Soundbite: Mini-Strategy Review: Does it sound like a plan?

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I do like to get involved in the odd property forum and try to offer a bit of advice and support if I can. Today I am going to share with you the essence of a forum exchange that I had with an aspiring investor, adopting something similar to the approach I tend to take with a Mini-Strategy Review. So, let’s hear from Rafal and try to answer his question: is this a plan; is it even possible?

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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 it’s a pleasure to have you join me on the show again today.

I do like to get involved in the odd property forum and try to offer a bit of advice and support if I can. You can mostly find me in The Property Hub where I am classed as an ‘Obsessed Member’ with over 700 posts and over 500 post likes so far. This seems to be a good audience to engage with in particular as there are lots of new and early stage investors hanging out there and let’s just say that they have not been sold on the become a property millionaire in 5 minutes pitch that you can find in some quarters!

Needless to say, today I a going to share with you the essence of a forum exchange that I had with an aspiring investor, adopting something similar to the approach I tend to take with a Mini-Strategy Review, which you can find details of on my website www.thepropertyvoice.net on the Mentoring page.

Right, so lets cue up the post and then dive into an adapted version of my response right now…

Property Chatter

First, let’s set the scene with an outline of the original post, which comes from Rafal.

“For some time I have been interested in a property investing, but I do not own any property yet.

I would like to hear your opinions about the strategy that I'm thinking of.

My strategy assumes, that in the next couple of years (+- 5) I will build a portfolio of a properties, that bring at least £1000 net monthly income. Moreover - what is the most important - I want it to be quite hands-off after that time. Ideally if I could spend most of my time outside the UK visiting it only once a month or once every two months.

Here is the description of my financial situation and the basic parameters of that strategy:

- Savings at the moment: £8,5k

- Amount of money saved every month: ~ £1,4k

- for the next couple of years buying properties - 1-2 bedroom houses in the areas located 5-10km distance from Manchester City Center

- I'm aiming properties in a price span from 40-80k

- Using interest-only mortgage with 25% deposit

- Getting a reliable letting team

- Having £200-£350 after-mortgage and after all costs monthly income from each property

- Reinvesting the rental income

Is that possible in your opinion to carry out this plan with the assumptions given above?

I would appreciate every single opinion.

Thank you in advance,

Rafal”

And here is an adapted version of my response:

Hi Rafal

Great that you actually have a plan...not everyone does! So, that’s an encouraging start.

First, I like the fact that you have set a clear goal and also recognise your lifestyle / personal preferences as well...again that is really important to identify.

You talk about the portfolio being hands-off after c5 years but you don't mention what you are prepared to do as you are building the portfolio...so, I am guessing you intend to be a little more hands on during this phase.

Is it possible? Well, yes in theory it kind of is. However, there are a few 'buts' to consider.

First is the type of property you will be getting at that price point - often it will need to have some work doing to it to either make it lettable or keep it lettable; in other words additional costs to start off and the works part to manage too and some maintenance along the way. This might mean tying up a bit more cash than perhaps you were expecting.

I would also say that if you intend to be 'location-independent' of the properties in the future, then you also do not necessarily need to restrict the area they are in to start with either. Remember, if your primary goal is income, then you need to be looking in high yield areas or at higher yielding properties.

Finally, remember that older houses will need more money to maintain than say newer flats, although the latter have service charges...it's swings and roundabouts but both maintenance and service charges will eat into your net cashflow.

I would therefore have a look at the type of properties you could buy and see how much money you would need to spend on them to get them lettable and run the full numbers to get to your net cashflow position based on local comparable rent levels. Allow around 2-6 weeks of voids per year and between 5% to 15% of rental income for maintenance, depending on the property condition. Finally, letting fees, insurance, annual inspections and accounting costs need to be factored in as well. Therefore, an allowance of around 25% of the gross annual rent per year would not be an unreasonable assumption to make in terms of costs for a hands off property investment with an older property, excluding any mortgage costs.

