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- September/October, 2020
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Episode 022 - Have you been thinking about creating personal and family wealth through property investing? - Part 1
This course has been made available as a gift to listeners completely FREE (normally paid) because we want to support self-education during these uncertain times – TIME MANAGEMENT SERIES >>
Start to understand the world of property investing and discover if you want to build a property business in this wealth creation focused episode. Dr Ro has been investing and educating in the area of property investing and building a property business for over 2 decades. Harms has been busy building his property business for over 5 years now. With that in mind Dr Ro & Harms give you a property investing 101 from two different stages of an investment journey.
The benefits of building a property business (yes it still works even in 2020) include:
Long term security through monthly income
Long term equity builds over time for your family
Short term cash opportunities through lucrative strategies
Bricks and mortar based business
The ability to use leverage to build your business quickly
Transition from a career you don’t enjoy and add a new income stream into your life
Plus so much more
So in PART 1 Dr Ro & Harms share the first 3 fundamental components to be aware of when starting a property business:
- The important of creation a VISION
- Getting the right EDUCATION & implementing the right STRATEGY for you, 8 unique strategies are covered in this episode
- Understanding your CREDIT STATUS and learn foundational knowledge about MORTGAGES
The reason there is a PART 2 coming up next, is because Dr Ro & Harms have another 7 vital components to share with you. So join us on the next episode to learn all 10 components to understanding and becoming aware of property investing.
This course has been made available as a gift to listeners completely FREE (normally paid) because we want to support self-education during these uncertain times – TIME MANAGEMENT SERIES >>
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For a full read of the podcast, here is a full transcript of everything Dr Ro and Harms covered in this episode of the Growth Tribes Podcast.
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Hello, it’s Harms here and welcome to another episode of the Growth Tribes podcast. We are very much myself and Ro, very much excited to talk about this episode because it’s a passionate area of ours. He has been teaching it for a very long time and we will talk about that in detail in a moment.
Essentially we both are involved in this kind of business which is a wealth generating vehicle. Now, why is this an opportune time? We’ve been itching to talk about this for quite a while, but with what’s happening at the moment, with what’s happening out there in the world. This is a great opportunity for anybody listening to double down and start to learn about wealth generating vehicles and wealth assets and all these amazing things that people have been making money from for generations and generations, generations.
Without spoiling it yet I’m going to let Ro reveal which wealth vehicle we’re talking about unless you’ve already understood it in from the title of this episode.
But hi Ro and there are essentially three wealth vehicles and financial security mechanisms or machines.Can you expand on them and then let the listeners know which one we’re going to be focusing on today.
Yeah, very good. Thank you Harms and thank you all for attending again another one of our podcasts, it is definitely a hot subject I think for anyone listening to this right now, we’re right in the middle as we’re recording this, of the global challenges with covid-19. What I think it’s done is it’s shaken that fundamental stability that everybody relies on, on a daily, weekly, monthly, yearly basis, which is our income, jobs, careers, businesses.
I definitely think people have been forced to pause and just question what they’re doing and is there another way, is there a better way, or is there another way I can put alongside what I’m doing at the moment to create more financial security. Which kind of leads us through the door of wealth, financial security, financial independence, whatever phraseology you want to put about that. As you walk through that door there are these three huge signs in front of you and each one of those signs represents a vehicle, a passage, a path, a direction you can go.
Sign number one is property investing.
It’s developing a business around property whereby you create not just assets for the future, i.e. building a portfolio that might be worth millions in the future. But also building a passive income, a monthly income that can come in, whether it’s £1,000, euros, dollars 2,000, 5,000, 10,000, 15 whatever your chosen figure is.It’s a business where the fundamental asset base is property so that’s the first path, passage, the first vehicle. Whatever term you want to put against it.
Second one is business.
Business has many guises, it has many faces, you can be online like Harminder does and we will have another podcast on that, where you have businesses that are online and you operate and have your income not necessarily virtually but certainly beyond your physical world.
It is out there globally right through to you could have a shop on the high street where you sell things, you sell widgets, you have a dry cleaners, you sell clothes, you might be selling gadgets, televisions, phones. Whatever your business is and everything in between that. So businesses could involve providing services, going into people’s homes, and providing a service there.There’s a whole range of different businesses. If you want to call them physical businesses versus online businesses that might be a simple way to break it down and that’s another way to generate security and long-term financial wealth.
The third area is a tricky one when I refer to this because we used to say trading, trading the stock market. That’s the term I certainly studied 20, 25 years ago, trading the stock market, but it’s a bit broader than that now.
I tend to say to people investing in the markets or trading the markets because, when we talk about trading the markets or investing in the market, that could be everything from currencies where you literally look at currency exchange rates and you trade whether the market is going up or down there. Across to buying and selling stocks, so you buy a stock and sell it in the future, get a profit from that. Or buying and holding a stock getting a yield from that as a shareholder in that company.
Right across to looking at commodities for example gold, silver, oil you can buy into these things and then you go right over to the other side where you can buy options on something, so you don’t need to physically have to own it, but you have the right to own it as a stock. You can have the option on that stock and make money if that option goes up or down, and that’s another way to create wealth.
These are the three big vehicles Harms and they can be both passive and active meaning passive you make the money while you’re not even actually physically doing anything in the business.
All three of those vehicles have the ability to do that by the way, and they can be active where you’re actually in the business whether its property business or trading and the time you spend there, you generate some cash for yourself. Whether it’s to 1,000, 10,000 100,000 whatever, and that’s how you build your wealth. Both parallel strategies, passive and active, and then three main vehicles.
You’re going to have to keep the breath because what’s interesting here is you’ve done all three of those.
Question number one is which one would like to focus on today? I know the answer. I know you could talk all day about all three of these so we’re going to have to get really focused.
So question number one is property, so today’s focus is around real estate and it’s a passion for both of us. And right now I think it is a great subject to talk about is, obviously we’ve only got an hour to a half to share, but we will pack as much as we can to give you some insights.
Which leads into question number two which is I know you can talk about this subject all day and actually you’ve been teaching this now, correct me if I’m wrong for two decades?
In front of live audiences you’ve been teaching online. You’ve got video educational products around this topic, you’ve got a blog, this is a big passion of yours and you’ve been investing for longer but you’ve been teaching it for two decades. Which way would you like to structure today because, for example one of your fundamental way you teach it is over a three-day session. We cannot speak for three days and certainly I can’t otherwise Geena would kill me if I’m speaking for three days in this podcast.
So how would you like to structure today?
I think that’s a great question and it’s such a deep subject and even when people come to see me and maybe spend three days and you’re often on those events, and you’re up teaching as wellHarms but we know beyond that, there’s a lot of depth behind it. Somebody might come and do a three-day fundamental training and then decide to specialise in a specific area maybe get some mentoring and coaching.
It is a subject that is so deep and so broad that we can go in lots ofdifferent directions. I think the easiest way is there are these 10 essential components that I’ve been teaching now for many years. If I go onto a stage and I’m invited to speak for an hour or two I’ll often compact everything into these 10 components. If we can do it, it would be great to do that today Harms, and maybe if I walk through the 10 components and then you just come in and add your experience and knowledge to it as well. That will be brilliant.
That sounds good and information for people we could spend an hour on each of these components, we could easily spend three hours, but we’ll try to keep it focused. The first thing I wanted to speak about was why I personally think property is such a fantastic vehicle and what it’s done for myself and my family. Just some headlines and these will make sense maybe you can refine these or add a few points to these. I think the first two big things is simply the fact that you’ve got a feeling and you’ve got an actual long-term security.
The reason I said feeling is because I have seen you recently did a Facebook live on Maslow’s hierarchy of needs and reminding people of that. Now the feeling of security comes from the fact that a property portfolio and we can talk about strategies in a moment, a property portfolio can generate an income, a net income after all expenses which ticks that base level box on the Maslow’s hierarchy of needs, which is security.Your feel secure in your life because there’s a base level of income coming in passively every single month.
That is probably number one, number two is besides from the income that comes in every single month, you start to develop an equity over timewhich can be released in the future or passed through to families. Whether it is a legacy, through trusts or whatever. Now that’s fantastic. So you’ve got a short-term win which is income today and them you’ve got a long-term win which is equity that builds up as the property value increases and as the debt depreciates.
I know we are getting complex here, as the debt depreciates over time. They are two big wins. Would you agree with those or is there anything you’d like to add?
The thing about property as you said there are so many different benefits, if I just wear my older hat for a minute for those of you listening, I would add, and say that if you’re in your 40s, 50s, 60s, Harminder’s pretty much covered all the stops there with what he talked about, whether you’re in the younger generation or older. But the 40s, 50s and 60s I think for a lot of us that have got children as we’re working particularly with covid-19 affecting so many people’s careers and jobs.
There’s this massive question mark over what have I been doing all these years? I’ve worked, but I haven’t built any equity into myself. I haven’t developed any value apart from I’ve worked and got paid. But that’s purely cash flow. What I haven’t done is created any equity in me as a brand, me as a human being my only equity is my years of experience in this job. But unfortunately right now there are younger people coming through who are getting those jobs and they don’t need my experience in the company and actually I’m being moved sideways.
