SPOTLIGHT ON EDINBURGH INVESTING…PLUS SOME HANDY INVESTOR PRINCIPLES

This week I attended a great property investment presentation that was part of the 10 year anniversary celebrations for my friend’s Property Management business in Edinburgh, called Southside. 

 

I thought it would be helpful for some people if I summarised and shared my notes from the talks- this will be of particular interest to those investing in Edinburgh, and even if you don’t invest in this area there are some useful principles that will apply to any area.

 

KEY REASONS FOR INVESTING IN EDINBURGH

  1. A major business centre

-Edinburgh has the strongest economy of any city in the UK outside of London

-43% of the city population holds a degree (highest in any UK City)

-Edinburgh has the most FTSE 100 organisations outside of London

 

      2) Education & Innovation

-60,000 students across 4 universities (grown from 25,000 in 2001)

-Tech hub- Edinburgh is one of the UK’s fastest growing tech ecosystems

 

      3) Tourism

-Edinburgh is a top tourist destination, a big contributing factor to pushing up house prices

-The Edinburgh Festival is the 3rd highest ticketed event in the world (over 3 million tickets sold in 2019)

-Year round tourism (Edinburgh had the highest hotel occupancy of all UK cities in 2017 with an ave occupancy rate of 83.7%)

 

    4) Growing Population

-Census 2001 – population of 430,000, Census 2018 – pop of 513,000

-Edinburgh’s population is predicted to be larger than Glasgow’s by 2032

 

    5) Housing

-Edinburgh had the highest growth in households of all Scottish cities between 2007-2017, up by 7.2%

-Strong and growing PRS (27% of Edinburgh households were recorded in the PRS in 2015, up from 14% in 2001, source – Scottish household survey)

 

THE 5 ‘D’ PRINCIPLE DECISIONS FOR BUYING, AND REASONS FOR A SELLER BEING MOTIVATED

 

The founder of Southside shared some guiding principles learned from years of investing for himself and from helping clients to do the same . Below a set of five things that an investor can seek to establish in order to uncover a deal. These are opportunities to add value and some of the reasons why a seller might be motivated and therefore willing to do a deal with you. 

 

DEVELOPMENT

-In other words, what’s the angle to add value? Add a bedroom? Extension? Attic conversion?

 

DISREPAIR

-Buyers are often put off by seeing scores of 2 and 3 in the Scottish Home Reports but understanding what refurbishment is required may well be your opportunity to negotiate a lower price and in turn add value. 

 

DEBT

-Is the vendor struggling to cover mortgage payment? Do they have other debts they need to pay off by selling a property? The landlord selling a rental property may have kept the property in poor condition so are now struggling to rent it and they don’t have the cash to refurb.

 

DIVORCE

-Selling of a larger property in order to downsize/split value

 

DEATH

-Selling part of someone’s estate

 

Here are some other short hand notes of interest from the series of talks:

*Always look at the floor plan of the property listing before spending time to go and view it- is there a quick win to be had by combining the kitchen and living room to create an additional bedroom? This will require an understanding of building regs for activity space and room sizes. 

 

*Inflation is good for property investors as it has the impact of eroding the true value of the mortgage debt.

 

*You never want your mortgage interest to be more than one third of the gross rent. (Calculate that over time the annual costs associated with the rental property will account for approx 33% of the gross rent).

 

*Plan ahead for refurb projects (ie just like cars need maintenance to run smoothly we have to treat our rental properties in the same way, so rather than spend all the profit each year, put aside an amount to cover the cyclical refurbs that will be needed every 7-10 years. 

 

*Invest for monthly cashflow, any capital gains are ‘icing on the cake’ but we can’t bank on them being there.

