Here comes our second Property Core Skill: Finding Funds.
Arguably, if we sort out the first two property core skills of finding deals and finding funds, we are home and dry. Well…almost!
However, these first two do form the bedrock upon which all of the other property core skills are built.
So, let’s discuss the funding & capital stack, the three types of property finance (institutional, alternative & creative), financial strategy and planning, the property finance game-changers and my personal favourite…financial engineering 🤓
This week is content week and will be followed next week with another small panel discussion to get a few more views and insights into the topic.
Oh…I may mention a forthcoming book on Property Finance that I am about to publish…perhaps once or even twice…
Enjoy!
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Transcription of the show
Here comes our second Property Core Skill: Finding Funds.
Arguably, if we sort out the first two property core skills of finding deals and finding funds, we are home and dry. Well…almost!
However, these first two do form the bedrock upon which all of the other property core skills are built.
So, let’s discuss the funding & capital stack, the three types of property finance (institutional, alternative & creative), financial strategy and planning, the property finance game-changers and my personal favourite…financial engineering 🤓
This week is content week and will be followed next week with another small panel discussion to get a few more views and insights into the topic.
Oh…I may mention a forthcoming book on Property Finance that I am about to publish…perhaps once or even twice…
Enjoy!
Property Chatter
Welcome to the property voice podcast helping you to navigate safely through the world of property investing, get the lowdown and updates, insights and outcomes on all matters property with a splash of entertainment along the way to a property, voice, or voice to trust among the crowd. Now, let's get started with your host, Richard Brown.
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 on the show today, we're going to continue our series on the property core skills. And we're back to content week this week. So we're alternating between a content week and a discussion week. So last couple of weeks, we had content wheat week rather, around finding deals. And then we had a discussion panel last week, talking about finding deals funny enough. So this week, we're gonna share some content around finding funds. And then next week, we'll have a panel discussion on the same topic. So you're kind of getting the gist of the format for this particular series now, so it's just me this week, and then we'll be joined by hopefully a couple of friends for next week's panel discussion. And if you'd like to get involved, by the way, there is an opportunity to get involved in various points in the series, there will be some people who are joining friends of TPV people on connected to as well as within the TPV ie the property voice family. So finding funds, then, what can I tell you? Um, you know, there's a film 50 ways to leave your lover? I think it is I think that's right, isn't it? Or is it a song, I can't remember 50 I think it's 50 ways to leave your lover. Well, I've written a book 50 ways to find funds. It's not actually called that it's called The Complete Guide to property finance. But the subtitle involves a reference to how many different types of funding there are actually available. And I was actually really surprised myself I thought is about 30, I'd got two on the list. And I actually counted them and got over 50 different types of financing. So there's a bit of a market for you, my forthcoming book is going to be released, hopefully, next month, all being well, it's in the final stages of production with copy setting and book covers, and as the proofreading, and that will be released shortly. So you'll get the full lowdown on every single one of those 53. I think it is 5354 different types of financing. And in the book, so a bit of a teaser for you. But I'm going to sort of give you a little bit of insight and a snapshot into some of that today. So in my world, or in my book, so to speak, with finance, in property finance, it really breaks down into three main sections that we have institutional finance, alternative finance, and creative finance, their institutional finance is pretty much what most people would think of immediately if I say, namely some property finance, and they go buy to let mortgage, you're bridging finance, something like that. That's an exact These are examples of institutional finance. But I've got another sort of eight or 10, sort of variations on the theme