I think the older generation at the moment are feeling a sense of frustration, maybe undervalued and it’d be interesting to see people listening to this if they disagree with this, and also a sense of lack of security because we were sold this dream certainly when I grew up, get a good job work really hard to get a degree, maybe get a PhD if you can. Climb the corporate ladder payoff your mortgage and you’ll work for 40 years and you’ll go into this amazing pension, which will look after you.
It is just rubbish. It doesn’t exist in today’s world, granted there might be some government type careers that people get into and maybe people might argue I can go into the military, I can come out. But even there that working length is been protracted now and once people are in it if they lose that inspiration about what they’re doing and they suddenly think shit, I’ve been here for 10 years I don’t know if I want to carry on doing this, but I’ve got to stay because I’m on this plan to get this pension.
I remember when I was in my career just after I left with my PhD and went to work, I started on this really low salary which I was shocked at. That was the biggest wake-up call. I think I left university at 25, 26 years of age having got a PhD and I started on £16,000 a year. I remember thinking all this experience, one of probably four of five people in the world that knew what I knew, and yet I had to start right at the bottom. They said you’ve still got to get experience in the company now and prove your worth, etcetera.
I think when I left and became self-employed, my salary had gone up to 20,000. And then I can make more if I was on a per diem out on site. It was ridiculous. I can tell you for the ones that are listening to this who are in their 40s or 50s what this gives you is the opportunity to build a business with your partner. Who you may not have been able to do that with over the years if you’ve been working in separate jobs. Create security for your children, not just for yourself but for your children and leave a legacy, if you have the right tax planning, you can have assets worth a million, two million, three million whatever pounds, euros, dollars, whatever currency you’re listening in.
Those assets become assets for your children in the future, not just the value of those assets, but the income. They can inherit the income once you’ve passed away, so there are some really big benefits to this.
Massive benefits and I thought what’s fascinating is the scenario that you had after your PhD is exactly the same as what my generation are facing now and the generation coming up after us.Which is if you’re in the US it’s in six figures. If you are in the UK it’s 35, 45, £50,000 on a higher advance education, university degree and when you come out you start at the bottom. On a 20, 22K salary. If you think about how much of a jump that is from your era, realistically it’s just absurd, nothing’s changed in that system.
That’s assuming they get into the career they want to get into. There are wide-ranging set of statistics on this, but one stat I read a couple years ago it said about half the graduates in the UK at the time were not getting into the careers they wanted to get into. They were going into fast food and whatever it was to just get some form of employment.
Yes and that’s clear, it’s evident. There are lots of surveys now being displayed showing that, that’s a serious reality. If somebody is listening in my generation, saying, yeah it’s going to be different for me. No. The reality is it’s not.
That’s the fact. So there are some fantastic benefits and if I were to just remind myself of why I did it, why I started to build a property business, it was really about buying back my time as soon as possible because I was thinking okay, I’ve got a career it’s pretty good , or what I assumed was good. Sort of enjoying it but they really want a lot of time for what I actually do at work. The reality was I was looking ahead at about 45 years minimum worth of work and that’s if they didn’t extend the pension working age.
Minimum 45 years’ worth of work. The biggest benefit to me put the cash aside, all of that aside, was the fact that I could buy back that time to go and do some things I wanted to do with my life. Which was go on longer holidays, spend time with my wife, potentially be a full-time parent, drop my kids to school. Pick my kids up, hang out with them have the energy to hang out with them. So for me it was really just buying back the time. It wasn’t about chasing millions.
If somebody is listening to this and they’re thinking, okay yeah, but property investors are all millionaires and blah blah blah. Whatever your stigma is attached to this right now just know that it’s not necessarily about chasing the millions, it’s all possible but the first target for me Ro was just buying back those years that I would have spent travelling on a motorway to work, committing to building somebody else’s business.
Coming home exhausted my wife and my children in the future would see the worst of me and people at work would see the best of me. That was not on, for me it was just not on. Not happening.The idea was simply to buy back as many years of those 45 years I was supposed to spend it work was to buy that back and I managed to do that.For those of you listening and you’re 25 it’s all good you can start then, if you’re 23 it’s all good you can start then. If you’re 20 it’s all good you can start then.The benefits are incredible.
Yeah, and I think just adding to that as well what Harminder’s made is a very valid point. I remember when I first went over to Scandinavia my other half Scandinavian, Danish, and people said what do you do?I said I’m a property investor and that was a mistake I discovered afterwards because their perception there at the time, and this is going back a while now obviously was, “oh right you’re a landlord”.
For a lot of people they saw landlords and the same thing here as money grabbing, self-interested, just purely wanting to become wealthy off the back of other people.
But actually if you think about what we’re doing is we’re providing homes for people that aren’t in a position to be able to buy. I have been a tenant over my lifetime on several occasions and was extremely grateful for the landlord who provided me with a home. I never once perceived them as being money grabbing, and I think that’s the challenge I think with any business and those of you listening to this that may be feeling a sense of resistance to the concept of wealth. The concept of creating more money than you may feel you physically need.
The universe works in a beautiful way. If you can create abundance in your life and you can allow yourself to overflow it gives you choices then to direct that overflow of money. Whereas if you’re living in a place of lack, where you are just surviving and then you watch a programme about a charity that really needs help to give money to them and you’re thinking I’d love to do that, but I don’t have enough money for myself.
I remember feeling this many, many years ago, the frustration of not being able to give financially and for a while I used to blame career and poor salary and my job. Very quickly I realised I have a choice to do something different. I have a choice to create an abundance which allows me to overflow and then give off that overflowing cup. I think that’s the way we want to walk into this podcast with you so that you’re not thinking of this as some huge money grabbing operation where you’re going to go out and become a multi millionaire as a property investor and then rake it in and look after yourself.
Actually you have the chance to build it. Even within the portfolio build part of the portfolio so it has a social consciousness built into it and we can tackle that whilst we’re going through today’s podcast.
Fantastic so I think that’s a nice point to now start talking about the 10 steps, the 10 components you would consider any property investor or anybody thinking about investing in property or starting a property business to start with.
As we go through these we’ll follow them in a sequence and it’s probably the ideal way to do it if you’re listening and making notes. However,the real mechanism of real estate is that as you start to build it you’re going to jump in and out of these different components and many of them will be operating at the same time parallel to each other. But to help you give some structure to this we will go through the 10 and then you can start to see how it works.
Number one is simply vision and people say to me what do you mean by vision? I ask what’s your vision? “I want to be rich.” So outside that, what else do you want? “I want to have more money in the bank.” If I gave you a pound you’re going to have more money in the bank. “I want a bit more than a pound.” Okay here is two pounds.
When we talk about vision here, what Harminder and I are really talking about is a painting, a really clear picture of how, as you just heard from Harminder there about how he sat back and thought about this and I still remember him in the audience with at the time his girlfriend, now his wife Geena. His eyes were completely engaged. Some people sit in the audience and they intellectually get it and they go, yeah this would be nice. Others extreme would be Harminder, whose eyes are just completely open, taking loads of notes fully engaged because he could see beyond the seminar.
I’m speaking on behalf of you but I hope I’m correct. But what I saw was you could see beyond the room, the slides, you could see beyond the content that I was delivering. There was something bigger for you, would that be correct?
That’s correct and it was that vision and I think when you look back in hindsight and think what was it that piqued my interest and had me so engaged, taking notes and been very studious. It was very much the fact that I had built up prior and it was being enhanced in regards to having a really vivid image of what I would like my future to look like. And is what I’m doing now benefiting the vision and the answer was no.
So it was very much what do I need to do to get to that vision of mine and that was a first vision and I would say the vision evolves over time as well.
Yeah and if you’re listening to this thinking do we need to do that? Can we just skip to the nitty-gritty? When you’re on the road, driving an hour, two hours may be to look at one property only. It could be you’re looking at 20 on the same day or you’re sat there on an evening with a computer and you’ve analysed 35 properties straight in a row and not one of them seems to be stacking up. Or you’ve had a load of offers rejected or the banks start messing you around because something in your property doesn’t quite fit with their criteria. Whatever is it, it’s only when you have a vision in front of you, you have something to turn to.
It is no different to us driving on a motorway for two hours to get to somewhere if the screen is dirty. If there’s fog, if there’s a blizzard coming across the road and we can’t see where we’re going and we don’t have a satnav to tell us where we are going. We are going to wander around and people do this aimlessly in their careers. They start off all passionate as you mentioned earlier on about getting out there and saying, I want to start my career I want to get going.”
And then after a couple years they go off, they party a bit. They try lots of things. They spend fricking much everything they earn, and before they know it the only vision is getting to the end of the week and then it’s going to June when they can go on holiday. Then they come back from the holiday and then it’s getting to theautumn holiday and then getting to the Christmas holiday.
The vision become two or three times a year getting to the next holiday. What we’re talking about here is a life vision. How’s it going to look? How’s it going to feel? What’s your daily life going to be like? How will you be able to treat yourself or your family to holidays? Where would you live? What would you drive? Would you be spending more time in the business or less time? Would you like to be a hands-on property investor or hands-off property investor? Do you want to have millions in the bank or do you want to have maybe two or three million pounds worth of property and £5,000, £7000 a month cash flow.
