Month: May 2021

Most property investors are familiar with HMO’s, I have a few myself. And many of us are operating serviced accommodation (SA), but we don’t see so many investors combining the essence of these two models in the commercial space – in other words commercial multiple occupancy (CMO) buildings offering serviced space. 

I remember reading a fascinating feature in the YPN magazine back in 2019 about this CMO strategy – the interview was with Scottish commercial investor, and podcast host, Jerry Alexander. With covid restrictions finally allowing a bit more movement, this week Chris and I drove over the bridge for a tour of Jerry’s CMO investments followed by an evening of amazing pizza and a game of Cash Flow. 

Better understanding the CMO model will absolutely help you see buildings differently. Whether that be looking at how to increase annual rent from a currently tenanted building, or considering different ways to optimise a vacant ‘problem’ building. Had the local baker not tenanted our commercial property, we certainly would have wanted to go down the CMO route to split up our 2500 sqft shop into smaller parts to multi-let the different sections. That will always be a fall back option for us though 😊. 

I’m a keen learner and note taker so scribbled copious notes over the day. Here is a selection of some key learns, distinctions and observations.

# I was fascinated to see how the demand for business centres has evolved from being predominantly professionals like Accountants, IFAs, Mortgage Brokers etc to businesses in the therapies space, beauticians, physios, tattoo artists, chiropractors and the like. These businesses change the thinking in terms of what you’d need to provide for access to the building ie not the standard 9am-6pm times. 

# The key thing to understand before jumping into this is to figure out if there is a place for a serviced office offering – in other words understanding what is currently available, what isn’t and what is there significant demand for. Eg, are there lots of large office spaces for let but no 2-4 person rooms with desks?

# One of the Business Centres we toured was previously managed by a national agent and when he took it on the running costs were incredibly high. However as Jerry pointed out, national agents aren’t great at managing serviced offices, but that’s where opportunities can be found. Jerry was able to reduce the cost base by over £30K under his own company’s management. 

# Larger spaces, although they may seem more daunting, offers significant economies of scale 

ie having 1 member of staff to manage the building, their salary is shared across many more rental spaces. 

# The concept of net lettable space ie if the building is 10,000 SQFT and 7500 SQFT is available for office space then 75% is the net space that can be monetised. So it raises the question how efficient can you make a building in terms of what is lettable vs the circulation space ie 75% 80%?

# Most of Jerry’s business centres had substantial parking areas and part of those were used for shipping containers to provide storage space to rent out. What a great idea! Especially as there are more and more small businesses with physical product offerings who need a bit of storage plus a bit of desk space – voila, there’s the ideal solution. [Note shipping containers are liable for business rates]. Shipping containers can be a great way to attract new small clients who start by needing some storage and later need to upgrade to take office space too. 

# As most reading this will know, the opportunity to add value to a commercial building comes from the key inputs of rent, length of lease and quality of tenant. While a CMO building may not have tenants on a long lease, as most would typically be on a 12 month license to occupy, the higher rent/SQFT will mean that net cash flow can be far higher than with having one tenant on a long term lease. With a significantly higher rent income, the CMO has the opportunity to value up higher, even taking into account the shorter license terms. The valuation of a CMO building is calculated as a multiple of the net licensed income.

# When it comes to business rates, a CMO building can have each office space rated separately and with the license holders being responsible for the rates, they can each benefit from small business rates relief.

# If a staff member can be afforded to run the serviced offices rather than using a national agent, it will generally create more ‘glue’ (as Jerry calls it 😁) with the clients and in turn higher rental rates and occupancy. 

# In buying well at the beginning, the back up plan/worst case (but acceptable scenario) for a CMO is that it’s let out as standard office space at the most competitive end of the market rate – and that still makes money because you bought it well. 

I love business and I love property, so the CMO strategy really strikes a chord. We already have a serviced accommodation business and I can see so many commonalities between CMO and SA – in short, they are both about understanding the client base you are serving and selling a serviced space solution- one is for working while the other is for living. Both will have similar types of cost base ie utilities, maintenance, staff, both can be operationally involved (unless you have staff or outsource management) but both have the potential to generate significantly higher net income from the same space from which a traditional long term lease would generate far less. 

What did your property business lead you to learn this week?

This week Chris and I took the day to do a site visit with key members of our power team to help us work through the latter stages of our diligence. 

With encouragement from the Government to ‘build, build, build’ we reckon there will be many investors already actively building new houses or interested in doing so. With that in mind we thought it might be helpful to share some thoughts on an opportunity we are looking at. 

A picture paints a thousand words, and a video even more, so here’s one we prepared earlier……😁

In this brief video we run through what we are considering in terms of development on the large garden plot of a detached bungalow. 