 

*There are 6000 HMO’s in Edinburgh and the market to serve is still under supplied

 

*Definition and criteria for an HMO in Scotland

-3 or more unrelated individuals living together in a dwelling

-HMO license is granted by the local council and can be valid for up to 3 years

-Strict criteria for the grant of a license- 3 main criteria are: 

-property meets the specific HMO criteria

-Property owner is a fit and proper person/entity

-Property Manager is suitable, experienced and has processes and knowledge in place

 

Hopefully there were some useful insights in there that may have either validated your thinking or prompted some new actions.

 

Have a great week ahead.

 

[Congratulations to John and the team at Southside for 10 years in business, and a huge thank you for your great work in managing my properties]

DECIDING- IS THIS THE RIGHT DEAL FOR ME?

There is no doubt that a unique dance of back and forth thoughts goes on in the minds of every property investor when it comes their decision on whether to proceed with a deal or not. 

 

By virtue of spending a lot of time with fellow property investors, its a common occurrence for Chris and I to have conversations about deal analysis, risks vs rewards and the whole ‘shall I shan’t I’ dilemma. 

 

What’s interesting about these conversations is that as humans we are typically seeking some form of consensus, approval and permission from our peers and mentors before we proceed. However, we must bear in mind that what’s good for one person may not be good for another.

 

As one becomes more educated in property, we can sometimes feel the desire to be back at the beginning with limited knowledge and a cavalier attitude, because then we would have less holding us back from diving in (I’ve certainly felt that in past years, even though we recognise that’s no way to build a property portfolio). As we increase our knowledge there is the risk of paralysing ourselves with analysis, looking for the elusive risk free deal with a guaranteed high return. 

 

However it really doesn’t have to be that way- we don’t have to have an arduous decision making process. We each need to create a system for decision making so that when opportunities are found or presented, we have the mental capacity to take action on a number of them. With that in place the decision process can be more of an elegant and well practised ‘mental dance’.

 

This will not always come down to a matter of Return on Investment (ROI), but many other variables that are particular to you, your beliefs, your values, and other factors. 

 

We simply can’t expect any investment to be 100% risk free. The only truly risk free decision is to do nothing at all, but then what’s the opportunity cost of doing nothing? In order to use property as a vehicle to increase income and wealth in assets, you will need to make the decision to proceed with a certain number of deals. To do that you will need to run the decision through your own filter – is the deal good or bad in the context of your life and objectives. 

 

So what might that look like? Here’s one possible approach to help create your decision making filter.

 

The way we like to talk about it round our Mastermind tables is to start with ‘WHY’. In other words, what is it that we actually want property investing to create for us. This is getting crystal clear on what you are working towards and deciding if the deal moves you closer to that big why or not.

 

At the next level the prospect deal might be filtered through how closely it aligns with how you are involved, and the possible input required from you. For example, if the nature of the deal will require your input into tasks you enjoy, possibly draw on your existing expert skills, network and knowledge, then you will be more attracted to it. If the nature of the investment requires you to be doing activities that are not in any way aligned with what you want to do or enjoy, then its going to rank lower. 

 

When it comes to the rewards, there is no one size fits all. The level of ROI you are happy with is completely a personal choice. I think so long as you are happy that the investment can conservatively deliver a return better than ‘A another’ investment you have experience in, often that is satisfactory. It will always come down to what you feel is a fair exchange.

 

When it comes to the risks, it is each investor’s responsibility to carry out sufficient diligence to understand and mitigate the possible downsides. This involves working through all the possible what if’s and marrying up the appropriate exits, business structures and associated financial downsides. The somewhat comforting thing about property is that quite often time can be a great ally to put certain things right. However, whilst some deals will come with large upsides, the downsides may be proportionately too large for the investor to shoulder if the worst case scenario unfolds. This is why it is so helpful to specify a certain risk tolerance as part of your criteria. For example you may be willing to work with (and potentially lose) 10% of your net worth, but you wouldn’t want to put 90% of your net worth on the line.