That has to be so vivid and so clear that every decision you make in your portfolio leads you to that direction. If you asked me why is that so important? I made the mistake at the beginning of having a really big dream, but at the same time hanging out with some pretty ambitious people and we found we started doing investments that weren’t necessarily taking us towards that vision. But we did them because there were exciting strategies, I don’t know if this makes sense Harms, but we got carried away and we did certain property deals which we shouldn’t have done.
Had we just stuck to the original core vision and this is what I do with people it’s like, “I’ve found this great deal.” I get that but what’s your primary vision? “I want to get to here. But guess what if I do this, this and this they’ve told me I’m going to make this much.” I know, but that’s going to distract you.
That’s taking a fork in the road and then spending the next two hours on a track or path that is not actually going in the right direction. You then come back again get on the main road and carry on towards your end direction, the vision is not just to excite you, but it’s like your compass set for north. The minute you slightly go off the track you check on your compass it brings you back. It keeps you going in the right direction that’s the purpose of this.
That’s fantastic and I would agree Ro because I had veered off course whilst I was building my business. I was looking at different strategies which were just not aligned with my vision. For example if I want to be a full-time parent in year five or six of building my business in my vision is, I want to be a full-time parent. I want to have the energy to spend with my children pick them up from school because that’s my vision and part of that is my genuine true vision. Now if I were a property developer and I was handling planning, that was part of my role within the development part of what we do, now that could be very time intensive.
So that particular strategy doesn’t align with my vision and it’s actually veering me off course completely. It is taking me away from the very thing that I set out to do so if you’re listening at home, hopefully that’s an example of why we’retrying to tie vision with building a business because this applies for any business I guess Ro.
Because some businesses are so time intensive you will start to question why you even built them in the first place when it’s taking away from the reason you wanted to build the business. I think it is really important to anchor this in and take this part really seriously because I do find that people often skip this part Ro and they wonder why they’re veering and they’re like, “why is it not working out for me this deal was supposed to make this much money. I was supposed to have this many houses by this time, it doesn’t seem to be clicking.”
So talk to me about why you started this, talk to me about your vision and what were your goals behind the business? “Um I just wanted to make money.” That’s maybe why you’re veering off course because when you speak to enough people you realise money is not the real reason.It’s a big massive bonus byproduct don’t get me wrong but it’s not the real reason, it’s typically what would you spend that money on?What would that money allow you to do and that starts to form the vivid picture.
Absolutely and I think that’s a great way to step into the next part because once you’ve got that vivid picture and you’re clear the next thing is, how do I get there?
Now I’ve got this vision in front of me so step number two or component number two, because actually you would come back and revisit this component several times. Component number two is education and strategy and they do sit alongside each other because in the process of following a strategy, you can’t just randomly go and do that strategy you’re going to have to learn the strategy. And if you’re going to do it properly you’re going to have to learn it at a specialised level, not just at the surface.
Let’s tackle education very briefly and then talk about the strategy and I think it’s a good chance to open up on maybe the three core umbrella areas and then we could drill into those. You can learn about property from a whole range of different environments, so let’s just list some of them out. You could read books on them there is absolutely countless books, whichever country you come from.
When I first went over to Australia for example, to teach over there I’ve got a very dear friend of mine who is still over there. He’s been in property for a long time, so he started talking about it, but I still had to up skill myself in that market, even though I knew the basic strategies and knew how to teach and do it, I wanted to be clear on what that market was.
Huge numbers of books in Australia, same thing in the states and Singapore. Not so many in Singapore because the market doesn’t work so well there, but there are books there. UK massive amount books.
So you have books, you have audio programs, a lot of stuff is free out there at the moments you can get some free content. Maybe we can differentiate between free and paid in a minute Harms, I think that would be good to cover. There is video if you go as Harminder mentioned if you have a look at say my Instagram page, there’s a lot of short five to 10-minute videos that I’ve done addressing the typical questions that come up.
These types of videos and audios aren’t intended to make you a professional property investor that’s not the intention, they’re there to really help uncover some of the mystery around real estate such that you can then make at least an educated decision as to whether I want to specialise in this more.
I think the mistake people make is they’ll go watch lots of free content and think they’re an expert and actually they’re not. They’re just getting little snippets. It’s like going into a cheese tasting area or a wine tasting and you have a sip of everything but you don’t really get to take the full amount of it, you don’t get to sample the whole thing.
For example, when I went to a wine tasting many years ago on a date with Geena we tasted a whole bunch of wines, we were told how to taste them properly.When we left there we felt like connoisseurs. We felt like we were experts and then when we went off to try it at a restaurant the following week we were like, we actually have no idea how to taste this wine. We’d got this free tasting the little bit of information in little jigsaw pieces and then I just couldn’t replicate it.
We just went to this wine tasting, learnt how to taste wine and I’m sure there are people at home who have certainly gone through the same experience and it’s like, actually, I have no idea. Wine just tastes like it’s going to get me drunk and that’s pretty much it.
The good thing is at least you had some idea and you could start to taste the wine and maybe the biggest challenge is it’s not as nice as you thought, maybe didn’t make the right choice, but you get drunk. With property you’d lose money.
If you applied the winetasting metaphor to property investing. We have, and I say we because Harms has been on so many events with me over the years. We have met countless people that did the wine tasting on property they did online education a little bit of free stuff, maybe read a couple of books, listened to some podcasts. Went into property and lost money or were not cash flowing or just had bad experiences and it really put them off.
That’s when they’ve then chosen to come into the next level, which is really a face-to-face educational experience. You’re coming into a classroom with someone’s experience that has been doing it for a long time and make a note that there is a different between a trainer and an investor who is a trainer. I invest in property and I train so I’m able to talk from a place of experience, but there are people out there that will run a course but don’t invest themselves, or if they do they might have one or two properties. And that’s also a challenge because you’re then dealing with potentially an individual who has a small amount of experience in one area but not a breadth of experience.
The longer somebody has been in the game ideally if they’ve been teaching as well, you’re going to have a much more rounded individual sharing with you and then you go right to the other extreme, now where you go from entry-level education to specialised education.
Where now you go into specialised training, you’re learning about a specific area of property, tax for example, specific area financing, and that’s maybe a two or three day concentrated. Bit like doing a PhD now in that particular subject, and then the piece de resistance is to have your own private mentor.Someone that can coach, mentor you.
You’ve got coaching in between that so from the classroom you’ve got coaching which would be for example maybe yourself and Harminder talking on the phone coaching you. Or a property coach doing that with you on a weekly, every month live on a webinar, for example, could be small group coaching. It’s great because you are now talking to, questioning, getting feedback, going out doing it and coming back to the table, telling your coach what you’ve done and they’re refining you. But the next level above that and the ultimate is both myself and Harminder have done this. We had this experience in our early days is to go out with a professional property mentor into the field where they were actually physically help you through the process of putting offers in and negotiating, buying the properties, repositioning the deal, meeting the power team.
That is the spectrum of education, so before we go onto strategies anything you want to add to that Harms?
I think you’ve nailed it there, which is there’s a nice pathway there and the pathways almost therefor example, this podcast episode sits nicely between the free and entry points. We’re going to discuss the insights, demystify it, it’s completely free and you can listen to it.
It’s not meant to be, “I’ve listened to this I’m going to become an investor.” That’s not the intention behind this.
Correct and I like that pathways and it’s no dissimilar to any sort of career because if I look back I did an apprenticeship as a railway engineer. I did not go to university to start with, so it was a case of you go to an apprenticeship open day and they will give you this discovery, they would talk to you about what this is, what the benefits are and why we should choose this company versus another apprenticeship project. Okay, now we would then apply and then we now commit to the apprenticeship.
Now committing to the apprenticeship is the next step and then once we commit to the apprenticeship we had to decide what to specialise in.
For example, any railway people listening it was do you work on the track? Do you work as an electrician or do you specialise in the signals? I was like I’m going to specialise in the signals, then the pathway was get to work and then the final thing was a university program which gives you an engineering degree. It is a nice steady pathway at entry-level because we need that level of is this for me?What are the options out there, the books, audios, videos and I would definitely recommend, and I’ll leave the links in the show notes at growthtribes.com/podcast.
Those who are actually flicking on their phone I would head to Instagram and follow Dr Ro’s account as he has got some cracking videos on property and that’s @drro.tv. I know you left it for me to say your Instagram because sometimes you forget what your Instagram is.Or head to Ro’s website which has got some blog posts on property as well and that’s two decades plus worth of information there and experience sharing with you.
Also Harms they can have a look at your Instagram as you do some stuff when you’re out looking either on your own or with your lovely wife, so maybe just let them know what that is.
What I love is we are at different places Ro is at a different place in his investing journey, whereas I’m actually still building my business. Ro is building his business in a different style, more hands off whereas mine is actually semi-hands-on, hands off as I sit somewhere in between for my clients it’s very much hands-on. So yes follow me @toottalks and you’ll see the glimpses behind the scenes of us and the things we do. These components will start to make sense when you start to see what I do on a daily basis around the property business.