The second point, is the net rental income, which is also linked to the property type just mentioned, but also the tenant type. Have you done some analysis on rents and tenant type to arrive at your target £200 to £350 per month net income? £350 sounds high on a hands-off investment at these sort of price points based on vanilla single-lets.

Let me give you an example from a deal we recently shared on our Deal Tips Service. It is in Liverpool, would cost around £45k to buy but would need around £25k spending on it to get it lettable, plus some other acquisition costs etc.. However, it should be worth £85k or so once done up properly and could potentially be refinanced to extract some of the cash required to get it set up. The local rent around there is c£550 per month and so after all costs and provisions it would net around the £200 per month mark in cashflow.

The alternative to buying it cheap and doing it up would be to buy it ready to go, which would need around £25k or so as a deposit including the usual fees and other buying costs versus around £46k if following a 'buy-refurb-refinance' (BRR) model, leaving around £18k cash left in after refinancing, thus saving around £7k or around 28% of the starting funds once refinanced.

The reason for highlighting this example is twofold: first to show the type of net cash position and funds requirement you might need based on a real world example - buying this property done up would need £25k or so in cash, assuming the no works option and would net around the £200 per month in cashflow mark.

The BRR strategy on this one would work best if you could pay cash and would result in a similar net cashflow position based off lower cash left invested, allowing your money to stretch a bit further.

So, you could probably squeeze 3-4 of the these types of properties out of your full 5 year investment pot, assuming reinvesting your rental profits along the way. That's £600 to £800 in net cashflow...so you would miss your goal.

You may be able to squeeze and extra property or two out of the pot by following a BRR strategy, taking you to £800 to £1200 per month and hopefully reaching your goal...so a bit more work to make your money stretch further with say a BRR strategy is an option and also my second point.

Could you do better than this example? Potentially, yes you can - I certainly have done but I am trying to show you a fairly typical easy-to-find project that most people could locate alone and undertake without too much effort and drama.

That all said, here are some things completely different for you to potentially also think about...

Consider some higher yielding strategies, like certain LHA strategies and say HMOs, although the latter will need more cash going into the deal at the front end...but with a higher potential net cashflow per property too...think 1-2 HMO properties over the 5 years instead of 4-6 single lets.

And...if you don't fancy a load of hard work for 5 years, try setting aside your money in a high-interest facility and then just go and by yourself a few low-maintenance flats / newish houses or a ready-made HMO or two with the funds when you are ready to invest / have enough set aside to buy one! This is the easy life alternative 😉 But don't forget to set aside funds for voids and maintenance, especially if this is your only source of income.

Anyway, just a bit of food for thought for you and also to show an insight into the type of thought process and analysis I tend to undertake when working with people on a mini-strategy review exercise to open their thinking to other possibilities and test their logic in a real world setting...I hope that's been useful for you and I wish you the best in putting your plan into action!

And on that note, I just wanted to say that I do undertake mini-strategy reviews on property investor plans and as it so happens, I will also be running an event called The Property Investor Toolkit Live on Saturday 1st July in London. It will pick up the key elements of my book; Property Investor Toolkit, along with a sneak peek into 2 brand new chapters coming with a second edition. However, in addition, I am allocating a segment to look at some strategy reviews of some investors to coach live on the day.

Every attendee will have the option of receiving a signed copy of my book if they would like one. They will receive the two additional chapters in advance of the release of the second edition and if that’s not enough, will also receive a 100% rebate on my next book to be released later this year.

Premium attendees will also get to have a live coaching session, looking at their planned strategy or alternatively a deal surgery on a property project they are currently looking at. If you want to know more about the event, there will be a link in the show notes, or you can just ping me a quick email podcast@thepropertyvoice.net and we can have a conversation instead.

I hope this snapshot strategy review has been insightful today, I like to dip into the odd property forum and give a little back when I can and this is an example of that. I would also like to meet some of you in person as well, so I hope you can join me in London in a couple of weeks’ time too. Remember that you can email me podcast@thepropertyvoice.net if you want to talk about anything from today’s show or more generally in property investing, the show notes will be over at the website www.thepropertyvoice.net

But for now, 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.