I get to see LOTS of potential property deals each and every week. I am looking for potential opportunities for myself, for a select number of clients and also for a small number of subscribers to our Property Deal Tips service as well. In addition to our own systems, I am also on a large number of mailing list and in a few online groups too. Therefore, I probably get to see around 150 to 200 potential property deals every week all told.
I say no to the vast majority of these deals though and so today I decided to review a few of them to give some insights into why I said no, in the spirit of sharing with you dear listener.
Let’s dig a little deeper into why so many deals don’t make the grade, at least as far as I am concerned.
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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 on the show again today.
I get to see LOTS of potential property deals each and every week. I am looking for potential opportunities for myself, for a select number of clients and also for a small number of subscribers to our Property Deal Tips service as well. In addition to our own systems, I am also on a large number of mailing list and in a few online groups too. Therefore, I probably get to see around 150 to 200 potential property deals every week all told.
I say no to the vast majority of these deals though and so today I decided to review a few of them to give some insights into why I said no, in the spirit of sharing with you dear listener.
Let’s dig a little deeper into why so many deals don’t make the grade, at least as far as I am concerned right now then…
Property Chatter
As I mentioned, I do get to see quite a lot of property deals! I regularly see or am presented with potential projects falling under at least the following categories:
- Apparently ‘below market value’ or BMV opportunities
- Potentially highly profitable flips
- So-called high yield BTLs
- No or low cash left in BRR projects
- Development & conversion projects with BIG profit potential
- Rent-to-rent deals with next to now cash required
- Serviced accommodation opportunities with over a £1,000 a month cashflow per property
- Portfolios and apartment blocks for sale…off market
- Holiday homes, fractional ownership and other timeshare style opportunities
Basically, all shapes and sizes and more besides!
So, I get a lot of practice in sniffing out a decent deal you might say.
I would imagine that 80% of the properties and opportunities that I personally come into contact with, I can say no to very quickly. The main reason for this is that I know what I am looking for in the first place. I know whether I am looking at certain strategies, locations, values, return expectations, tenant type and so on. This certainly helps to sort out the wheat from the chaff in the first instance.
In fact, when I have a conversation with a deal sourcer, who then asks me what I am looking for, I and am usually greeted with surprise and a comment along the lines of ‘so you really do know what you want then’ when I tell them.
So, that’s the first point then…know what you are looking for and be able to articulate it in a short summary statement. My challenge these days is that I am looking at several different strategies and locations as I am not just looking for me any more…but that’s a different story.
So, once we have the general description written down, I tend to have a top line filtering method that helps me to focus on the 20% of the 20% of what makes it this far.
For example, I might have a minimum gross yield metric for a BTL opportunity, or a minimum expected monthly cashflow figure for one of my cashflow strategies, or even a minimum profit or ROI figure for a flip, BRR or development project. At this stage, it’s a simple hurdle rate that any opportunity needs to get over before I will look more deeply into it. This is particularly handy when analysing inbound marketing inquiries from third parties, such as deal sourcers and agents.
So, the second point is to set your initial hurdle rates and minimums in order to save you some time and energy reviewing bad deals.
For the active searches that we do, we apply some Golden Rules as I like to call them, which helps to squirt out the equivalent of the filtered inbound inquiries from the agents and sourcers as I just referred to.
Thus, from a long list of something like 600 to 800 possible opportunities per month; personally, I am looking more closely at something like 32 possible deals a month, or approximately 1 per day typically.
I have developed a range of standard deal templates for each of the scenarios mention earlier that quickly allow me to run the numbers on these opportunities. It then takes me up to half an hour to undertake a quick desktop review for a single property, which looks at the purchase price, works or conversion costs and gross development value or GDV, allowing the qualifying properties to be highlighted. I then apply my more in-depth filters, such as profit, added value gain, cash investment requirement, monthly cashflow and ROI for example.
Some deals will fall by the wayside at this point too.
So, we are into ever decreasing circles all the time.
Of what are now left, I will undertake a more in-depth analysis, arrange for any supporting information to be pulled, such as desktop valuations, title plans, or set up a property viewing, if appropriate.
You get the picture.
Deal Analysis
However, as I promised you, I also wanted to run through a few actual cases that I looked at recently that I said no to. Here they are.
Property #1 – High yield studio apartment BTL in Manchester
I actually looked at this opportunity on behalf of a client who asked me to conduct a portfolio review. However, this particular deal was not yet completed, and it was a case of would you proceed or not if it were you Richard?
Here are some headline numbers…
| Description | Value |
| Purchase Price | £45,000 (paying cash) |
| Refurb | £10,000 |
| Buying Costs (Incl Sourcing Fee) | £6,462 |
| Gross Development Cost | £61,462 |
| Rent per month (gross yield) | £465 (12.4%) |
| Disclosed Rent Deductions per month | £150 |
| Notional Monthly Cashflow | £315 |
So, at face value, we have an apparently high-yielding and affordable property with a decent cashflow, on paper at least.
So, why did I say no to this deal then?
Well, firstly the ROI falls below my personal minimum, which based on these numbers equated to 6.2%. Some other investors might be happy with that, especially when they have no debt on the property, but it does not meet my personal criteria that’s all.