that are in the book in that particular category. And then the second category is alternative finance. Now alternative finance is finding finance through alternative means. And so that's things like raising yourself, it's peer to peer lending, and crowdfunding could be grants could be soft, soft loans, there could be private finance. So it still looks and feels like finance, what's really different is where you get it from or how you get it. So you're not going to get it from a mainstream bank or high street bank, you're going to get it somewhere else. So that's why it's called alternative finance, that kind of looks and feels like finance, which just comes from a different place. And then the third category is creative finance. Now creative finance might not even look like finance at all, in some respects. Because in my world creative finance is achieving similar aims as financing. And for me, financing is basically achieving either payment over time, or a financial contribution to your property investment. So that's my definition of finance, property finance. And within the realm of creative finance, we can have contractual structures such as option agreements, delay, Completion, assisted sale, renter rent, those sorts of things, which are examples of contractual structures, which achieve the ends of deferring payments, spreading them over time, or getting some kind of contribution, or even control of an asset without actually, you know, having to pay for it. So that's, that's the context of the three different types of Finance. So that's one of the concepts I want to get over Today, there's a couple more on my little list. The other one is the concept of what I call the funding stack. So imagine a pyramid in three sections, the base, the middle, and the top. And you've got that in your mind's eye. So I'm going to be covering the funding stack. And in the funding stack, what you have at the bottom of the pyramid is what I call acquisition finance. So that's, that's paying for a property. And often using finance, you're not, you don't usually you don't manage to raise all of the money, sometimes you have to pay all in cash. And then if you want to use a buy to let mortgage, for example, you might get typically 70 75%, sometimes a little bit more depends on the condition, market conditions, etc, of the purchase price of the property. And that's cheap, you know, pretty much acquisition of Finance. And there's a couple of variations on that bridging finance is classically used for short term, you know, projects, by select mortgages and commercial loans, usually, for longer term, ownership of properties, property assets. But it's in this in this realm of acquisition, finance, a lot of people know about these things already wanted to have, you probably get you're getting shivers down your spine, as I'm talking about bridging finance. But it's, it's perfect for the right project, trust me. And then in the, I'm going to go straight to the top. So the top of the pyramid right at the top there, we have basically equity, and equity is, is our own cash, essentially, in fact, hold that thought, because it doesn't always have to be our own cash, but its cash, its cash in the deal, or some people call it skin in the game. And I'll come back to what sort of proportion you might need in a second. But that's that's usually so sometimes you have a pyramid, which doesn't have the middle section, which I'm going to explain in a second. So you just have the top and the bottom. So you have acquisition, finance, and then you have your own cash. And your own cash is typically the deposit. And the acquisition. Finance is typically something like a buy to let mortgage or bridging finance, for example. And so in let me just focus on that as an example. Let's say you have a 75% loan to value by select mortgage. That's the acquisition finance and therefore 25% of that purchase price comes in your own funds. And that's classically how, you know, finance is thought off in, in the property. But as I mentioned, there's over 50 ways in which you can finance your property acquisitions. And so I'm going to kind of dive into that a little bit without, you know, basically talking you through nearly 80,000 words, which is what the size of the book is, there's quite a lot, in other words, so I'm trying to give you a headline or flavor. Now kind of set you up by thinking there's a middle section of this pyramid that is missing. And that middle section of the funding stack, this pyramid is you could call it development finance. But you could also call it mezzanine finance. Now if you're kind of a fancy pants person, you might call it mezzanine. And that just means it sits in the middle.