We met at the site with our Architect and Building Contractor which ensured we got the most out of our visit there, and what a valuable meeting it was. For example, in discussing our options with the site ie improving the existing property under permitted development (PD) and building 4-5 new houses on the grounds, we learned a number of key things. 

Here’s one of those things – the alterations to the existing bungalow would fall under PD, however, if we were to apply for planning permission, gain consent and then implement that planning (ie start) it would invalidate the PD on the existing building. So in short, strategic timing and having a good architect to guide you are essential. In a situation like this, our architect suggested, one approach could be to use PD and do a pre-app for the rest concurrently.

Here are just a few of the many learns/takeaways/avenues to explore further that came out of the site visit and meeting:

• You can have (develop) 5 houses max when accessing the plot from a private drive so no point going for anymore
• With shared ownership of a private driveway we’ll need to find and understand deed for rights of access (ie how many houses does it allow)
• We’ll need to enquire about possibility of moving a telegraph pole and power line – how, how much, who?
• Utilities wise we can enquire about air source heat pump grants and providers, can also look into solar and what available in terms of a feed in tariff
• Need to open a conversation with a neighbouring property owner about possibility of acquiring a small bit off their garden to improve access

• We’ll be exploring 3 options to compare cost, ROI and optimal all round outcome
• 1) buy the back bit of garden and reconfigure the 2 bed to 4 bed, then add 4 new houses
• 2) keep entrance the same, shave off the front bedroom and reconfigure bungalow, then add 4 new houses
• 3) keep entrance the same and demolish the house to then reorganise the whole site – factor in how much potential loss in cash flow from downtime vs the overall value uplift
• Key action to submit a pre-app through our architect

We’ve got a busy week ahead of us.

What have you learned from your property power team that you are actioning this week?

Has the events of this last year changed the shape or direction of your property portfolio?

The week just gone was monthly mastermind week so I had the privilege of observing and working with a broad spectrum of property investors over four super productive days. Hearing about and helping advise on so many different property business plans in a relatively compact period of time always leads me to reflect on my own portfolio and business plan I have with Chris. 

Whilst it would be too soon to claim we are fully ‘post pandemic’, the success of the vaccination programme is certainly turning the nation’s attention back towards optimism and growth. The last 14 or so months have thrown up unexpected challenges and opportunities for property investors. Being in this reflective mood after mastermind week, I hope that this post might encourage some healthy conversation and knowledge sharing in relation to property pivots, doubling down on what works or new ideas altogether. 

What I’ll do is lightly touch on some of the most common property strategies, reference a bit about what we’ve done and encourage thoughts from others around the country in relation to said strategy. 

#1 BTLs and HMOs

The first property investment portfolio that I created was all single lets and HMOs. Those properties were the vehicle that provided enough financial independence to leave employment in early 2014. I was incredibly grateful for them back then and even though I had fallen out of love with single lets for some time, the covid lockdown reminded me once more how grateful I am for those properties. Yes there were some notices given but on the whole those properties continued to provide great homes for people throughout the lockdowns, and in return continued to provide me with a decent cash flow. 

Whatever an investor might choose as their primary focus, I’m a firm believer that a portfolio of residential let properties should feature as part of their overall portfolio. 

On the HMO front my multi-let professional properties fared surprisingly well however a couple of my student lets in Edinburgh did take a hit with a period voids and the need to lower rents for the first few months of a tenancy to incentivise the re-lets. Fast forward to now however and that student let market is thriving again, with even the summer months being taken on (I’m guessing that is in part to do with students wanting to have a summer of fun after so many months locked down with their parents). 

GOING FORWARDS

I was already starting to feel the love again for single lets in 2019 and we (Chris & I) have continued to invest in this space by developing flats in the upper parts of a shop (mid build as we speak) and adding family homes to our portfolio that are serving the Rent to Buy market and the long term vanilla BTL market. If anything, I think the pandemic has only further validated the value of having good residential assets in the portfolio. We will continue to allocate a portion of our focus and funds into adding alternate RTB and BTL assets. 

What about you, have your views shifted in any way when it comes to BTLs and HMOs?

#2 SERVICED ACCOMMODATION

When we first went into lockdown, approx 35% of our SA portfolio served the public sector (for Emergency Accommodation) whilst the remaining 65% was all private sector, and split between predominantly contractors and a good amount of tourism bookings. So when lockdown kicked in that 65% of the portfolio naturally dropped off a cliff as the Easter bookings had to cancel and some of the contractors couldn’t continue on site. Thankfully we had built solid foundations with our local authority over the previous year (that choice was made to introduce healthy diversification of bookings) so we were able to quickly pivot towards the Emergency Accommodation sector at the end of March with the first lockdown. We have served the councils needs effectively and as a result now have 70% of our portfolio serving the council, and their demand has remained steadfast throughout the various lockdowns. 

GOING FORWARDS

We are working hard to secure a place on the key supplier list with the council, alongside working the contractor bookings and a summer of healthy summer holiday bookings with a select few properties. 

