Building Your Property Business!
Last time we spoke to the guys at Smart Property (July 2015) Andy showcased some of their recent projects and talked about their earlier transition into a property business. They have niched in high-end House in Multiple Occupation (HMO) developments since 2009 and now run new build schemes in parallel. They continue to move from strength to strength and have had a bumper start to 2016 raising several million pounds in the first quarter. This month they complete works on five HMOs while the new build schemes develop in the background.
Now they’re back, writing a regular column for YPN to talk about the benefits of building a property business.
From Investor to (Property) Businessperson
If you’re anything like us, you’ll share the same passion for property and get a certain buzz from making great deals come together. As property enthusiasts, we romantically envision the finished product down to the colours on the wall and the fixings in the bathroom before even signing on the dotted line. If you’re fortunate, this will continue with you as you grow your portfolio for many years more and if you do it right, you’ll reap the financial rewards along the way. And what’s not to like about property? After all, property investors continue to dominate The Sunday Times Rich List, with their wealth this year actually outperforming the index.
The idea of topping the rich list this year may be a stretch too far, even for the most optimistic of us, but if your goals and ambitions take you beyond owning just one or two investment properties, then taking the steps to transition into a fully-fledged property business are what you need to do next. It can catapult you into a world of investment strategy and finance and set you on your way to long term property success. So in this series of articles, which will be published quarterly in YPN, we’re going to guide you through the steps to help you do exactly that.
This Month’s Goals
By the end of this article you should be able to…
1. Recognise the benefits of a property business vs remaining an ‘investor’
2. Establish what type of property business you are
3. Establish your roles as a director within your business
4. Identify your requirements in a prospective business partner
5. Affirm your vision, values and strategy into a business plan
THIS MONTH'S TOP TIP
Working with investors on a 50:50 basis (your time, their money) is a joint venture model and very different to most investment models. While it works for some, it doesn’t work for the majority. Savvy investors don’t work on a time/cost basis; they operate on a risk/reward basis. If they’re putting down the finance, they are assuming the risk and will rightly expect a favourable return. The figures need to work in the investors favour, not yours!
The Benefits of a Property Business
Put simply, a business is an organisation where goods or services are exchanged for one another or for money, the difference being that if you own one or two properties and have retained them for your benefit, or sold them to make a profit, you’re an investor not a business. And that’s great! But developing a successful property business is to build a vehicle that can enable you to provide your service to somebody else – or even back to yourself as a consumer – on a recurrent basis because the right systems are in place.
By doing this and focusing on a longer term business vision, you can unlock the key to raising private finance and generating deal flow. Inevitably, although it may not necessarily be the primary objective of your property business, your personal portfolio will grow organically in parallel as you start to reap the benefits of the additional finance, skills and contacts you have created.
What Type of Business Are You?
Let’s first think about the type of property business you want to have. This isn’t as simple as picking from a list; it’s about considering your prior experience, professional skills, logistical considerations, what your time availability is, what your financial situation currently is, your financial goals and the stock in your local area. This list isn’t exhaustive, but it will give you some idea of the common types of property investment businesses.
Sourcing - LOW RISK
You source profitable property deals and sell them to private investors who can purchase.
- Flexible time requirements
- Low capital requirement
- Some of the best can do it from their desk from anywhere in the world
- Financially rewarding if you’re good!
- Requires large private investor base to sell to
- Irregular cash flow strategy
- Less options for equity gain
- Very dependent on systemisation.
Rent-to-rent - MEDIUM RISK
You source and manage multi-let properties independently.
- Regular cash flow
- Less capital required than purchasing.
- Moderate time requirement
- Requires skill in sourcing and negotiating
- Inheritance of landlord duties and obligations
- Little option for equity gain
- Risk of not filling rooms.
Buy-to-Sell - HIGH RISK
You source properties that can be purchased and resold for a profit, often with a refurbishment sandwiched in the middle that you manage.
- Capital strategy
- Availability for equity tie–ins
- Attracts private investment.
- Requires skill in sourcing, negotiation and project management
- Time intensive
- Large seed capital requirements.
Turnkey Investments - LOW/MEDIUM RISK
You source, set up and hand over a ready-made property investment.
- Flexible time requirements
- Attracts private investment
- Cash flow and capital development model.
- Requires skill in sourcing and negotiating
- May require capacity to become a landlord or managing agent.
Development/Conversion - HIGH RISK
Moderate time input.
- Attracts investment
- Potential big financial upside withoptions for asset retention.
- May require prior experience in development
- Needs a well-funded niche investor base.
Planning gain - MEDIUM/HIGH RISK
Locating sites suitable for development and obtaining planning permission to increase value.
- Flexible time requirement
- Will attract private investment
- Capital strategy.
- Requires skill in sourcing, negotiation and planning
- Moderate seed requirements depending on size of project and cost of services
- Needs a niche investor base.
If you’ve been able to narrow down your business, you can then begin to think about your niche within that sector. Most people make their first mistake at this point and continue to pursue more than one strategy. Stick to one. Build it. Systemise it.
For example, is your turnkey investment service to deliver up and running high-yielding LHA properties in the North East? Or are you a buy-to-sell specialist acquiring properties between £250,000 and £350,000 within ¼ mile of Brighton centre?
- Task 1: Scribble down your five-year business related goals.
- Task 2: Write down all of the skills and attributes that you think are required in a director to make your business a success. And be picky!
- Task 3: Assess yourself against Task 2. Which skills and attributes do you have, and more importantly,which are missing?
Now it’s likely that you don’t have 100% of all of the skills and capabilities yourself, which only means you’re human! At this stage, it might be worthwhile to consider the benefits of having a business partner; it isn’t a necessity and many people make it on their own, but from personal experience it can be exponentially advantageous. If you can find somebody with a complimentary skillset who shares the same visions and values, it can catalyse your business prospects. And it’s worth remembering that 1 + 1 doesn’t always make 2!
Things to Consider in a Potential Business Partner
- Do we have a similar vision, ideas and objectives about a property business?
- Are our strengths and skills complementary to one another?
- Are we both able to communicate effectively?
- Are they trustworthy and reliable?
Coming up in the series, we’re going to explore how to build your awesome business brand, how to appraise property deals like a pro, how you can raise millions in private finance and how to construct the deals!
Where to Find a Business Partner?
Unless you have somebody in mind, it’s time to start networking. Local property or business meetings, educational events and social media are all great starting points. Remember it’s not an interview process, but immersing yourself in the property community will provide you with endless opportunities. We (Nick and Andy) initially met over Facebook and to cut a long story short, Nick came into the business from Deloitte where he had been working as a city accountant.