Or you can you know, more commonly, we might know this is development finance, which sits in the middle of acquisition, finance, and equity. That's what the middle section actually means. So it's something that kind of isn't 100% acquisition finance, and isn't 100% equity, either, it sits in the middle, and it could be a bit fluid. And by definition, if we're thinking about development, finance, then is usually funding some of the development costs that we might have in a project. So you wouldn't typically have this middle section, if you just wanted a buy to let property that you wanted to buy and hold, you know, for several decades, and not really do any work to it, just rent it out. I mean, actually, if you're an owner for several decades, you will have to do some work to it, let's face it. But generally speaking, if you just want to buy an asset, and rent it out, you're not young got a project. And so that middle section of the pyramid may or may not apply. But I do want to focus before I move too far away from the funding stack on you know, what I would call a game-changing realization in my own property investing journey. And there's been a couple, actually, but as far as financing is concerned, raising finance, the two main game changes, were one to get finance higher up the funding stack. So higher up this pyramid that I'm talking about moving away from purely acquisition, finance, into the realms of development, finance, and actually also into equity finance. And in fact, that brings me on to the second game-changer, which is accessing private finance. So this is, if you remember what I said about institutional alternative and creative finance, if you're accessing private finance, it looks and feels like finance, but it's just come from an alternative source. So that's alternative financing. So, alternative financing through private finance, and also moving higher up the funding stack, beyond say, a 75% loan to value mortgage on the purchase price of the property, and moving into funding some of the development and the associated professional development cost of associated professional fees, and also getting into some of the equity financings. And I've actually funded deals 100% without any of my own money. So when we're talking about the potential, the potential is 100%, financing, okay, the potential is 100% financing. Often, that's kind of, not often sometimes that's not, you know, achievable, and you might need to put some of your own funds in. So what I typically talk about with people is the need to put in between five or between zero, let's face it between zero and maybe 25 30%, of a project value in your own cash terms. And that will, you know, along with development, finance, or even if you're not, you're undertaking a development project, with the acquisition, finance, will get you into a deal. So you need cash, you often not always you need cash, but you don't necessarily need as much as you think. And that's really what's kind of elaborated on in some detail in the book, The Complete Guide to property finance, have a blog that enough already, I think you probably have. So we've got this notion of the funding stack. And the other thing I kind of just want to make clear, if it isn't clear enough already, is if you can imagine the funding stack splitting into two. And in one, one half, it's, let's call them institutions, providing the funding. And then it's predominantly towards the bottom end of the funding stack of this pyramid. So acquisition financing, to some extent development, finance, up to a percentage of the loan to gross development cost or the project value, in other words, can come from institutions. And there's a range of different institutions, range, different places, you can get that kind of monitoring. And you know, really, you're in the realms of finding a good broker to give you access to those types of funding solutions. But it's fairly mainstream is this called institutional finance, reason, traditional financing in another language if you like, or another term. So that's the left hand side of this particular pyramid. On the right hand side, I mean, I'm looking at my own diagram here. So I'm trying to describe it to you, I've got an arrow going from top to bottom. And in that arrow box, I've got the word private finance, written. So in other words, you can access private finance, at any point of the funding stack, whether it's acquisition, finance, whether it's development, finance, or whether it's equity, finance. So usually at the bottom development, finance and acquisition, finance is usually debt borrowing, in other words, and usually towards the top equity or, you know, cash, in other words, so, but just hold that thought that if you want to get higher up the funding stack, you need to have access to alternative sources of funds. And whether that's alternative through institutions, which will get you so far, or alternative channels, people, mediums, etc, private financing, which can actually get you all the way up the funding stack. And I had a conversation with somebody fairly recently. And he said to them, you know, what sort of funds have you got available to invest right now? It doesn't really matter what they said what their answer was. But I asked them the follow up question, what sort of, let's say, let's say they said, 200,000 pounds, right, which is big for you. 200,000 pounds is the funds I've got to invest right now. And then I asked the follow up question, what is the purchasing power of that 200,000 pounds to you. And, you know, once they kind of understood the concept that really, you know, that they could buy something for 200,000. Or they could put it together with say, a buy to let mortgage or bridging finance. And maybe they could sort of get up to, you know, close to a million here, you know, something about order, you know, perhaps a little bit less, maybe 800,000. Actually, let's get my math correct. 