What about you? How has the pandemic altered your approach to SA? Or if you’re just getting started with SA, what is your primary guest audience?

#3 COMMERCIAL

Aside from our SA commercial property, our first ‘true’ commercial property had just come into our ownership a few months prior to lockdown. We initiated conversations with a local independent baker pre-lockdown and following our refurb (somewhat delayed over lockdown) the formal lease commenced in October and both sides are very happy with the outcome. 

GOING FORWARDS

In terms of commercial going forward we are a little less attracted to the big high streets having seen how they were affected and how they have played severe hardball with landlords in terms of paying any rent. Pre lockdown we were starting to look into light industrial for trade counter providers – a space we’d still love to get into but now finding the price for vacant industrial has risen sharply while the rents haven’t. Still great contenders for pension investments however. 

If commercial property is your main focus, how has your strategy changed in terms of the types of property and end tenants you may be targeting?

#4 FLIPS

Flips have never really been part of my plan, perhaps because I still feel I’m building the asset base. I did flip a property back in 2012 in Edinburgh and in hindsight wish I’d kept it (I would have done far better taking the capital gain out of a refinance tax free and keeping the cash flow). 

GOING FORWARDS

The occasional flip is now however on the horizon. I didn’t think I would but with the appetite from buyers as it is for certain types of property along with the rising price of the properties I’d like to buy and hold, I figured replenishing the capital pot needed to ‘leave some money in’ the properties I want to hold, would be a big help. 

What about you – curious to know if flips are already working well for you now or if you plan for a flip to feature this year?

#5: DEVELOPMENT

In it’s broadest terms, I’ll use ‘Development’ to refer to adding value to existing resi, commercial conversions and new build. 

So this is a seriously interesting area. It;s where many of us want to expand after progressing through a few more simple deals and it’s certainly where Chris can leverage his building experience. For us, this is all about developing to serve an end user audience we have validated in some way so it helps mitigate development risk.

GOING FORWARDS

Anything we develop would need to feed our existing property business avenues of serviced accommodation, BTL or possibly rent to buy. We are just in the latter stages of diligence on a site that presents an opportunity to reconfigure an existing house for SA, whilst also adding a few new build units to serve the same contractor SA audience. We are very excited about the potential of that. 

With our Government promoting ‘Build, build, build’ and reforms in planning policy, does development of some sort feature for you?

To close, I really hope this post sparks some interesting discussion and knowledge sharing – so, how has the events of this last year changed the shape or direction of your property portfolio?

Can you guess what the highest paid skill of the super successful is? When I asked this in a group coaching call a load of great answers came up – networking, sales, marketing, plus a few more. All of these skills and activities absolutely play their part, but what really underpins any answer we might come up with is one overarching super skill. And that is steadfast consistency. 

Some reading this may have also seen Darren Hardy’s recent series on the ‘Success X-Factors’ where he lifts the lid on 10 common factors of the world’s most successful people. Well, X-Factor #7 in the series is Steadfast Consistency. And this one really struck a chord with me, which is why I wanted to write about it – both to anchor the philosophy in myself, and to serve as a helpful reminder to anyone reading this for whom it resonates. 

We all know that the greatest Achilles Heel to our human behaviour is the fact that people are typically terrible at staying consistent with positive behaviours. Everyone sets goals or makes resolutions at new year, but very few achieve them and even fewer maintain them. All those promises and intentions that people make drift ever so slightly until they just drop off a cliff. Its a sad truth that humans lack commitment and the ability to sustain the promised activity/behaviour over a long period of time. 

This is where Darren reminds us of that meaning of commitment we’ve heard so many times before, 

“COMMITMENT IS DOING THE THING YOU SAID YOU WERE GOING TO DO LONG AFTER THE MOOD YOU SAID IT IN HAS LEFT YOU”. 

That last half of the quote is the decider – the bit about ‘long after the mood you said it in has left you’. You see, people tend to set goals when they are in an empowered, ambitious, heightened mood. You know the score – the punctuation of a new year brings the resolution that ‘this year is going to be different, this year I will add X properties to my portfolio and £X amount in passive cash flow per month’. And it’s relatively easy to be committed when in that mood, but soon the mood will leave and that’s when the real test of commitment will come. This lack of consistency is why most humans don’t reach those dreamy goals. Darren refers to that lack of consistency as the, “subtle stealer of dreams”.

So why am I writing about this? It’s absolutely not to mentally beat readers into a feeling of defeat and ‘why even bother’. No, quite the opposite. I’m writing about this common human fault so we can wage war against it and consciously remind ourselves to STAY CONSISTENT with the practices that will bring our property goals to fruition. 

We have to work on MASTERING CONSISTENCY. 

How you might ask.