I think the other point you mentioned was free versus paid, how would you describe it to somebody because there’s a lot of people out there who say, “don’t pay for property education. It’s all here in this book.”
I was going to ask you what’s a millennial’s view on that because I think you’ve nailed it there. Talk from a millennium’s perspective for a minute.
I think we are split so I’m a millennial myself and if I want to master something I am not naïve enough to know that the information is going to be free. When I look for education this is me talking to you Ro when I look for education it must be packaged up, it must have an end-to-end process, a system. It must have steps one to 100 however many steps there are in this process I specialise in. There must be people around there who are dedicated because I’ve paid for this service dedicated to serve me.
This would be the case in anything but certainly when it comes to education it’s a case of, I know that if I pick up the phone there’s going to be somebody on the line. I know every Wednesday there is going to be a certain service being provided for me in regards to education.
So for me it’s very black and white, which is, if I want specialist knowledge I’m going to pay for it and I’m going to pay for somebody’s time who is associated with whatever education service I’m buying into. That’s a no-brainer for me. I can’t see anyway else around it for one reason, specifically, which is my life is very short as is all of ours on this beautiful planet and I cannot waste my time going through the forums, the Facebook groups, the blogs.
I feel like if I were to do this and I hadn’t gone through the process I’d gone through myself about learning it and specialising I would be trying to put together a thousand-piece jigsaw puzzle, but there’s no picture of the jigsaw piece.
I have to jump in here because with respect, as somebody that’s been through this myself and the older generation and as a trainer, speaker in this field for a long time now. What’s frustrating for me is I totally agree with you however, there’s still a large number of younger people that don’t have that same mindset as you have. I get people coming in saying, “but my girlfriend said this, my dad told me this. My mom said I shouldn’t do this. I should just go and study on my own.”
I’m thinking the amount of money people have lost trying to do this particular thing property on their own, is millions and millions if you add it up cumulatively. Yet there’s a parent or a brother or sister who’s never done real estate, telling them do it on your own, you don’t need people to help you. Then of course they become the victims of a bad deal and they’re the ones that say it doesn’t work. When actually it does work.
Correct my second phrase was going to be there is half of us and there’s no exact figure on this.I see a lot of millennials now shifting and my generation shifting realising actually, I’ve got to get on with this and I’ve got to do it properly. We do have that category.
But there’s also the category which you’ve described Ro, and I think it comes from a place of ego which is, I don’t need you. I’ve got plenty of time to make some mistakes, I want to learn and experience these mistakes by myself, but I think what they miss is the fact that property is not like drinking the bad wine. It’s very much you’re going to lose £20,000 and time.
Imagine how long it takes you to put together a thousand-piece jigsaw puzzle where there is no picture on the jigsaw puzzle and the reason I’m using this is as I’ve started to see these being sold online. I imagine because of the coronavirus and lockdown but people are selling thousand-piece see-through jigsaw puzzles, no picture just a see-through jigsaw.
I think it’s fantastic and that’s what it’s like. I’ve had friends who haven’t gone through the process I have, who decided not to, and they’re still putting that jigsaw piece together. The reason I know that is because the kind of basic level entry level questions they asked me Ro are so basic and I have to be honest with them and say I haven’t got the time to put your jigsaw piece together for you. Because we are quite busy ourselves building a business. I think that’s the difference between free and paid from my experience.
Remember we’re still on component number two and we’ve spent more time than we planned to talk there.
I think it’s because I’ve had literally and we are sharing on a free podcast here, but I’ve had literally tens if not hundreds of high volume or certainly awkward or uncomfortable arguments, conversations with people over the years over this one subject. Where a partner or somebody is not prepared to invest this time and money into learning to do it properly and yet they’ll go off and do a career for years which ends up being the career they didn’t want to do. Or they’ll do a degree or something which they were told to do by someone else, they still had to pay for it either way.
The reason that I want to emphasise it more so here on this podcast as you’re listening is because it’s through education that you get clarity on your strategy. Now remember this is component two education and strategy.
The first area is cash generation.
This is where you actively put time in and these are property strategies and off the back of that you would generate cash. The next category within the three strategy areas is passive income. This is where you put the work in once and then on a monthly basis for a year, 10 years, 15 years, 20, whatever you choose, you would receive a monthly passive income.
In other words every month in your bank account arrives a certain amount of money, the outgoings go out and what’s left is your net cashflow. Could be one hundred, thousand, 2,000, 3,000, whatever it is for that particular property. There are multiple strategies under that umbrella so we’ve got cash, passive income and the last one is creative. Creative strategies and creativity are about how to structure the deal, how to finance the deals, how to make the deals work in a way that is nonconventional and you can apply the third category to the other two.
The other two are where you generate the money. The third component or the third category I should say, the third umbrella are several different ways of structuring the deal and those can be applied to the first two. So you’ve got passive, cash and creative.
Let’s delve into a few of those Harms just to give them some idea.
That’s fantastic before you start Ro I’ve got a suggestion and those listening at home, we’ve got 10 components. I had a feeling we will be to talk about these for days. I think we should and let me know if you agree with this or not we should do five today and we will do a part two follow up, where we do the final five and pick those up.There will be a part one and part two. Because we are at 45 minutes and we’re still on component two and they’re going to love it at home because we’re diving in deep here. I think we should dive in deeper than we had wanted to but we split it into two parts.
Okay let’s start with cash, if you’re driving or running, or you’re not near any paper we will just talk about. If you are near paper and you want to write these down it’s quite a good way to understand the difference.
Cash generation is where you put this is like you being in your job where you put time in and you get paid for your time. The difference here is you can leverage and what leverage means is that you can put a small amount of time into a cash generating strategy but yield a lot bigger return on that time. i.e. you get paid a lot more for it.
We’ll do a couple of examples so I’m thinking Halms if I do flips and you do sourcing as an example. I’ll start with the flips and if you’re listening to this flip is an American term that we picked up years ago. But this is basically to buy to renovate the property and then to sell that property on for a profit. If you’ve ever watched some of these TV programmes and that’s another way people think they can suddenly become a property successful millionaire by watching TV programmes, that’s not the case. In fact tonight I am doing a webinar with Martin Roberts from homes under the hammer and if you don’t know who he is, he runs one of the most successful BBC daytime TV programmes and Martin I will be talking to a group of people that are starting on their journey for property education.
He’ll tell you that people have watched his programme in the past and just off the back of the programme had a go at doing property, but of course buying and selling, but they just didn’t have enough detail so be mindful of this.
What we do with this strategy we are buying a property at a discount and the result we got there was we bought it from a distressed seller, possibly going through divorce, they might be going through a challenging financial situation and they’re forced to sell the property quickly. We buy the property at a discount if the property is distressed, if it’s run down, got damp, it’s got roof bits missing from the roof. Maybe it needs completely upgrading and it hasn’t been touched for the last 10, 15 years it will be in a depleted state and just a distressed state is the term we typically use.
The objective here is to add a certain amount of value to the property, so you might buy it for 100,000 you might put 20,000 pounds, euros, dollars, whatever currency you’re of work into that property.S
o now you’re in the property for a hundred purchase plus £20,000 worth of work, you’re in it for 120. That property on the market because it is now in good condition maybe worth 150, so there’s a £30,000 profit there. So you choose to go and sell the property out to the market and you’ve walked away with a £30,000 profit that would have taken you maybe a couple months to buy it. Another six to eight weeks to renovate the property you’re in it for four months and then you put it back on the market and maybe it takes two months to sell.
Six months from start to finish seven months, you’ve made £30,000 profit. How much time have you spent there?Well if you used the team which we will talk about later in the second part of our podcast. Your team could have put the work in.
Harminder has moved to the south of England just recently, but he has projects in the North of England as do I where we have people working on this project for us, so we don’t have to physically be there. You may have only spent two or three or four or five days of your time to make £30,000 worth of profit, whereas in your job you might have had to work half the year to earn that.
Whereas here you’re only spending a handful of days because you’re leveraging your builders time so you return on time invested, the ROTI If you’re Indian and you’re listening to this or you’re African, roti means maybe a piece of flat bread with some curry. Whereas we’re talking about return on time invested. So you’ve put a weeks’ worth of time your builders have put the work in, but you’ve generated £30,000 worth of profit. That is a very good return on investment. So that is a cash generating strategy. You have had to put time into it but you’ve made a lot better return than in your career.
Very simple, so Ro you asked me to speak about sourcing and that’s great, and we’ve had a sourcing company for the last 12 months as well. To show you the amount of level that building a business can take we moved up to our area for 12 months before we moved down south in order to put all of these components in place, and physically be there. That’s why when I said I am in a different stage to Ro when it comes to building the property business and continuing to expand it, I’m very much hands-on with this.
The way to think about a sourcing company is to compare it to somebody similar but not quite. So let’s look at the business model and the business economic model of an estate agent, think about a conventional estate agent and think about the two main parties that they would transact with.
Number one is the person selling the house, that’s person one they deal with. Person number two they deal with is the person actually buying the house. Now let’s think about how do they make their money? Well actually they make their money from the seller. Once that transaction is completed, the buyer buys a house great, but the estate agent actually makes the money from the seller when the sale of the house is completed.