800,000 pounds would be the purchasing power. And 200,000 pounds would be the deposit. 600,000 pounds would classically be acquisition finance, and I'm ignoring costs and fees and associated bits and pieces like that. Actually, that dilutes your purchasing power, but I'm just trying to keep it simple. So they thought they had purchasing power of service. It was 100,000 not million bank upon. So they thought they had purchasing power of 800,000 with a 200,000 pounds, cash ports. And I said to them, well, what if actually, that could be 2 million. What if it could be you know, 4 million And there's like, well, how can that be? How is that even possible? And the reason it could be possible is by moving up the funding stack, and actually providing less of your own funds, your own cash resources in the project in the deal that you're looking at. And, of course, classically that says, Well, how do we do that, then? Well, you know that you read my book, basically, no, no, I'm plugging the book too much. I'll stop doing that. But you move, you move further up the funding stack. So you get access to things like development, finance, you get access to things like private finance, and you know, some of the other 50 or so different types of financing, institution, alternative and creative as I've mentioned. So you can actually increase your purchasing power by having a greater understanding, awareness and access to different forms of financing. And that's the game-changer. That is the game-changer by understanding what's available by having access to it. And then being able to leverage it, capitalize it and utilize it in your property business, is how you can actually increase your purchasing power, and buy assets which are more valuable, or do more deals or do bigger deals. And that, in a nutshell, is what this episode is really about. It's not really telling you how to get a buy to let mortgage news, there's lots of resources out there, telling you how you can get a buy to let mortgage, there's lots of brokers out there who can help you get a buy to let mortgage, the game changer is moving up the funding stack. There we go. So now we just dwelled on the funding stack. And while I'm talking about stacks, the other stack I want to talk about is another one I call the capital stack. So the funding stack is usually about debt and equity. It's you know, what you understand by financing, but the capital stack are different types of capital that you can raise and leverage in your property business, one of which is financial capital. So that's what we've been talking about. So financial capital could be coming from your own cash, it can be coming from accuracy, whether that's your own equity or somebody else's equity, it could come from debt or borrowing, usually from institutions or private investors. But that financial capital is only one of eight different types of capital. And I've talked about this topic before, so you might have come across it. And just so briefly, by having access to different types of capital, or leveraging different types of capital that you have, or growing different types of capital, so that you can layer them one upon the other, we can actually grow our property businesses that way, too. So she's going to digress a little bit, because some of these are not financial at all, I don't want to go too far in it. But it knowledge capital is another example. Okay, knowledge capital, what do you know, your planning rules is a great example of knowledge capital, if you know your way around the planning system, you can leverage and capitalize on your knowledge capital, or indeed somebody else's, doesn't have to be yours. Social capital, if you've got a large following on social media, or an over network that you can access and leverage that is valuable, it can bring additional resources, additional capital to your business. And just quickly, the other ones are emotional spiritual sets, that's things like empathy, and a great, you know, people skills, if you like, systems capital, where if you can make things work without you being there, because they're automated, for example, then that systems capital, you can do more with less human capital, you can leverage other people, whether it's their brain power, which will be utilizing their knowledge and capital, or their labor, you know, the, you're actually utilizing their resources, their time, and brand capital. So when you have a brand, it has a resonance that attracts people, it has value. And finally, natural capital, natural power is the hardest one for me to explain. But, you know, essentially, you know, it's using things that are out there natural resources, it could be land, could be solar, wind, etc. In our property businesses. So I just want to touch on the idea of the capital stack, along with the finance stack, if you like. That's, that's really important to understand.
