Vanessa Warwick: Well, welcome along to day three of Buy-to-Let Blueprint week here on Property Tribes in association with Nova Financial. We’re here at their offices in London, and I’m joined all this week by my guest and cohost Paul Mahoney, who is the MD and founder. Paul for this installment, we’re moving onto what is such an important topic, and that is mindset.
Vanessa Warwick: I think, certainly when I started out 15 years ago, I had very little financial intelligence or knowledge. You’re not taught it at school. In fact, one of the reasons that we started Property Tribes in 2009, was because I was so keen to learn and grow myself as a business person. Do you think it’s very important that everybody seeks to do that?
Paul Mahoney: Yeah, absolutely. I can relate to that in a similar way. You finish school, you learn nothing about money really. You might learn how to go into business yourself perhaps in a way, but how to make money, but then to what to do with it. I think that’s probably even more prevalent when it comes to property, is when people invest in shares, for example, they generally think about it fairly unemotionally and commercially minded.
Paul Mahoney: It is about making money, whereas when it comes to investing in property, a lot of people are quite emotional about it. They focus on what they want and like, as opposed to viewing it as an investment in the true sense of the word. Definitely, I think education, gaining a full understanding of why you’re actually going into it.
Paul Mahoney: At the end of the day, most people are investing in property to make money, because that’s what investing is about, so it should be viewed in that way.
Vanessa Warwick: I think so, and also I do want to stress how important that it’s an ongoing process. We talked a little bit about the lifecycle of the landlord. Many people think that once you’ve rented the property out, that’s the end of it, actually it’s not. It’s the beginning of the longest phase of the landlord life cycle, which is management and ownership, where you’re dealing with tenants, where you’re dealing with managing an asset.
Vanessa Warwick: Again, I think it’s very, very important that even if landlords are in a full time job and they’ve just got a couple of properties on the back burner, they should still be keeping up to date with landlord issues, legislation, regulation and use resources like Property Tribes, the forums and yourselves at Nova and all the content you produce to keep in the loop and keep growing their thinking.
Paul Mahoney: Yeah, absolutely. Yeah, and again, I think that’s another likeness or difference between investing in shares. If you had a share portfolio, you’d probably keep up to date with what’s happening in the companies you’ve invested in, you’d at least keep your eye on it. Whereas as you say, I completely agree, a lot of people think they just buy a property, it’s set and forget and they’re not worried about it, rather than keeping up to date with all the latest of what’s happening.
Paul Mahoney: As you say, there’s so many resources out there to enable you to do that. I think it’s very, very important, because especially over the past few years, it’s a changing market.
Vanessa Warwick: Yeah.
Paul Mahoney: What worked four or five years ago may not work today. In a lot of cases, it doesn’t, and there are certainly on the other side of it, things that work a lot better than they did four or five years ago. If somebody had a strategy four or five years ago that no longer works, they’re not going to be successful, unless they’ve kept up to date and they’ve changed that strategy and adapted it to what works in the current market.
Vanessa Warwick: No, I think that’s a very good point, and that was very much the thrust of our Smart Landlord campaign that we’re running throughout 2019, is that in some ways newbies coming to the sector now, they never knew how easy we had it before. They know what the conditions are, they know about the taxation, the regulation, etc.
Vanessa Warwick: In a way, for them it’s just normal, but I wanted to pick up a little bit on the fact of don’t get emotionally attached to an investment. I think one thing that everybody should do is put themselves in the shoes of their tenant to understand what their tenant wants. It might not be what you want, but to understand what your tenant wants.
Vanessa Warwick: A good example I always use is that when we were purchasing our flats in London, I always used to get Nick to drop me at the tube station at night and I would walk from the tube station to the potential acquisition just to see if I felt comfortable in doing that. If I didn’t, then a female tenant’s not going to want to live there.