Second, the cashflow stated is not the real cashflow position in reality. Because, there are two big items missing here: voids and maintenance.
The figures presented exclude any provision for when the property is empty, here with the justification that it comes pre-tenanted. However, it is unrealistic to expect that it will always be oppcupied, even where a tenant has been in situ for several years. Therefore, its prudent to make a provision for some voids. I therefore assume the NLA average of 3 weeks per year.
As regards maintenance, or more fully: a provision for repairs, damage, maintenance, updates replacement and overhauls…again it is unrealistic not to have any costs over any extended period of time. Therefore, I tend to allow an initial provision of somewhere between 5% and 15% of the annual rent, depending on the condition of the property, the type of property and the type of tenant. In this case, a full refurbishment to a flat was to be undertaken and then it was to be let to an LHA tenant. I went with 5% therefore.
The net result of this was to reduce the monthly cashflow from the stated figure of £315 per month to £265 per month instead. The revised ROI was then 5.2%. Personally, I would accept the cashflow but not the ROI. Upon query, the investor client was also expecting a better ROI as well.
So, based on the numbers, there could be a case when this deal still gets a yes…not from me, but from an investor looking to beat the bank say. But, I have not finished yet.
In this case a survey had been undertaken, which had some of the following contents included from the surveyor:
- Overall opinion – ‘It is advisable that you think carefully before committing to purchase this property’
- Description discrepancy – presneted as a 1-bed, when in fact it’s better described as a studio
- Concerns about the overall property condition and the local area affecting its resale potential
- Suspected asbestos and traces of damp reported
- No form of heating was present and indeed was refused by the current tenant!
- Value £40,000 rather than £45,000
Normally, I would be rubbing my hands if I see a survey like this one, at least in part. The list of problems identified and the down-valuation could offer an opportunity to renegotiate the price obviously. However, when you see the surveyor basically say don’t buy it you have to be worried!
So, whilst a reduced price could potentially be negotiated to cover the lower valuation and higher costs to put things right, in my opinion this one got a thumbs down from me and that’s without even reviewing the legal aspects.
Would you have been tempted at any point I wonder? You may have been drawn in by its affordability, high yield and cashflow possibly? And now, after I shared some of the reality of the deal…what would you say now?
The situation here is that this is also a deal introduced by a property sourcer. The client has probably been misrepresented on a few levels and is seeking a refund of their deposit now, which I am guiding them through. But guess what…the terms and conditions do not allow the fee to be returned. If you want to know how to avoid falling into this trap, then just drop me a quick line and ask to receive a copy of my Property Horror Stories article on deal sourcers and I will share it with you.
Property #2 – ‘Turnkey’ Rent-to-SA Deal in West London
I wanted to share this one, as it addresses two of the so-called high cashflow / low cash in strategies in one: rent-to-rent and serviced accommodation or SA.
The email from the sourcer is quite tempting… ‘SA Deal in West London Income 70% occupancy circa - £3715 Turnkey’. This suggest you can make nearly £4k a month without any effort, doesn’t it? Wrong!
I decided to plug it into my nifty little SA deal calculator and what promises to be £3,715 monthly income, actually looks as follows:
| Description | 40% Occupancy | 70% Occupancy |
| Room Rate | £175 | £175 |
| Monthly Turnover | £2,100 | £3,675 |
| Booking & Card Fees | £453 | £898 |
| Rent | £2,100 | £2,100 |
| Opex | £40 | £40 |
| Net Monthly Income | (£1,214) | (£320) |
| Upfront Cash Required | £4,000 | £4,000 |
| ROI | -364% | -96% |
OK, so that would not have made it too far, but I shall also state some of the other reasons why I would say no to this deal, even if the figures looked a little better…
- No asset – its by definition an income strategy, which is OK as long as you have a long-term arrangement of say 5 years or more
- It might be in a restricted area – whilst the actual location was not stated, in London short-term renting above 90 days requires planning permission
- Hidden expenses – what about wear and tear, damage and replacements on the property and furnishings? I allowed a modest £40 per month for opex, but this could easily get out of control and does not provide for replacement furniture
- The Holy Grail of 70% occupancy – SA is in effect a hotel model and top hotels do manage to achieve 70% occupancy, which is where this target comes from. But top hotels are also very experienced, spend tons on marketing and have their tentacles in many sales channels. Most rent-to-SA operators are small without this same reach or experience. Consider for a minute…70% occupancy is equivalent to renting out the property for 5 days of the week, every week of the year, without fail…how likely would you say that is? I can tell you based on real experience that its not that likely. I have several SA properties in different locations and we do not hit 70% occupancy consistently with ours. But maybe we are just really bad at it 😉 I therefore look at a range of between 40% (3 days per week) and 70% (5 days per week) and see where I break even. Hint: if you can break even at 40% to 50% at a push, then you might make a fist of SA by optimising your occupancy rates.