In a conventional estate agent model and that’s common and known to everybody, it’s been operating for many years in the UK and globally actually. They’re just known as different things like realtors, real estate agents in the UK, estate agents classically known as.
Let’s compare that to a sourcing agent know how does a sourcing agent make their money, what is the business model there?
A sourcing agent deals with the exact same people an estate agent does but it deals with them slightly differently.Number one is the seller of the house. What the sourcing agent will do is actually go find the sellers of these properties and find these properties themselves. The second person they deal with is actually the buyer but these buyers are typically investors. So how does a sourcing agent make money in a different way to an estate agent and what’s the difference there?
A sourcing agent doesn’t make money from the seller who sells the house they actually make money from the person buying.The person buying the house would say to a sourcing agent, “okay, I’m an investor, and I’m looking for” and these are is arbitrary numbers so don’t think this is a good deal to go and start looking for immediately. I will keep them very low.“I’m looking for a property that has a 6% yield, I’ve got a budget of about hundred thousand pounds and I am looking in your area that you’re actually sourcing in, which is West Yorkshire, South Yorkshire.”
It could be Liverpool, Manchester, Newcastle wherever South Wales and “I’m looking for that kind of deal”. The sourcing agent will turn around and say yes perfect. I can go find that kind of deal and how many are you looking to buy this year? They say I’ve got a budget of hundred thousand, well actually with the kind of deals that we find you probably buy two of these, great.
Now the sourcing agent will go out hunting for these deals which meet the buyer’s criteria, then they will hand them to, they package them up and say to the buyer these are ready to go. The buyer will then pay a fee to the sourcing agent and this fee can range from £1,500, £200 anywhere up from £10,000 plus depending on what strategy it is.
So that’s it in a nutshell, Ro does that make sense?
It did and I think the thing to point out here to the listeners is if you’re in a career and you can learn the skill of finding properties, in other words you get the right education to do this and go and source these properties. You would do the research to locate them, check the market there, check what the demand is, check the cost of the work needed to do the house up. Maybe even engage with local letting agents, management companies to place tenants in there and do that work on behalf of the investor. What you’re doing is you’re basically presenting yourself as a business that provides that service and that can be run parallel to whatever you’re doing.
Many people I’ve taught over the years have gone on to generate 20, 30, 40, 50, 60 80, 100 and more thousand pounds per year, running this is a parallel business to whatever they’re doing. Depending on how much time they want to put in so it gives you the ability to create money to feed back into the pot to buy more properties for yourself.
So it’s a fantastic strategy for someone that has a little bit more time as Harminder has in recent months and years and is able to package a property up and then present it over. You do need to be registered in the United Kingdom to do this properly.
A sourcing agent has a list of regulatory criteria that they have to meet, I don’t want to go into detail as it will get confusing. But essentially they have to be regulated, they have to be insured, you have to ensure you can handle data. There’s a checklist of things a sourcing agent must tick the box off to be considered a professional sourcing agent. If you’re on the other side of this way saying actually, I would like to work with a sourcing agent then you’ve got to make sure they have these things in place.
I like the way described it Ro because think about you as a sourcing agent or you as a buyer who is buying from a sourcing agent, you are essentially buying into an end-to-end package where the property is found, negotiated. The teams are all set up. If it’s a distressed property like Ro mentioned, then you need a build team to renovate this, then once it is done can they hand it to a letting agent to get tenanted. All of that is handled as part of this end-to-end package, so that’s what you’re buying into and as a sourcing agent that’s the service you’re providing.
Actually I know sourcing agents in their 50s, late 50s and I know young people who have started sourcing at the age of 18, 19 years of age, so it’s a really great business to develop if you’ve got the skill to find good deals.
This fits nicely under the cash category and I think Harms let’s just pause it there because there are other cash strategies we can talk about, but I think they’re are two good contrasts there that can get people’s appetite going on and start thinking what if I was to do two buy and renovate deals a year, and maybe source five or six properties. I could generate enough money to get me out of my job from a cash perspective, as opposed to a passive income perspective and that would buy me some time to start building the next are which would be my passive income.
I agree Ro, I think that’s two good strategies which fall under that. So then the next thing to consider is the passive income part of this umbrella. So which ones would you like to talk about within passive income because there’s a lot, and I’m also conscious of time as well. I think the classic one which people know is a buy to let.
Yeah and that’s a great question Harms, there are so many strategies under passive income. There is something we call the income pyramid and the income pyramid works on the basis that, at the bottom of the pyramid is where you most likely to have the most number of properties in that strategy and they will likely produce the least amount of cash flow per property. Then at the top of the pyramid you’ve got the highest income producing properties and you’ll have less of them because they’re bigger units.
We will just touch on a few of those now between myself and Harms maybe do four. But be mindful as you’re listening to this that when we talk about passive income, everything we refer to here is the income in your pocket before tax but after you’ve taken into account mortgage, running costs, management fee.
You would have your rent coming in minus your mortgage costs minus your running costs and minus your management fee that creates a passive income.The term passive income before I dive into buy to let, the term passive income Ro is an interesting one because there will be listeners at home saying, nothing’s passive income. You’ve explained cash flow is income after all expenses that’s your net cash flow, that’s what you are going to receive in your bank account at the end of the month.
But what does passive mean because we can debate and say some of the strategies may need some work involved, in which case it’s not completely passive, how do you describe it? This is interesting because network marketing is classified as the three categories of what we talked about earlier on. Network marketing classifies as business and people used to say, network marketing is a fully passive income.
I’ve been involved in multiple businesses and I’ve also spoken at conferences and if you speak to the people that are high level, they will say, well okay, it is a passive income in the sense that every month you get a monthly income coming in, but you’re still really involved with helping people build the business. You’re still involved with going out and putting the work in to help recruit and bring new people into the business to help it expand and grow. It’s a good business model for the right people. It can be very successful as long as you put the time in like any business.
With real estate I think it’s more so passive, but there is still a level of involvement needed.
For me, a true passive income would be where you put work in once and then every single month get money and you do nothing at all. I don’t believe and I think you’ll vouch for this as well, and we are not here to sell you on the idea of this being hands off because it’s not. I think what happens is your initial amount of work goes in at the start the finding the property, doing the diligence, putting the offer in, owning the property, renovating it if you need to. Getting it ready and fit to be rented out.
Then there’s a massive drop in the amount of effort. Then you hand it over to a management company whereas in your job to earn £1,000 you might have had to work the equivalent of a week, every month depending on your salary, or two weeks a month to get your thousand pounds.
Now if you’ve got an HMO property, producing £1,000 a month, you may only spend half an hour that month on that property to generate the same amount of money of one thousand pounds. That half an hour may have been you simply checking a few things on the financials, checking the mortgage statements, possibly doing a little bit of admin and then dealing with a phone call from a letting agent to say, we’ve got a slight problem with toilet. You might spend 10 minutes on that. That’s it.
It is a passive income, meaning that it comes in every single month whilst you’re asleep but there is some time involvement still to ensure that the business runs smoothly.
That’s fantastic and I wanted you to clarify it for the listeners because everybody attaches a meaning to certain words and knowing what people’s opinions are out there on passive income. I think you’ve explained it very well. There is time involved, but it just happens to be in different parts of the business and actually not that much time that you would really think about. Managing the portfolio doesn’t take that long if you compare it to a conventional job.
The caveat there is, depending on how educated and how well you’ve chosen your tenants. So if you’re listening to this and you’re thinking, I’ve had properties in the past and I spent a lot of time on it.
My question to you would be what sort of education did you do before you built your portfolio? “None I had four properties I did on my own.” What tenants did you have? I bought them in really low value areas and the tenants were typically people that weren’t necessarily classified as the best tenants, but I thought if I go for a cheap property, then at least I can get into it, with less money.”
It is like anything if you to go to one-star hotel you have a different type of client using a one-star hotel to a five-star hotel. So how you build the business will reflect on how much time you have to put into the business once it’s been built.
If you listen to what Ro said actually not all buy to let properties are equal and not all buy to let properties will generate you net cash flow. We’ve had a load of people who come to us and say, I’ve got three, four, five buy to let properties and then when we run the finances on those particular houses, their face expression changes when they realise they are not making any money off that particular house.
Think about a buy to let property as this in the sense that you’re going to have a family or an individual who’s going to be renting that house from you that particular unit. It could be a two bed, a one bed, a three-bed property, it could be a flat.
But a buy to let works very much so the fact that they are renting the house from you and an agreement is in place, which is an AST. That AST allows them to let that property as a single family or individual, depending on how you’ve got it set up. That’s it in the simplest form.
Once they move into the house you’ve got an agreement which is agreed via an AST. It could be for you directly if you’re that kind of landlord who deals with your tenants directly, or a letting agent who will be arranging this process for you. Once they’re in the house they will then pay you a monthly rent for being able to stay in your particular buy to let property. Which is evident in the name now you’ve bought the house in order to let it and you let it to a single occupancy for family. The reason I say single occupancy will make sense when we talk about HMOs in a moment.