 

As you can see there is certainly no one size fits all when it comes to decision making. The purpose of this post is by no means to be prescriptive but rather prompt the conversation for investor’s to have with themselves in order to define their own criteria to arrive at a decision. One thing I do know for sure is that if you are ever feeling too emotionally attached to a deal, there is a risk of compromising on your criteria in order to push it through. The antidote to this is to work harder on your deal flow so you feel OK with turning deals down in favour of the ones that do meet your criteria [I’ve written a separate blog on the importance of deal flow if you’re interested, see link at the bottom].

 

So in conclusion, I wanted to leave you with 2 fantastic questions that will help you implement a decision making process for yourselves. These were shared by our mentor Paul Smith.

 

Once all of your number crunching and diligence has been done, you have to decide what is right for you, your goals and your measure of safety. To help, ask yourself these two key questions:

 

  1. What’s the best possible outcome for this deal and will it make a difference to my life?
  2. What’s the worst possible outcome for this deal and will it make a difference to my life?

Here’s to some great deals being done in the final stretch of the year!

Click here to read the post on deal flow

 

WE BOUGHT A SHOP

This week Chris  and I picked up the keys to our new commercial acquisition. It’s a High St Shop that extends to over 2400 SQFT on the ground floor plus an upstairs that was used as storage.
 
What we liked about this property so much right from the outset was the fact it lends itself to a straight forward conversion and gives us multiple exit options.
 
Our plan with this one is to create two flats above the shop for single lets, lease the commercial space, refinance everything and hold long term.
 
As ever, we are always learning and we thought that sharing some key points about this deal would also help some of you reading this.

 
WHY THIS WAS A DEAL WE COMMITTED TO
Our approach to investing is always to de-risk as much as possible so we can buy with confidence. To achieve that, we aim to bake in as much certainty as possible by lining up our desired end outcome where we can, and ensuring we have multiple exits to the deal. Whilst the small window for securing this deal didn’t allow for us to secure the commercial tenant in advance there were a number of reasons why we felt confident to proceed:
-there was already expressed interest from two local independent businesses in renting the premises with an option to buy
-research with local letting agents gave us confidence in the strength of demand for letting one and two bedroom flats in this location
-the commercial unit can be divided into two or even 3 separate units if required, presenting more options and different appeal to a wider array of tenants. The rear section has access to a car park and would make a great wee workshop for which we have been informed by a commercial agent there is high demand and low supply.
-with a purchase price of under £100K and the fact we have multiple exits, the risk was minimised
 
THE PURCHASE PROCESS
Our intention was always to own the commercial unit in an LLP and the flats in a Ltd company so we would need to split the title. Our solicitor advised the cleanest way to do this would be to split the title before the purchase was done so that on completion day each part would go straight into the desired entity.
 
What we found however was that the process to split the title was going to take longer than the vendor was willing to wait (amongst other things we needed architects plans to show how the separate rights of access for each part would work).
 
Long story short, we had to purchase in one entity (we bought in the LLP) and are working on the title split now. Not our first choice, but thankfully a capital gain will not be created by selling to the Ltd co, nor will there be a stamp duty liability at the buying end. We are pushing to get the split done asap because by doing so it will reduce the size of each unit to be below the threshold for small business rates relief.
 
PLAN OF ACTION FROM HERE
The priority it to simultaneously strip out the retail unit and create a clean white shell whilst continuing our marketing conversations. We will be seeking 3 quotes for the works and the light refurb downstairs will serve as a good working interview for the works to create 2 flats above. [By the way, if anyone has a recommendation for a contractor local to Carluke who would have the track record to refurb the commercial unit in addition to building 2 flats that would be great].
 
In terms of the marketing we will be using a national agent in addition to having a couple of direct conversations. There will be a few moving parts and timings to juggle in this process because we will need to paint a vision of the refurbished unit for prospective tenants, yet we also need to have some flexibility in the scope of the works in case a few tweaks will secure a particular tenant. We also need to be confident in the completion date of our works so this can also be communicated accurately. We will be looking for the optimal solution to maximise the rent, and in turn the commercial valuation. This may come from one business letting the entire unit, or it could be a multi-let solution to two or even three business. The latter will naturally require a little more upfront investment to section off and create a new side entrance.
 
