

Here are some of the rules that I tend to adopt when it comes to looking at projects involving undertaking works:

• The 40% Rule – for flips & refurb / refinance projects I look for a 40%+ difference between my target purchase price and the property’s end value after undertaking works. This often allows some headroom to cover the cost of works, finance and holding costs and my profit margin.
• End Profit Offer Rule – I use this rule to help me determine my maximum purchase price for a property. I take the projected end value after works based on recent, local comparable sales, deduct the estimated costs of works, finance and holding costs and then my required profit margin in £s. This would then tell me the most I could afford to pay for the property in order to make my required profit.
• Different Project Risk Margins – I have different minimum profit margin expectations for different types of project and usually as there is more time, risk and complexity as we progress through this value-chain of project. For example, refurb / flip projects will be at least 15% ROI, conversion projects at least 20%+ ROI & development projects at least 30%+ ROI. These are minimum levels of return and are often higher, but having them allows me to quickly assess whether a deal is likely to meet my requirements or now. Also, don’t forget that by using finance, we can use less of our own cash and so this often increased the ROI on our personal funds invested.
• Stress Test our numbers with ‘What If Scenarios’– I tend to have best, worst & mid case scenarios when I am evaluating a project, probably settling on the mid-case to make a decision provided there is sufficient margin in it to cover the downside of the worst case. I flex time, cost and end value to stress test the project profit to help decide. Be careful not to be too optimistic or too pessimistic on every aspect of a project…either one can work against you, leading to reckless decisions on the one hand or no projects on the other.
• The contingency rule – I always have a line item for contingencies! Flex this based on your experience 10% to 25% is customary and don’t be tempted to say, we can afford a lower profit as we can add in the contingency…it is there for a reason…
• Have 2 or 3 exits if possible – On any project, it is wise to have several exit options if possible. For example, sell, refinance and let out or extend and defer a sale instead. Weigh up each of these options, assessing the returns in each case. Undertake due diligence to assess each one in turn. You will find that some exits are more favourable than others. If you find that there is only realistically one exit, then make sure your margin is big enough to stand it going slightly off course.
• The three quotes rule – OK, if you are merely fixing a leaky tap this does not apply, however, for any significant level of expenditure, always ensure you get at least three different quotes. Follow all the guidance I have made about referral and recommendations to identify who to invite to quote and then ask them to submit a written quote for the job at hand. Make sure that when you are comparing the quotes that you are comparing apples with apples, as some trades will provide a quote on a different basis to others. Having a written programme of works will certainly assist with this. Do be prepared to consider alternative ways of doing things or standards of finish but also keep in mind the implication of changing the programme on your overall objective for the property.

Now some ideas specifically dealing with managing a works project from a distance.

Undertaking works remotely

Here are some of the things that I tend to consider when undertaking works from a distance.

1. Leverage local people such as local agents and other investors. There is always the risk that the good people will be too busy to undertake your project when you need them too, but still this is worth testing…even the best work on referrals and recommendations. If you get an ‘outlier’ quote which is very high, consider replacing that one with another contractor instead.
2. Seek out recommendations and referrals – personal recommendations from people we know and trust are best, however, network meetings, forums and social media can help with this. Sites such as ‘Trust a Trader’ can also be used but choose wisely as you don’t know the people making recommendations here.
3. Have a trusted advisor that can give advice on estimates & quotes, undertake an inspection or monitor the works completed. This could be a good personal contact with knowledge of property and building or a contractor that we pay like a project manager or surveyor for example.
4. Have a written agreement of schedule of works / project plan. This helps there to be a clear objective of what is intended and then a reference point to assess the final quality of the job. A project plan, setting out even in broad terms what should be done, in what order and by when can be a very helpful reference to assess progress.
5. Consider asking for a ‘method statement’ of exactly how work will be undertaken: what materials will be used and how will the end result be achieved. Don’t be caught out when the finish wasn’t exactly what you had in mind…different size tiles to what you were expecting, cheap materials that will need repairing or replacing sooner rather than later and a less than acceptable finish when you are trying to impress a would-be buyer can all be avoided by doing this.
6. De-risk the project with retentions, fixed priced agreements and insurances. A retention of monies in the region of 5%-15% can help to ensure that any snagging issues are completed for the builder to get paid in full. Do consider that with retentions that many builders price this into the job, so make sure you bring this up after getting your quotes at the contract stage. Fixed price agreements can reduce the risk of you being hit for ‘extras’, however, keep in mind that if the works are not well specified or are changed mid-way through, this can lead to significant add on charges to the contract. Some builders will limit their risk with a ‘provisional cost’ for certain items when they cannot fully inspect what is required, for example under floorboards, behind walls, etc. Equally, if we intend to transfer the risk to the tradesman doing the work, then they, quite understandably, will try to reduce or limit their risk by pricing higher, having financial caps or contractual limitations as to their liability. Finally, have adequate insurance in place. You cannot really insure for a project overrunning in cost as such, however, you can have a good policy that can protect in case of ‘insured risk’ arising like subsidence, accidental damage (in some cases) and so on. Also, check with the insurer what their terms are when undertaking works and leaving the property empty overnight.
7. Adopt the ‘4 eyes’ approach to checking things off. Two people looking and checking is better than one unless you are very experienced. I tend to use photos and video to see how work will be undertaken if I cannot be there in person.

This is more a perspective from a hands-off and remote based investor, which is different to Damien’s approach last time out. Look at both approaches over the last couple of episodes and select which is the best approach that suits you better.

Your Voice

We return with a listener review in today’s Your Voice, this time a 5-star review which comes from Desanj77 who says:

Great Property Investor Podcast 5 Stars

Desanj77

This property podcast stands out from the rest because Richard has done a great job of tackling difficult subjects articulately. The topics covered are a must for all investors. Richard has his own unique style in explaining the subject matter well. Cassa is great and her contribution adds a different dimension to the topic. Keep up the great work!

Thank you so much for taking the time and trouble to leave a review for the show Desanj77, it makes us smile to see the show being so well received J

Who will be next to have their 5-star review read out on the show…could it be you? Well, it could be…but only if you leave us one of course…so what are you waiting for…?

Shout Out

I thought I would share some useful resources for undertaking works in today’s Shout Out…here are four very useful resources for you to check out at your leisure:

LNPG – the Landlord’s National Property Group is a syndicated buyer’s club where discounts on common items for refurbishment works can be sourced.

The Building Sherriff – a great resource that helps make sense when it comes to job costing works in property

JCT Suite – The Joint Contracts Tribunal has a selection of contract templates to suit nearly all types of works in property

Build Cost Calculator – Jewson have produced a simple calculator to estimate the cost of building a property in different regions using different approaches

So, there we have it, the second instalment of undertaking works and more of a look from the perspective of a remote investor this time. I hope you found that useful.

We are drawing towards the end of the current series, looking at the Investment Property Lifecycle. Having explored the acquire, finance and now works phases, we only have the exit phase left to consider. So, join me next time as we take a look at the exit phase and why it is so important.

Feel free to start a conversation about property with me by emailing me: podcast@thepropertyvoice.net , meanwhile all the show notes will be over at the website www.thepropertyvoice.net

However, as always I would like to say thank you very much for listening again this week and until next time on The Property Voice Podcast…it’s ciao-ciao