Paul Mahoney: Yeah, no, that’s a good point, absolutely. Yeah, I think that’s a great point to a certain extent. What I mean by that is that’s a great example. You’ve worked out there that probably half of your potential target market will want to feel comfortable walking from the tube to their home, and that makes a lot of sense.
Paul Mahoney: Perhaps if that particular home was a one bed and you live in a four bedroom house, that still may not be exactly the type of property that you as a person would live in, but you can probably understand how a young professional may want to live in that type of property. I think it’s definitely very important to understand what your target market wants and likes, and in a way separate that from what you as an individual wants and like and the stage of life that you’re at.
Vanessa Warwick: Particularly when it comes to taste as well. Some people go spend a fortune on creating this very bespoke apartment with designer features and everything, but for a rental, it’s not really going to increase the achievable rent. It might make it slightly more desirable, it might turn some people off. Again, you’ve got to think about the tenant and creating just a really fresh, clean home for them.
Paul Mahoney: Obviously you want the largest potential target market as possible. Your particular tastes may not be the majority of other people’s particular tastes. We always recommend that our clients keep their properties relatively neutral in color, because having a red carpet, that would probably turn quite a few people off.
Paul Mahoney: It might be a silly thing, but it’s reality. You want to make sure that your property is as desirable to that target market as possible. That all ties into that mindset, understanding well what is going to make this property as desirable as possible? Because desirability will drive demand, and demand is going to drive the outcome of my investment.
Vanessa Warwick: I think another thing that’s always worth reiterating is that numbers will never lie to you. Maths is very black and white, whether you’re going to get a return or not, you can see it written down on paper. I think, always, always, always crunching the numbers is absolutely vital. You made the good point off camera that some people, they don’t understand the calculations, and they don’t look at the correct metrics.
Paul Mahoney: Yeah, absolutely, so understanding the numbers, absolutely important. Also understanding what return means. Obviously with properties there’s two different types of return. There’s capital growth and there’s yield, your rental income. Again, those two things can relate to the asset value, or they can relate to the actual cash that you’ve applied.
Paul Mahoney: If you’ve bought cash, then maybe that’s the same thing, but if you’ve bought with a mortgage, is obviously is what most people do, those are two different figures. For example, the types of returns we generally aim for, for our clients with a 75% mortgage is around 10% net on the funds applied.
Paul Mahoney: That’s from a yield perspective, and I’ll come to the growth in a second, but let’s say we’ve got a 50,000 pound deposit. We buy a 200,000 pound property, we’d want to be achieving around 5,000 pounds of net cashflow, so that’s post expenses pretax, which is quite achievable in the current market, given we can borrow at 2% or 3% and achieve yields of around 6% or 7% gross on the asset value.
Paul Mahoney: 10% you’re starting out with, and we can be pretty confident about that, because we can estimate that based upon comparable properties, we know we’re going to get that. Then if we add in growth to that equation, the UK average for growth over the past 20 years is 5.5%.
Paul Mahoney: If we scale that back to 5% let’s say, well that gives us an extra 20% on our cash, because your 5% on your 200,000 is 10,000 pounds. 10,000 on your 50,000 is 20%, so we put the 20% with the 10%, put them two figures together, we’re at 30% per annum on the cash applied.
Paul Mahoney: That’s not setting the world on fire by any stretch. I think everyone will agree that a 30% return on your cash every year is a really good return. I think far too many people overlook that, what leverage does to your returns. That’s really why we like property, and the fact that we can achieve relatively average returns on the asset value.
Paul Mahoney: That gives us really fantastic returns on our cash, which means we think if we’re comfortable and confident with the 30%, well, we don’t necessarily need to take too much risk or try to maximize yields or maximize growth. Let’s invest in the type of properties that are relatively conservative, and we can have the most confidence in those returns, because we’re comfortable with them. Does that make sense?