When the thought crosses your mind about slacking off on your action plan, consider the massive cost of inconsistency – in other words the cost of not doing that single action but also the potential collapse of your entire progress and momentum. That is why its one of the most important principles of success.

A FEW TIPS ON MASTERING CONSISTENCY

#1: FOLLOW AND MODEL people who are already successful in this attribute and in the area you want the results. Tony Robbins reminds us that, “if someone is successful at anything, and more than once, then they have a strategy, even if it’s unconscious, they are doing certain things consistently. 

We need to make it our business to learn what those consistent things are and create habits, routines and rituals around them. In your property business will that be in relation to the regular communication cycles with commercial agents, will it be the number of networking events you attend, investor conversations you initiate, weekly social media activity, regularly calling through past SA guests for referrals…..? In relation to your health and personal development will that be a certain number and type of weekly workouts, a certain dietary plan, a consistent morning and evening routine. 

This is what you need to figure out and then practice and develop your skill of consistency. 

#2: HARNESS ACCOUNTABILITY. Once you’ve identified the activities that will lead to your goal achievement, stacking multiple layers of accountability around those weekly tasks is one of the most powerful things you can do. Getting things done is a social phenomenon and once you learn how to effectively leverage accountability, it will be the unfair advantage in your corner. In my humble opinion, leveraging accountability is one of the most powerful ways to win the war against that part of our human nature that, if left to its own devices, can be the ‘subtle stealer of dreams’.  And the great thing is outsourcing accountability brings the best results. You can outsource accountability to people you trust, respect and value – ie your spouse, a friend, a coach or a mentor.

It’s not about how you start something, it’s about how you continue. If you stay consistent, even if slowly, the tortoise will always beat the most talented. 

What activity in your property business will you commit to consistency with?

Over time we have grown to appreciate the importance of having a pipeline of property deal opportunities and to have patience not to force things or get too downhearted. 

And the last few weeks have been a very real reminder of the up and down journey to source and secure a satisfactory property deal.

Most recently we had a very strong cash offer (in our opinion 😊) turned down on a bungalow that sat on a nice flat half acre site. Our initial due diligence with multiple agents, our architect and build team validated our plan to extend the bungalow under permitted development and subsequently build 4 new houses on the site. It could have been a cracking little development however, after several back and forths the vendor turned us down. This is one that we really wanted, as we had multiple strong exits, so naturally felt very disappointed with the ‘thanks but no thanks’. I let myself feel properly p#ssed off and disappointed for a few minutes before reminding myself that deal flow is the antidote to deal disappointment.

Within the same 2 week span I very narrowly missed out on a 2 bed house that could be converted to a 4 bed for either a RTB or a flip in the same year, plus there was a great office to self-contained apartment conversion opportunity that another investor just beat us to.

Whilst it would be nice if everything that makes our shortlist for serious diligence could come off, it’s just not realistic. 

So, what’s the point in sharing all of this? People only want to hear about amazing deals coming off and success stories, right? Well, not always. It’s great to share news of deals coming off but from several recent conversations in mastermind and coaching groups, I’ve observed several people experiencing the same disappointed so my hope is that sharing the experience and learns from the ‘ones that got away’  is helpful to refocus back on the deal flow. 

The below is by no means an exhaustive list, but here are seven key points that Chris and I keep reminding ourselves of along the property investing journey:

#1: You can’t be too emotionally attached to any one deal and you certainly don’t want to stay down and disappointed for too long when a deal doesn’t go your way (that could hold you back from seeing the next opportunity)

#2: The antidote for deal disappointment is to have multiple deals to consider, hence the importance of DEAL FLOW

#3: Having a selection of shortlisted deals to consider will prevent you from becoming too emotionally invested in any one deal. With only one deal on the table it can bring about a sense of ‘this has to work’ and that can lead to force fitting, irrational thinking and accepting unnecessary risk.

#4: A decision to proceed with a deal can’t be based solely on the most optimistic outcome playing out. It’s wise to bottom out multiple exits and to see a way to be satisfied with a conservative/secondary outcome.

#5: Deal flow comes when you can be clear about the end audience you are serving, be clear on the kind of properties/sites that meet your range of criteria, and you know the input activity required to uncover the kind of deals you seek.

#6: Getting to a no decision on a potential deal should be framed as a mini victory in itself – it should serve to refine your analysis skills, validate what you really want from a deal and get you a step closer to the good deals.

#7: Keep a record of the deals you have shortlisted and analysed because they may just come back round and present an opportunity to acquire cheaper/or create more value than you previously expected. 

CONCLUSION

Knowing the reality of this emotional rollercoaster that property entrepreneurs have to cycle through weekly, monthly, yearly – this is why mindset is such a big part of the property game. You can’t one up the universe and avoid these highs and lows, but you can develop a mindset to work through the dips as quickly as possible.

What have been your highs, lows and lessons on the property deal front recently?