Very recently Chris and I had shared that we bought a tired 3 bed property to refurb and flip. What we didn’t explicitly share is that we did so with total conviction and confidence about the end to end process and our exits. Reflecting on the last couple of years, we only wish we had the same confidence starting out. When we first formed our business partnership just over 2 years ago the plan was to buy and flip, and source packaged BTL deals for investors. How could we go wrong when we had my previous 8+ years of single let and HMO investing experience combined with Chris’ 15+ years in the building and development trade.
Here’s Chris (pic1) and me (pic 2) at our recent acquisition.
The thing is, we are both fairly risk averse people and when investing with our own, and potential investor money, we didn’t want to gamble on the hope of making money thanks to a fairly strong market and the hype that can come with our Scottish closed bid buying system. With that in mind, the solution had to be to buy below market value and then force the value with Chris’ building and joinery skills. (In hindsight we would have got away with doing that based on how the market has been since 2015, but hindsight is 20:20 isn’t it?). The reality however was that whilst we did put multiple offers in, there was no securing a property for below market value in the kind of areas we were focusing on. As educated property investors we couldn’t accept paying much more than home report value for a property, to then be constrained to only one possible outcome to really make any money ie sell it in a bidding war. The result, we didn’t buy anything for 2 years. Instead, we diverted focus to starting and scaling a R2R SA portfolio.
The SA portfolio has been and continues to be great for us. However, the aim was always to build up our own asset base and work towards the dual revenue strategy of a monthly cashflowing business (ie the SA portfolio) AND a source of periodic cash lump injections (ie from creating value and selling).
Perhaps we were too cautious previously, but it’s only reasonable for a property investor to want to de-risk a deal and have a few options to exit, right? It was just incredibly frustrating that our buying options (or at least the ones we could see) looked like roughly like this:
- Force the value through refurb, but the only way to make more than 10% would be based on the ’hope’ that buyers get drawn into bidding a good bit over home report value.
- If can’t sell hold for a while and let with cash tied up and unexciting returns in the single let market, combined with punitive legislation on the horizon.
- Instead of turnaround flips consider a small site for build to sell where we essentially build in the 20%+ developer margin that one would hope however this would come with significant finance costs, development risk and the one exit of having to sell at the right price to cash out. The challenge we have found with many of the potential sites in Scotland that we have analysed is that the sales price per SQM is often not that much higher than the build cost per SQM. The result being that once you add the purchase of the land the deal either doesn’t stack or it doesn’t give enough margin to keep you safe.
So what’s so different now? Where has the confidence come from? A friend was asking about our journey the other day and it’s only when you get an external question like this that you stop for a moment and try to take a 30,000 foot view of your own situation. It was a very thought provoking question because on a day by day basis Chris and I have our heads in the detail of incremental progress, moving the property business forwards. This question made us take a step back and connect the dots in a more simplified overview.
What it boils down to are 3 key things or areas that we have gradually been able to refine and de-risk. Those 3 overarching areas lie in:
#1 the buying
#2 the converting and refurbing
#3 how we optimise the ways to monetise the finished product
Addressing these key areas effectively is what’s allowing us to de-risk deals and buy with confidence. In documenting our processes, we thought it would be a good exercise both for our own systemising, and for those out there getting started, if we elaborated a little on each main area over the next few posts.