The next thing really, that's important, I believe, is where do you go to access these types of Finance? So I'm back onto the talking about finding finance now. And really, we've got three main funding channels or finance channels, if you like. So we've got first of all mortgage brokers, which many of you will be familiar with, but also mortgage platforms. Sometimes there's, you know, there's a platform or two out there which serve the same purpose. As a mortgage broker. It's just, it's an electronic medium. So you've got mortgage brokers and platforms being number one, then you've got specialist brokers. And platforms. So apart from just you know, putting in something into search engine and going find the cheapest rate, or speaking to a broker and go, what's the best buy, select deal for my property, we can actually go to more specialist brokers and platforms. These are people like crowdfunders people who raise bond funding people who can help you raise equity. That's what I mean by specialists, especially his broker specialist platform. So we're moving further into more complex areas. And when we're talking about these specialists, and then the third channel we can use is what I call being your own bank. So that's using our own resources, our connections, our network, to access funding, and you know, particularly private finance is what I'm talking about here. So be your own bank, or be your own broker, actually, not bring your own bottle. I've got BYOB written down here. So that how to access it those channels. How do you access finance, either through, you know, traditional mortgage brokers and platforms, specialist brokers and platforms or being your own bank. And I talked quite a lot about being your own bank in the sad again, but I do talk about that somewhere that you know, yeah. Okay. So the other thing that's really important to talk about with, you know, that I will actually I wanted to talk about today was what I call financial engineering. So, financial engineering is really putting different pieces of the financial pie together. So I've already spoken about the funding stack in this pyramid with acquisition, finance, development, finance, and equity, finance, if you like, well, financial engineering, is piecing those pieces together, so that you can actually layer them together. And that's how actually you get further up the funding stack. So if you can layer, some acquisition, finance, on top of that, some development, finance, and on top of that, maybe some Let's call users her mezzanine, something in the middle, and also equity finance, you can move further up the funding stack. And so being a financial engineer, just like any engineer, is kind of putting different components together and making them work. So just wanting to introduce the concept today of financial engineering, how can you make a deal work? How can you structure the deal so that it it actually, you achieve more finance, or you go further up the funding stack, so just sowing a seed for financial engineering. And the other concept I really wanted to make when we're talking about, particularly private finance is that there's a number of trade offs. And the three main trade offs are risk, reward, and security. And it's a bit like, what was the there's a trade off isn't there, when you're talking about buying or buying a service, that you can, you can have it cheap, you can have it fast, but you can't have quality, you know, you've got those three things speed, price and quality, and you can't have it all, there's always a trade off, you've got to compromise somewhere. And so it is with financing. If you want, if you want low risk, you probably going to compromise on reward. And but you're gonna get a lot, maybe you get a lot of security, but you get lower reward. If you want very high reward, you might have to compromise a little bit on security and or risk. So there's this tension, if you like, there's these trade offs between reward risk and security. And the important thing there is dependent doesn't matter what side of the fence you're on, whether you're, let's say, a provider of finance, or a, you know, utilizer of Finance. So that could be debt could be equity, borrowings, or cash, you know, provided to your property deals is to understand your risk profile, and understand what your, you know, realistic expectations are, and how much security is going to make you feel comfortable. And there's a scale. And you know, it's just understanding where you sit on that scale. So many people I speak to, I say, well, what's more, important to you reward risk or security. And they'll say all of them.
And it's actually not true, or it's not even possible, you can't have all three, you can't max out on reward risk and security is just not realistic. So the follow up question is if you had to compromise on one, what would you compromise on? Or put it another way? which one can you not live without compromising on. So you either pick one that you don't want, or you pick one that you absolutely must have, but just want you to perform that mental exercise of trading off and working out what your risk profile is, and therefore understanding what rewards you want and knowing if you want high rewards you normally gonna have to trade off a degree of security or risk and obviously vice versa. So we're going a couple of trade offs that we need to consider as well. And then the final thing, really in terms of concepts I wanted to share today is to have, have an idea, have a strategy, have a financing strategy, and have a financing plan. And I talk to people about this quite a lot. So if you're looking to grow, if you're looking to buy your own property, you need a plan of how you're going to raise the funds. So that will be your plan, your strategy is to buy your first property. And then the plan would be how are you going to raise those funds, and that will form probably break down into