Meanwhile we can submit planning for the creation of the two flats.
 
Attached are a few videos giving you a tour of the property (you’ll see how well the upstairs lends itself to the conversion). We’ll look forward to giving you a progress report on this nice little ‘shop and uppers’ project.

WHAT TO DO WHEN YOU ARE WAITING FOR OTHER’S INPUT TO PROGRESS YOUR PROPERTY DEALS

I’m sure there are many property investors out there who can relate to those weeks where you don’t feel like you’re making much progress. Maybe you had set a goal to have reached a certain stage in your analysis by a set date, or to have started a refurb by a certain date. However, even with all the right intention, you find yourself not making much progress because you are waiting for key inputs from various third parties. Sound familiar?

 

In the last couple of weeks Chris and I have felt like we’ve had a lot of waiting across all of our property deals. Here’s a list of some important things we are waiting on:

 

-build cost estimates from a QS in relation to a potential development site

-drawings from an architect to title split our commercial property and commence a programme of works

-a contractor to finalise a quote on works and confirm a schedule for a single let refurb

-a planning application decision to convert a 2 bed to a 4 bed

 

It reminds me of that famous Guinness advert where the group of friends are waiting to catch the biggest and best wave, do you remember – “Tick followed tock, followed tick, followed tock….” then it comes, they paddle out, they ride it, and celebrate (remember the charging horses in the waves?). And the tagline- “Good things come to those who wait”.

 

So what’s the message of this post? There will be many times with property projects where you find yourself having to wait, and often, good things will come from that. However, while we are waiting for certain inputs, contributions and information from others, it doesn’t have to stall the feeling of progress. 

What can we do?

How we plan and execute a week can have a big impact on how we feel at the end of that week, and subsequently how we go into the next. If you set a load of goals that don’t happen, maybe because you are still waiting on other inputs, then your brain’s perspective might be one of disappointment and frustration. In other words “the outcome wasn’t achieved this week”, or “I didn’t get this project to where I wanted it to be”, and you can feel down about it. 

 

One of the key things I’ve learned over the last 5 years about the psychology of goal setting and achievement is this – the goals we set for ourselves, and the way we measure them, must be entirely within our control. In other words it is within our power to initiate them, continue and complete. 

 

I’m conscious that it is unrealistic to think we are in control of an entire property project, because it does require the inputs from a power team around you. What I’m highlighting however is that knowing this, and to maintain your motivation, it’s important for us to set weekly goals and measure our progress against the things we are in control of, and the effort we put in against it. 

 

So what does that look like in reality?

 

In the context of waiting for third parties, like in my four examples above, that means doing things like this – providing them with absolutely everything they need to complete their part; thinking ahead to what they’ll need next and preparing for it, and yes of course, being that ‘squeaky wheel’ when needed to push things along with calls/texts/emails. Alongside tasks like this, there will always be plenty of proactive sub projects, that are fully in your control, that you can schedule in and complete in advance of them having to be urgent. Examples might be getting admin in order ready to apply for finance, business development conversations with prospect end users/buyers/tenants of the property, or any number of related tasks that you could fill in the blanks for. The key thing is to schedule a bit of time each week to think ahead, get organised and plan for these things.

 

In summary, your weekly property goals have to be what is within your control to progress – focus on those things and you’ll feel good about your done list at the end of the week. Look at it the other way and you’re at risk of feeling disheartened and frustrated, which can have a negative ripple effect, This is a very subtle difference but can have a massive impact on how you view your accomplishments, progress and sense of satisfaction.

So in the week ahead, what is something in your property world that you and you alone can progress and feel great about doing so?

[Image credit: Guinness advert]