They will then pay you rent every month that rent will either you go through a letting agent into your bank account, or it will go directly to you. Then you will pay all your expenses associated with that house, i.e. the mortgage, insurance, the bills and then what is left over at the end of the month becomes your net cash flow and can contribute now towards your income, your livelihood, future investments, depending on how you got your finances set up.
The next level from a buy to let is how you have to ensure that the buy to let is legal for your tenant to reside in it, to make sure the contracts are appropriate and watertight, what to do when tenants don’t pay your rent.
All these questions instantly come to people’s minds. Where should I buy the buy to let, how much money should the buy to let typically give me in my bank account? That’s a lot of questions there but I guess if we put an income a monetary value associated with it, a good buy to let will give you a net cash flow income of anything between £150 to £250.That should be a nice target to go ahead and understand what should be that minimum target figure.
We need to put that in context as well because Harminder is referring to a property in the United Kingdom you’ll be buying in the range of £50-£80,000. Yes but an entry-level for a buy to let that works quite well would be 50, 60, 70, 80.
In some areas you can talk about 90 to £100,000 but you’ve got to ensure that the rent will still allow you to receive that minimum rental income, net cash flow at the end of every month of 150, 200, £250 plus. That’s the benchmark therefor a buy to let and there are a lot of legals behind it and I think the government is getting stricter and stricter.
For a professional landlord I guess that’s the best way to describe us, for a professional landlord it’s fantastic because it means we are greater protected, the tenant is greater protected. The stakeholders in between are greater protected but also the fact that it reduces the competition in the markets. One of the questions we do get is aren’t everybody buying this? Not really, it’s become very much a sophisticated regulated business in the fact that not everybody wants to be a part of that anymore.
There is licensing, there are a whole bunch of things that have been introduced and the range from a buy to let is 150 to 250 but you can get three, 350, 400 depending on where you’re buying and what the yields are in that particular area. I think the other thing to add is that if you’re listening to this and you’re listening outside the UK. You might be thinking did they just say, £200, £300 a month cashflow and I’m only buying it for 60, 70, 80 £90,000?
Yes, if I went to Melbourne with you, you’d be looking at buying one or two bed apartment for maybe five, six, seven, 800,000 dollars. Singapore probably upwards of half a million. Hong Kong upwards of half a million three-quarters of a million, so the yields are very low and they don’t get these kind of cash flows. That’s sometimes hard for people to understand. So what we talk about is you’ve got to have the right strategy and then when you find a strategy you want, you’ve got to go find an area where that strategy works.
Maybe you’re listening to this thinking it doesn’t work where I live Dr Ro and Harminder,that’s fine in that case what you need to do is invest in the other area. That’s why so many international investors are buying in the United Kingdom because they can still live in their own country and buy properties like the one Harminder is talking about, generator cash flow have a corporate set up, have the right company structure which we can talk about in the second part of this podcast and still be able to live in their home country. There are some really good benefits you don’t have to be inhibited by the fact that that strategy doesn’t live where you are based. That is the key thing to remember.
Yeah your buy to lets can be anywhere in the country, which is why I alluded to and hinted about the letting agent. We’ll talk about this in the second part in terms of an operational team that needs to assist you with this business.
What’s the next level up from a buy to let as I spoke about single occupancy. One assured short hold tenancy with one family or one tenant for an individual house.
Let’s talk about what we call a house of multiple occupation in somewhere like Australia, New Zealand if you’re listening you might call it a boardinghouse. In America, you might call it a multiunit type strategy shared accommodation. This is where you have one room but multiple tenants with separate agreements. This a very important point to pick up on.
If you’re listening to this and you’re outside the United Kingdom be aware that in our country the United Kingdom we have AST’s assured short hold tenancy agreements, which are a legally binding contract between us and the tenant.
Whereas if you go to South Africa, Australia and other countries it’s quite difficult for the landlords and they get nervous because they say I’m allowed to do this, but how do I get my tenants out the property?The beautiful thing about for example in the United Kingdom is our tenancy agreements allows us to put them in place for a certain period and under certain conditions, we can invoke a notice to the tenant and then legally ask them to leave the property.
Which means that our lending in the United Kingdom is so much more relaxed because the banks are able to look at it and say this is great. I know I can get vacant possession of property because you’ve got the AST’s in place. I thought I’d mention that Harms because when I travel the world and I think I’ve taught in about 20 different countries now, one of the biggest question that comes up is, what about getting the tenants out? I say what do you mean? In our country we can’t get them out. But in our country United Kingdom yes you can through an AST agreement.
For those listening it’s great to have Ro on here talk about this because you have answered questions from people globally about investing in the UK market, so it is great to have that level of experience being discussed here. Our listeners are international and you’re right, somebody will be listening thinking I’m sorry you can make 200, 300 £500,000 a month from these properties? I don’t believe you.
The truth is you can. For example, the house of multiple occupation strategies where you might have a four or five bedroom and there are different categories of HMO but that’s for you to learn at a different level.
Harminder talked about a buy to let property where you have a family in there and it’s a family of three kids, two adults and it’s a four-bedroom house with two rooms downstairs, a lounge and dining room and kitchen. An HMO landlord, you could actually rent out five of those rooms because the three bedrooms upstairs, plus the lounge and the dining room downstairs can all be converted into rentable rooms.
You would have a separate tenancy agreement on each separate room, so you could have an architect living in one room, you could have a young junior doctor living in another one. You might have a young teacher living in another one and they all share the same kitchen and utilities and they cook in that space. They go back to their rooms and they might have an ensuite where they can shower, have their own TV in that room.
Because of that what you have is five different profit centres, five different points of income coming in as opposed to one income in the buy to let. What that means is you typically will double or even triple your income on that property.
Whereas Harminder’s example of making, say, £250-£300 a month cash flow as a buy to let, the very same property in the same area assuming that the demand is there and it’s the right demographic that area. In other words the property is set up in the right location, near a hospital, near a central location train station, whatever. Depending on your type of tenant you’re probably looking at somewhere around 750 to £1,000 a month cash flow on that same property that was only producing 250 to 300 as a buy to let.
Now if you then scale up and went to, say, six, seven, eight, nine-bedroom property now we’re starting to look at incomes of passive incomes of 1,500 to £2,000 a month in your pocket. That’s general rent of maybe 3000 a month minus the mortgage, minus running costs, leaving you with about 1,500 in your pocket or thereabouts. Essentially what we’re talking about here is a higher income per unit, which means you can get your financial freedom targets with less properties. So we’re further up the income pyramid.
There are more running costs, but we allow for that in our cashflow calculations and there is more work to be done, more legislations, licensing to be done, etcetera it is a lot involved but it does allow you to create more cash flow per unit.
Something in between what you’ve just described there Ro,which is a nHMO and a buy to let, sits another fantastic passive income strategy which is known as social housing.
Typically the people who this is ideal for is somebody who is looking for a hands-off business, so they’re happy to do the work in advance upfront, but then they want a hands-off business for an agreed, or a set period of time. This is also great for somebody who maybe says I love the idea of property, but I don’t want to get into the private rental sector, which is potentially what Ro and I just discussed, and I don’t like the stigma attached to a classic landlord and all this kind of stuff maybe playing in your head.
Well, what if you have the opportunity to provide housing for vulnerable people? People in society who really need a place to live and they need taken care off. They need social care, social help this can be anything from homelessness, people who have been subjected to abuse, asylum seekers. A whole range of people who just need that additional step and integration back into society. We have an opportunity to provide housing for.
Ro I know you do this and I implement this strategy as well and what’s very special about this and why it sits in between because the income is roughly that of just between a buy to let and a HMOs.
You can typically get income of £350,£400,£500,£600, £700 and some strategies about £1,000 a month on these kind of properties. The question I get is but why does is it hands off? Once you have done the work, and you provided a house for an organisation which has given you a specific criteria and you hand the house to them. In exchange, they’re going to put a contract on it which essentially guarantees your rent over a period of time.
The guaranteed rent contracts include maintenance, depending on what you’ve negotiated. They can even include them paying the bills for you, them paying the council tax, them providing a grant, a loan to help you with the renovation, to bring it up to standard.
These contracts can range from a length of time, anywhere between two years, three years, five years, and even 10 years plus. We’ve been speaking to a sophisticated investor who’s got contracts now locked in at 25 years guaranteed rent with all maintenance handled.
I get excited about this because this is truly hands off and when we talk about passive once the work has been done, as long as you keep a good relationship with these organisations, then this is completely hands off. So what do I mean by that? It means income is guaranteed so as part of the agreement with you they’ll continue to pay you into your bank account every single month regardless of if the house is empty or not.That’s quite magical as a strategy.
Particularly at the age I’m at now, when an opportunity comes along to get a more hands-off strategy I jump on it. In the early days we’ve been doing social housing from the start but we’ve then broadened into the whole range right across the government housing asylum seeker strategies.
I think for us, that’s where my main focus is at the moment. Those of you listening from overseas we do have people that we know of that come in from overseas and they like these type of strategies because it enables them to be able to own a property in the United Kingdom, get a guaranteed rent for three, five, six, seven, eight years and still be living in their home country and not have to worry as much about the change of tenancies.