raising funds for deposit, and then borrowing the rest, that will probably be your planning outline. But if you're already a little bit further along the journey, and you have several properties or a portfolio of your own, then actually your strategy and your plan will become more complex. And it'll become more complex, because you'll need to refinance probably, at various points along the way, you may also decide to, you know, cash in your chips, so to speak with some of those properties as you go. Or you may repurpose them into something else, you may renovate them and improve them as well. So it becomes a bit more complex in that sense. And the other dimension that really needs to come into it is your stage of maturity. In terms of your property journey, let's say that. So when you're starting out, you know, you can be probably a little bit bullish in terms of let's say, taking on leverage, leverage means the amount of borrowing the asset that you're going to take on. But as you mature, you might want to ease off a little bit on the amount of leverage and let the sort of average loan to value the average debt as a percentage of your property or portfolio value to maybe slightly reduce over time, as you mature, and you stabilize your journey. And then towards the end if you like, when you want a bit more security, and you don't want too many high risks, and the source of the next property crash taking you out scares you, it scares the living daylights out of you, you either want to you want to de leverage, or you want to be de leveraging that point in time. So there's kind of a, you know, in terms of leverage, and using finance, there's kind of this sort of bell curve effect, if you're not, you're scaling up, you kind of plateau, and then you're scanning down in terms of your leveraging in the end, in your portfolio. So your strategy, and your plan needs to take account of where you are in your property journey, and what you're looking to do, and you know very much the time, the timeline that you need to adopt there. So there we go, I probably wasn't going to share too much more, it was more of an introduction to the topic, I'll tell you what, though, what I will say is this, I made a note of the 50 odd, you know, types of private finance, if you'd like it, just drop me a line podcast at thepropertyvoice.net, you can have that with my pleasure. And you can then go away and just sort of reach out research yourself. You know what they're all about. I'll share it with you. So just drop me a line. And I'll share, I'll share that it's a quick short to consider, you know, quick, short cheat sheet. Wow, that was a sentence to say. But you know, I'll share that with you With pleasure. But hopefully, you've got the points that there's different types of financing be institutional, alternative or creative. The game changes are moving higher up the funding stack from the bottom acquisition, finance through development, finance, sometimes called mezzanine finance, to equity finance. So the higher up the funding stack, you can access the height, the faster you can scale, the larger the projects are, the greater your purchasing power. And then if you can access private financing, you will probably you know, have all the funds that you need on the sort of win win terms with a great finance partner or to achieve everything you want to do in property, make sure you look after their interest is the only thing I would say about that. And then don't forget the capital stack that there's more than money in terms of helping you to leverage and scale. And the and the final two points were have a strategy and a plan that's appropriate for you where you're at in your property journey and where you're headed and your risk profile. And don't forget the point of financial engineering, and financial engineering is being able to stitch together different components for different deals. And so that's why I like the most actually, he's talking to someone and then thinking, what tool in the toolbox Am I going to use? Or what tools what combination of tools Am I going to use as a solution for this particular scenario? It's not one size fits all. It's about you know, forgetting the most appropriate tool or the most appropriate tools for the job at hand. And that gives me a lot of fun.
I don't know why I'm laughing about that. But yeah, I really enjoy financial engineering. So there we go. That's the intro action to finding funds. I think we could delve a little bit more into it, especially when we want to talk about private finance, and how to do that, what sort of strategies and techniques where to go. But what I'm going to do is I'm going to defer that until we have the panel discussion. So we've got a few people who have raised funds privately, obviously, I have myself, we're going to have a chat about that next week. So there's an introduction today, and next week, we'll have a panel discussion, we'll probably dive a little bit more into different types of financing, and private finance in particular. So there we go. So if you would like the show notes, head over to the website, thepropertyvoice.net. If you'd like that cheat sheet that I talked about the 50 odd types of finance, institutional alternative and creative, drop me a line podcast at thepropertyvoice.net If you want to talk about anything to do with this, this property core skills series, or finding finance in particular, then reach out to me, I'd love to hear from you. But I guess all that remains now is to say thanks very much for listening once again this week. And until next time on the property boys podcast.
Thank you for listening today. Now head over to thepropertyvoice.net. For more inspirational content and get updates through our mailing list. Join us next time on the property boys podcast. And if you enjoyed the show, please don't forget to rate us on iTunes.
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