Vanessa Warwick: Well, it does make perfect sense. I think, again, it’s worth touching on the fact that if you do have much higher returns, that it’s much higher risk as well. Which goes back to what we were saying in the previous video about newbie’s starting out with very high risk strategies. When property goes well, you can do extremely well out of it, but when it goes wrong, you can lose a lot of money very quickly.
Vanessa Warwick: No, I totally get what you say. Again, the numbers never lie, so I get that. I think, just going back to the topic of mindset, I think the other thing that people should really consider is to get inputs from all sorts of different places, because it’s healthy. You don’t want to be getting an input from a singularity.
Vanessa Warwick: If you get inputs from lots of different places, and there’s so many good free or low cost inputs out there, you can put those all into your hopper, your mind and process them. Then you can pull out the bits that are relevant to you and work on those. Just for example, your property TV show, fantastic resource for landlords.
Vanessa Warwick: We can put some videos onto Property Tribes for people to have a look at, but do you agree that the mindset of the investor is to get their inputs from lots of different places?
Paul Mahoney: Yeah, absolutely, and I think people need to decide what they’re comfortable with. As I say, because there’s lots of conflicting information out there, there’s lots of conflicting opinions. If you’re going to align yourself with one particular train of thought, then that should obviously be the one that you feel comfortable and confident in.
Paul Mahoney: Yeah, explore all the different sources, and there’s so many of them these days, because everyone’s giving away information for free now. Everything’s shifted a little bit, so you can go out there, and you can get all of that information and gather it, and then decide on what you think is going to work for you.
Vanessa Warwick: Indeed, and we’ll just remind you about Paul’s book, The Property Pension Plan. There will be a link below the video where you can apply to get it just for the price of postage. I still love books, Paul. I read every night. Obviously people like their podcasts and their audio books. Again, we can take our inputs in, in so many different ways, can’t we?
Paul Mahoney: Yeah, look, I love the idea of reading a book, but I never make time to do it. I listen to an audio book about once a week, and I would never read a book a week. If I’m digesting 50 books a week, versus digesting four hard copies, I think that’s a better thing for me. In fact, I’ve just recorded the audio book of The Property Pension Plan last week, so that should be out in about a month.
Vanessa Warwick: Fantastic, well that’s great stuff. We’ve talked a little bit about the mindset of the investor, somebody that’s committed to personal growth, development, getting lots of inputs, always seeking to improve their level of knowledge. I just think it’s so important now. It will hugely mitigate risk as well, won’t it?
Paul Mahoney: Yeah, absolutely, and we spoke about all the changes in the market. If you go back a few years, well even now, I’d say a lot of people view property as a DIY activity. I could half understand that, still don’t quite understand it, but I’d half understand it a few years back before all of these changes.
Paul Mahoney: When you think about property is probably the biggest purchase you’ll ever make. Any property you buy is a big decision, and then you add in all the complexities of all the tax changes and legislative changes and finance changes. I think you’re absolutely mad to go it alone, so you really do need to make sure that you’re considering all of these things and you’re doing the right thing for you.
Paul Mahoney: There’s a bigger gap now between what works and what doesn’t.
Vanessa Warwick: I think you’re right, and I think you’ve just prompted me to say actually that part of the mindset of an investor is you’ve got to treat it as a business. The days of the hobby landlord, the amateur landlord, the dinner party landlord, whatever you might call that landlord that just had a couple of properties on the side and went about their everyday work a day world, those days are gone.
Vanessa Warwick: We are in the era of the professional landlord, even if you’ve got a full time job.
Paul Mahoney: Yeah, absolutely, it’s not something that you can just have a property on the side you never think about, because there is so much more to consider now.
Vanessa Warwick: There is. Well, I hope you’ve enjoyed this installment of our Buy-to-Let Blueprint week powered by Nova Financial. Tomorrow we are going to be looking at the fundamentals of due diligence. Join myself and Paul tomorrow for the next part of Buy-to-Let Blueprint, and we’ll continue with lots more information, and do check out Paul’s book as well.