It’s a brilliant strategy for not having to be so involved and still having an asset that’s going to appreciate. Now granted, it may not appreciate in value as much as, say, if you are renting in a central city location to a professional company, or professional let and because of that the markets going to grow quicker.
If you go for a buy to let strategy as a professional landlord for professional tenants you’ll most likely going to have high capital growth in your portfolio, but not necessarily guaranteed income for the five, seven years. Whereas if you go for the social housing asylum seeker type strategy you may not get as much capital growth as those sorts of properties are usually in areas of regeneration. However, you will get the guaranteed income so it’s about balance.
And with every strategy we’re describing there are going to be pros and cons, but they also must meet your criteria to be hands off or somewhere in between. Ro talk to us about serviced accommodation.
By the way, don’t think of these as all being mutually exclusive. We run the strategies parallel, you could be doing these parallel to each other, we are just breaking them down. But you might end up with a portfolio mixture and you should have a blended portfolio.
You’re probably familiar with bookings.com, AirBnB it’s become extremely popular in the last five years. When it first came out everyone thought it was a novel idea and it’s stormed the hotel industry and the general public are now in a position where they can buy a property and rent it out as though they are renting out a hotel.
So four rooms in a property, each one rented out on an overnight rate, so you might be getting on one property £1,000, £2,000 a month if it was a nHMO and you are renting the rooms out under long-term contracts.
Whereas if you rented rooms on a daily basis i.e. £80, £90, £100 per night, as opposed to per week you could suddenly see that same property, producing instead of the total rent of say £2,000 month, you might be getting£7,000 month which means your net income might be £3,000 a month, as opposed to £1,500 a month as an HMO.
That sounds really appealing because of the money but you have to think of it as now you’re running a hotel. The HMO is more hands-on than the buy to let, the AirBnB is more hands-on than the HMO and the buy to let, unless of course you were to engage somebody to run it for you. I have for example a property in London, which has a value of about million pounds and that’s an AirBnB property and what we do is we have a company that does that for us. We take less income on the property than if we were to do the whole thing ourselves, but we take more income than if we rented it out as a normal buy to let.
The concept here is that Airbnb can be totally you run the whole thing yourself. But then it’s like running a hotel so you might say I don’t mind that, it’s a great location, close to where we live, we can see there’s a huge opportunity. I can get a cleaner in, I can get someone to do the towels, servicing and anything else, I’ll just manage the bookings, but you’re going to generate a lot of revenue. You’ve got to weigh up that revenue versus the time put in.
Whereas you might say, I want to put less time in now and I’ll get a company to even deal with the bookings accompanied to deal with the servicing of it, and the cleaning of it and all the towels. But for that they might take of your total revenue 40% so you keep only 60%, but that 60% will still likely be a lot higher had you rented it out as a buy to let property.
You’re going into the world of hotelier albeit on a more private level and it’s a great strategy for someone that is in an area or wanting to invest in an area where there’s a lot of interest like central London, near airports, near major cities, near major theme parks. Anything where people are travelling in and out a lot and they want to stay for short periods.
This is a great opportunity it doesn’t work for a big house. If you think I’ve fins a great house, I’m going to turn it into an AirBnB. Where is it?In the middle of the country. Whereabouts? Well there is nothing really there it’s a small town in the middle of nowhere. You’re unlikely to get a lot of traffic, so you could generate an income, but then the voids, meaning the number of days in the year the property is empty would be a lot higher than had you bought the property near the town, near the big museums, near the big attractions and theme parks.
It’s a good strategy, it can produce an income of £1,000,£2,000, £3,000 a month in your pocket, depending on where you’re buying. How big the property is and whether you’re doing it more yourself or you’re going to be hands off.
Bearing in mind that what we’ve already covered if you apply, just maybe two or three strategies we’ve taught you, and you apply them over the next two to three years, you could generate a passive income that has the potential to step you back from your job. In just what we’ve covered already if you are learning and studying it in detail.
In simple terms an option is the right to buy a property at a given price over a given period of time. Meaning that I can have the right to buy a property from Harminder he might be an elderly gentleman whose going to retire and go live with his kids. His kids are in their mid-30s and they’ve offered him to come they’ve got a granny annexe and him and his wife can go live there. They’ve got this house and the pension is really poor and he’s going to leave the money in the bank maybe making less than 1%. Probably a lot less than that right now in the current market.
And I say to Harminder your house is worth£200,000 that £200,000 sitting in the bank might make you less than £1,000 per year, maybe £2,000 if you’re very lucky. How about I give you £5,000 a year? I offered to give him roughly £400 a month which is a lot more than he is getting and it’s a five, six-bedroom house I can rent that out to two and half thousand pounds a month. So Harms and I have a contract. The contract states that I have the right to buy the property from Harminder in five years’ time in this example and he then moves in with his kids. He gets a monthly amount from me, which is a lot more than he would have got if he left the money in the bank.
I have the right to buy the house but I’m not obligated to buy it, so over the five-year period in the agreement with Harminder I can sublet those rooms out and get £2,000, £3000 a month coming in. I pay him £400 a month, I have my management costs, running costs. I might keep £1,500 depending on how I’ve structured the deal. I’ve never owned the property, so this is about controlling a contract and having the right to buy, as opposed to physically owning the property. It is great for everybody who is it particularly great for?People starting out that don’t have a lot of seed capital or starting capital can’t get a mortgage.
It could be that you’re listening to this thinking I love what you’re talking about but I’m not in a position to get a mortgage. I’ve got poor credit history; I don’t have capital to start with. In the United Kingdom and Harminder has done a few of these himself when he started out. You only have to put a pound down.
So I can have a contract with Harminder and put a pound down and secure that deal. Same thing in America, Canada most countries it works in a similar way. After the five-year period Harminder then sells the property to me for whatever price we’ve agreed five years before. Or it might be I choose not to buy the property and then he can go and sell it to the open market, so there’s lots of different ways to do this.
The beautiful thing about this is, it could be I’ve done four of those in a year. I’ve got four contracts set up to buy four properties in five years’ time, I’m controlling an income, I’m controlling the property. I just don’t physically have to buy the property at this stage which save me entry costs, capital costs and at this stage it’s a quicker way to get into the property market.
We could talk a lot about lease options for a long time, especially because Ro has mentioned probably the simplest form there to get the concept over towards you. But there are over 50 different ways, starting ways to structure an option.
So remember, this is in the creative strategy, so everything here is about structuring the deal, negotiating the deal and identifying areas of control versus ownership, which is very different to conventional methods. Now the amazing thing is you can apply a lease option to every strategy that we’ve spoken about in cash generating and passive income.Think about this as a way to implement what we’ve spoken about so far using a tool called lease options.
Rent to rent is very similar to lease options however, you don’t have the right to buy in the future, it’s even a more simplistic method.
Imagine Ro had a house in London as an example and he makes £1,000 a month rental to a single let family on the house.As the rent to rent business I would approach Ro and say, I can guarantee your rent of £1,000 a month. No voids, nothing, we will take the maintenance on but what we would like to do is run it as a business, run it as an HMO business.
The way we do that is, we will rent out all five of these individual rooms to individual people. We know we’re going to get the rooms full because it’s a very high demand hotspot area, but to save you the headache of running a business, because it is time intensive. I’m going to guarantee your single let rent via a contractor that is all agreed through solicitors and you will collect that paycheck every month. Guaranteed.
Then we will operate this business from this single let property, are you okay with that? Ro would say yes, I like the sound of that. I’ve had a few voids, tenant turnover that works fantastically for me, so that would be the arrangement. We would agree that for maybe three years, five years it could be two years and if he’s received his guaranteed rent every month for two years, there is an automatic extension which goes to five years.
That’s up to your creative negotiation as part of that. It’s really guaranteeing somebody a rent and again this is the simplest form that this can be operated with. This can be applied to residential houses, commercial properties and everything in between, so hopefully that makes sense. I wanted to keep that simple because you explained it in the large part in lease options but what we don’t have in rent to rent is the opportunity to purchase the house at the end or drawing the agreement.
Exactly and there’s lots of refinements in detail in here like dealing with the lender and getting consent to let and all those things, but that’s for you to discover as you look into the strategies.
The key thing is you get an understanding of it and look we could talk about creative financing and how to raise money and all those things, but for now I think that gives our listeners at least a good idea of the range. You could just literally pick one from each of those areas and you’re away, you’ve got three strategies to get on with and start to build a business around.
If you’re listening at home, you can very quickly realise why property is not just reading a newspaper and learning about it or reading a book. I think we just cleaned the dust of the surface here we haven’t even scratched the surface.Bearing in mind we’ve talked about vision and we talked about education strategies, component number three is really making sure that you understand and have got your credit status up to date and you understand about mortgages and what type of mortgages are needed to get you into the property market.
We’re now deciding I want to do this strategy flips, HMOs, social housing and rent to rent for example, well rent to rent you don’t have to worry so much about the mortgages or your credit status. But the others, you probably do.
We can’t give you financial advice on this podcast we’re not independent financial advisers and the caveat I would say is that anything we say to you during the course of this podcast, and the other one that’s going to follow go and seek independent financial advice or financial adviser. And everything we’re sharing with you is information only from an educational perspective, just to show things we do so.