- The £175 room rate myth – of course this is all predicated on achieving the magic room rate figure. I don’t know where this is exactly, but from the photos it does look like a 1-bed apartment in West London, admittedly with some nice facilities within the building. However, we have literally just booked a 1-week stay in West London for 4 people in a 2-bedroom property in peak summer season for £200 per night. That’s an extra bedroom and in peak season! How about a 1-night stay on a cold February Tuesday then, what do you reckon?
Enough said on that then probably.
Property Deal #3 – Development project in the Midlands: 3 x commercial units with 15 rooms above. Market value £450,000, offers in the region of £180,000.
At first glance, a potential gross profit of £270k clearly caught my attention, so I dug a little deeper…and here’s what else was presented:
| Description | Value |
| Purchase Price | OIRO £180,000 |
| Estimated works costs | £80,000 to £100,000 |
| Gross Development Cost | £280,000 (say) |
| Market Value (GDV) | £450,000 |
| Target Gross Rent | £52,000 |
| Gross Yield | 18.6% (on GDC) or 11.6% (on GDV) |
| Profit on sale | £170,000 (60.7%) |
| ROI on 75% LTV Refinancing | c32.3% |
Sounds pretty good doesn’t it? Ok, so you know the drill by now don’t you…so what’s missing then…
- The assumption is for a 15-bed HMO above 3 commercial units. The size simply won’t accommodate 15 rooms along with the required amenity space and facilities and even if it did, the rooms would be pretty grim! Assume perhaps 10-12 rooms at a push therefore. This will reduce the rental indicated by £7,800 to £13,000 a year without even looking at the commercial rents.
- The GDV is in dreamland - £450k is around 8.65 times the gross annual rent. It is mixed use and so more difficult to value, but I would say the maximum as presented would be 7.5 times the annual rent, so £390k reducing to £292k if only a 10-bed HMO is possible, again accepting the commercial rents as stated.
- Works cost estimate – the figure indicated was £80k to £100k. However, upon inspection the place was completely gutted, had both water and fire damage, had the remnants of the drug lab that caused the fire still present and even had a tree growing out of the kitchen roof! It’s fair to say that it ‘needed improvement’ as the agents would say. My guy estimated £200k in renovation costs for this one.
- Gross Development Cost – whilst the cost of works was mentioned, what was not mentioned and needs to be accounted for is: SDLT, legal fees, valuations & surveys, other professional fees such as planning, holding costs like rent, rates utilities, insurance and security, finance-related costs and letting or sales related costs. I didn’t get this far in my analysis, but this could easily account for tens of thousands of pounds here.
- Rental deductions – I worked on an average rental deduction across the newly developed site of 30% all-inclusive excluding a mortgage.
So, by simply revising the base numbers we have:
- Purchase price £180,000 but let’s say £150,000
- Works budget £200,000
- Other project costs (paying cash) £20,000, using finance say £35,000
- Gross Development Cost £370,000 to £385,000
- Gross Development Value £390,000 (best case) or £292,000 (realistic case)
- Revised rental figure £44,200 (best case) or £39,000 (realistic case)
- Estimated flip profit £20,000 (best case) or £78,000 loss (realistic case) paying in cash
- Estimated ROI for BRR 15% (extreme best case) or 11.5% (assuming paying in cash again)
- Estimated cash left invested £97,000 (best case) or £165,600 (realistic)…once again paying with cash
So, some people will still be tempted to do this deal, so before you ask me for the details, here are some other reasons why I said no:
- This is analysis is done on the back of a fag packet, so inevitably I missed something, such as contingency costs
- I am not convinced that the area has sufficient demand for either the retail units or the HMO rooms
- People don’t really want to live on a high street in a small room with a shared bathroom and if they do its probably because they have no choice. So, expect some anti-social behaviour and property damage on top of what I have indicated
- The sourcer is not direct to vendor, so that brings with it more risk
- There maybe structural problems with the property
- Better opportunities to make this sort of return with lower risk and complexity projects exist elsewhere
OK, so that is a bit of a sprinkling on some of the recent deals that crossed my desk, which I said no to. It’s possible that other investors and developers can see angles and opportunities that I have not. For example, with the last development project, I also considered splitting into flats and an extension…others may see other alternatives.
I am not trying to be negative, nor am I trying to knock people or suggest that others have it all wrong. As I mentioned, I am judging many of these opportunities by my own standards and criteria. I am both a tough person to please and also operate with a real world approach to development and investments at the same time.
I mentioned at the start that I look at lots of deals each week. This is for my own portfolio or developments, for my private clients and also for our Property Deal Tips subscribers. If you want to have a chat about any of these segments and how it could relate to you, or of how you could earn while you learn on one of my projects, then please do get in touch!
I hope that was helpful for you to see some of my own thought process when I look at deals and opportnities. Please also remember, that this is still very top level. Once I decide to move forward with a particular opportunity, I do plenty more research and due diligence I can tell you…but that’s for another day 😊
Right, it’s a glass of cabernet today, which is keeping me company as I prepare the show for you….but its running dry now, so time to warp up! I hope that you enjoyed the show this week. Remember, the show notes can be found over at www.thepropertyvoice.net. Or, 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!
Once again, all I want to say is thank you very much for listening once again this week and until next time on The Property Voice Podcast…it’s ciao-ciao.