If you go to America it will be different to Canada, to Singapore, Australia, wherever you’re living at the moment. It is important to work on it as soon as possible. So, for example in the United Kingdom people might go to Experian who is one of the credit agencies and there are three or four key ones.
Those four are really the ones that determine what your history is but unfortunately you don’t know what that is and they may hold different information to the other one. So without going into a lot of detail right now just be aware that if you have been rejected on a loan or credit card, or even a mortgage and they say you need to speak to Experian, the reason for that is because they have done a check against that particular credit agency.
As time has gone on, there’s a lot of information about this out there and I think at this stage what I recommend you do is go and delve to find out what your current credit score is, what your current credit status is. And if you do that it will give you an indication of whether you’ve got any problems.
Now when we’re teaching this in detail, we actually explain what to do and how to do it, and how to go and check it for yourself, but be aware that this is a very important component of you becoming a property investor.
It’s not just checking it now, but it’s cleaning it up, keeping an eye on it, it’s maintaining it such that when you’re doing mortgage applications it doesn’t hamper you.For example in the United Kingdom if your name is spelt wrong on a mortgage application, credit card application or utility bill, mobile phone bill or anything like that. It will drop your credit score by maybe a 100 to 200 points. If you happen to have a mobile phone which you’ve had for 12 months and they spelt your name wrong you’ve never bothered changing it. One spelling mistake on your phone bill could actually lower your credit score when you go for a mortgage application, simply because somebody else made a mistake with your surname or your first name. These are simple things but they’re real important.
I would say start exploring this in detail as soon as possible because, in short, the better your credit score the greater your ability to get lending. The more adverse your credit score will reduce the ability to get lending, that doesn’t mean you can’t invest or have a property business because we’ve spoken about creative strategies that mean you don’t have to own, so don’t let that be a barrier.
But what it should be is a wake-up call to very quickly start exploring it and repairing it. So do take the credit score seriously because it affects everything. It affects whether you can get a credit card, mobile phone. So explore it,it’s basically a financial history on you and they are scoring you based on how you manage to pay back money you borrowed. That’s essentially how they will start to score you which defines what a credit score is.
If you’re going to deal with good mortgage broker, a high-level mortgage broker, then they will need to get an understanding of what your credit status is. Because it doesn’t help them or work in their favour to go applying for a mortgage for you only to find out you’ve got a bad credit history because it causes you problems, but it also doesn’t reflect well on them as a mortgage broker going to a bank only to find a problem.
There are high street mortgage brokers. There are specialist mortgage brokers. Myself and Harminder tent to work with specialist brokers because they have access to the whole of the market and they are used to dealing with property investors.
If you’ve ever found yourself in a situation trying to get a mortgage for investment property and the brokers say you can’t do that and you’ve only been dealing with someone on a high street, maybe through an estate agent. Good chance that broker doesn’t want to put the work in, doesn’t put the effort in, and it’s easier for them to say no to you can’t help you, than actually spend an hour or two getting a mortgage over the line for you. Having the right brokers really important.
In the United Kingdom mortgages are not defined in the same way they might be in another country. Australia, New Zealand, South Africa, USA, even across central your earnings will play a big part in your ability to borrow mortgages for investment. For example if took you to Singapore and you want to buy an investment property, they would say let’s check your salary. Can your salary cover this mortgage? Yes, it can so you can get an investment property. Then about a year later you decide to buy another one and then the bank say okay, so your house that you live in and the first property you bought the mortgage is this much, is your salary enough to cover that as well as a new property? Yes, it can greatly you can buy another one.Then you go to buy a third one in about two years’ time. At which point the banks say I am sorry you can’t buy this property because your earnings will only cover these three properties your home and these two investments. You’re going to have to sell one of these investments to buy the third one. They restrict you and this is common across most other countries, they restrict you based on your affordability.
Whereas in the United Kingdom it’s a completely different model. You are going to have to seek advice on this.
But as a simple rule of thumb, you can get pretty much as many properties as you want as a property investor based on the properties stacking up. In other words the rent has to exceed the mortgage by a certain amount. The bank sends a valuer out the valuer praises the property, then they say yes, this property is worth this much and the banks say great, so the value of the property is correct. The rent covers the mortgage by a certain factor and they check your credibility and they look at your salary, to make sure you’ve got a certain minimum threshold salary. They say okay, we’re happy to lend on this property.
Great you buy your first one, you go to your second property. The first one, the second one is usually the toughest to get over the line with when it comes to buying properties as an investor. Once you’ve got your first couple oddly enough it gets easier. Then you get to four which is classified now as a portfolio landlord and then there are some other new criteria that have come in over the last couple of years. But each time you buy these properties they look at the properties as a stand-alone business.
That’s why Harminder at a young age was able to buy one, two, three, four, five et cetera because even though he was in his 20s when he did this, they weren’t looking at it to do with his affordability. They were simply looking at every property as it’s a stand-alone entity and so many people that I teach overseas, they are blown away by this.
I was over in Australia over the summer last year, and people couldn’t believe that you could go into the UK and we were introducing them to some of our students from Australia that had bought five, six, seven, eight properties in the United Kingdom in the space of a year or two. And yet they were struggling to even buy two or three in Australia, because out mortgage systems are different.
A typical question we get is okay that is great, but how much would the bank lend me typically for an investment property?
Typically if you look at a conventional buy to let property. The banks will lend you typically and this can vary slightly, but a sensible loan to value of 75%. Let’s imagine there’s a house which is worth and you have decided to purchase it for £100,000. You take this house to the mortgage broker a whole of market mortgage broken and say I’ve got this house, I’m going to buy it for £100,000.
The mortgage broker would say, okay, well, there’s this lender who will lend you 75% of that purchase price. That means they will give you and they won’t physically go through you, but they will lend you £75,000, which is 75% of £100,000 towards the purchase of that property.
That’s fantastic because what you then have to do is just produce 25% of the outstanding balance which will be £25,000. That’s where we talk about a powerful subject which is called leverage. They will give you 75% typically. I think that’s a good starting point to understand how much the banks back and how much the banks believe in property in the UK.
I think as well if you don’t believe this when I was in Germany they struggled with this; they struggle with two things. 75% loan to value and also an interest only mortgage. In the United Kingdom our banks will look will, they’ll take the rent is a factor, they’ll take the value as a factor and then they’ll simply say, we will give you 75% mortgage and all you have to do is pay the interest on that. You don’t have to pay the capital down because they don’t consider the risk to be as high as in some other countries.
Whereas if I went to Germany and other places around the world they’re nearly always capital and interest mortgages. The same thing across most of Europe because the banks want to see the mortgage reduced because they maybe don’t have as much confidence in the property market. But in the United Kingdom for example, typically properties double every seven to 10 years, say 10 years to keep it conservative.
In the banks view in Harminder’s example £100,000 property, £75,000 mortgage. The banks view is in 10 years’ time that property will be worth £200,000. They know even if you sell out the house in 10 years and the mortgage is 75, they’re going to get the mortgage cleared. That means that your cash flow goes up because you’re not paying capital every single month.
So our mortgages can be interest only 70, 75, even 80 in some cases, and you can take them out for 25 years or so. What it enables you to do is spread the payments, reduce the monthly payments and increase your cash flow, which is why it’s such a favourable market for us.
That’s the key thing when I explain to my clients and people who come to us and say yeah but why don’t I have to pay the mortgage off right now?Well the banks don’t want you to so why would you? That’s a simplistic view to that.
What’s one thing we can just leave them with for now?
I would say focus on just taking one thing out from today that you can do immediately and for me that would be if you have not explored it yet, or you haven’t explored it in maybe six months, three months or maybe you looked at it two years ago and now you don’t know what your credit score is. Go and explore your credit score.
Go have a look at those companies that we mentioned, and its simple to do once you identify the steps. The first thing is just to find out where are you right now in regards to your status.
For me I think it would just be have a think about do you want your business to be hands-on or hands off. If you’re listening to this and you might be very busy, but you like the idea of real estate and property as a business, then you say, okay, let me build a business from a hands-off perspective.
There are strategies that enable you to do that. Whereas it might be that you’ve got a lot of time available and you’re thinking I’d like to really make the business I get involved and physically get involved with as well, so you could be a hands-on investor.
Start thinking about could you fit this and it can be fitted in alongside whatever you’re doing as a business and it can generate an income for you parallel. It does not have to detract from other things that you can do. If you’ve got a great career and you love that career or a business you love, it doesn’t have to take away it can add to what you’re doing.You have to find a way to build the business parallel.
So the question is do you want to be hands or hands off?
If I were to give just another additional tip is definitely follow Ro specifically, by all means follow me because you’ll see some behind the scenes of somebody actively building their property business.
But Ro has been doing this for decades now, so head to Ro’s Instagram, which email@example.com or his website, which is Drro.TV, head to the blog section because there’s lots of varied information there on property. Things apply right now as well during the covid-19 scenario.
There are articles after articles all focused around property investing.
Go check that out, but a part from that it’s myself and Ro signing out from this special property wealth vehicle orientated episode, which is part one, we will see you on part two very soon.
From myself and Ro we are signing out we will see you on the next one.