Vanessa Warwick: Well, welcome along to day four of Buy-to-let Blueprint Week powered by Nova Financial. And joining me all this week, has been my guest and co host, MD and founder Paul Mahoney. And for this installment, Paul, we’re going to touch on a topic that’s actually very, very important to my heart. And it’s actually chapter five in your book, The Property Pension Plan. Chapter five is dedicated to this entire topic. And it’s really interesting because everybody I think has their own little kind of due diligence regime or little template that they use. And you’ve actually got 10 pointers and those are really kind of 10 boxes that any property deal that you’re going to consider investing in, it has to tick those boxes.
Paul Mahoney: Yeah. So essentially just the 10 different factors to consider when considering a particular area and property itself. So should we go through them?
Vanessa Warwick: Yeah, we’ve got 10 to get through. So number one is supply.
Paul Mahoney: So obviously any investment is determined by supply versus demand. And the ideal scenario is that we have a current lack of supply but also a future lack of supply. So meaning that currently there’s not enough properties there, but there’s also a lack of ability for lots more to be put there and a lack of reason for them to put there, if that makes sense.
Vanessa Warwick: Very good point.
Paul Mahoney: Because you can buy in an area that is currently under supplied, but if they build 50,000 properties over the next few years, then it could become over supplied. So in my opinion, a good way of doing this is buying in a location where land is very limited. So generally that happens in central locations. And the other side to that, which I think is point two-
Vanessa Warwick: It is.
Paul Mahoney: … Is these are areas where there’s very strong demand because there’s strong reasons people to want or have to live there. Things like jobs, facilities, amenities.
Vanessa Warwick: I would actually put demand at number one because I think we hear a lot of this term buy below market value, BMV. I do like to point out that is a tactic. It’s not a strategy and you could buy property BMV, you get the most fantastic deal in the world. But if nobody wants to to rent it, it’s actually not a deal at all. You’ve lumbered yourself with a liability. So I absolutely agree with you that you’ve got to ascertain tenant demand, and a very simple way to do that is to phone around local estate agents and ask their opinion. They know their area.
Paul Mahoney: Yeah, absolutely. I’d say each of these points are just as important as each other, that they’re not necessarily itemized in order of importance. Just one point on that because I half agree with you so far as speaking with the state agents because I know that some do know their area. However, I’ve spoken with some estate agents who know very little. So just be a little bit careful with that because you can be a concreter one day and an estate agent the next. There aren’t any qualifications to become an estate agent.
Paul Mahoney: So make sure you are actually speaking with somebody who does know their area. And of course it’s probably pretty easy to ascertain that. But I’ve definitely spoken with some estate agents and some clients who’ve spoken with estate agents who have just assumed that person knows everything about the location they’re in. Whereas in some cases they definitely have not.
Vanessa Warwick: Well, we all know what assumption happens when you make assumptions. On that note, you do definitely want to work with an agent who has committed, voluntarily, to professional standards. So you should be looking for an RLA or safe agent or RICS registered agent. Just a little side there. So moving on to number three, target market.
Paul Mahoney: Yeah. So understanding who your target market is and what they want. So we touched on this in a previous episode. Firstly, if you’re looking at a particular location, I’d say let that determine what the right target market is. So for example, if you’re targeting young professionals, then quite often they’ll want to live in flats or, one or two bedroom apartments. If you’re looking at a family type tenant, then probably looking at three bedroom houses.
Paul Mahoney: So you want to make sure that you understand who they are, what they want, the demographics of them. So what are their average incomes, employment rates, vacancy rates? All those types of things, the demographics of the area. And then make sure they are skewed in your favor. Where some people can go wrong is they’ll buy the one bedroom flat in the family area because it might be cheaper. But even if it’s a great area, if there’s no demand for one bedroom flats in that area, well, your property is not going to do very well and vice versa. The house in the flat area. So you want to make sure that that demand… Understanding your target market is important. But that will help you understand how the demand is skewed in your favor.
Vanessa Warwick: And also, I think understanding your target market is also going to determine how you set the property up and so on as well.
Paul Mahoney: Absolutely.
Vanessa Warwick: So that is important. Well, number four is location or as Kirstie and Phil like to say, “Location, location, location.” And of course, absolutely vital. I personally think that the number one thing really is access to major transport links, whether that be bus, train, motorways, people need to be able to get around.
Paul Mahoney: Yeah. Yes. And so I think that’s the fifth point. Infrastructure, which definitely ties into location, but understanding the particular location itself ties into the previous point as well. Who’s your target market there? What’s the best target market there? Where is it skewed? What’s happening in that particular location? As I mentioned before, my preference is central locations, because that’s where you tend to have the most depth in factors such as demand, but also infrastructure, amenities, facilities, all those sorts of things. Reasons, really strong reasons for people to want or have to live there.
Vanessa Warwick: Yeah. For central locations, I have what I call the pint of milk rule. So our properties in London, one of the criteria for them was that each apartment had to be within a five minute walk of a pint of milk.
Paul Mahoney: Okay.
Vanessa Warwick: Because that’s what people want, isn’t it?
Paul Mahoney: Yeah, that’s a good point. Yeah. Yeah, absolutely. And I think understanding that the shift in generational preferences is very important as well. Because without a doubt, and there’s many reports on this quite recently, over recent years, that show that your younger generations do want everything on their doorstep. There’s a strong trend toward the re-population of city areas. We spoke about Manchester before. That’s a really great example. If you look back 20 years in Manchester, there’s only a thousand people living in the city center because it was mostly retail and commercial space and everyone lived out in the towns and they traveled in, there’s now 30,000 people.
Paul Mahoney: So huge change there. With all this new residential property coming into central Manchester. And that’s not just being driven by the people building the property. It’s been driven by what the people living there want. So having things like the infrastructure on your doorstep, jobs, bars, restaurants, cafes, that will ensure you get the demand from that type of tenant.
Vanessa Warwick: Yeah. So Paul, I think location does actually move on to your point number five which is infrastructure because clearly people do need transport links to get around. They need amenities, they need supermarkets, all the things around everyday living. But also I think when you see infrastructure going into an area that’s a very, very good sign. For instance, a new tramline going in. We bought a property, a flat, where there was a new DLR station going in that’s had a massive impact on values in the area. So if you see that money is going into an area, that’s actually a very positive sign from also a capital growth appreciation.
Paul Mahoney: Yeah. Without a doubt, and the DLR’s a good example. Crossrail’s a perfect example. Infrastructure, can really change the face of an area and if you can get out ahead of that, it can have a huge impact on your property. Another good example which there’s been a bit of doubt in the media about recently, but HS2. That will have a huge impact, assuming it’s done on places like Birmingham, Manchester, Liverpool. Improving the links to London.
Paul Mahoney: So yes, major infrastructure like roads and rail can have a huge impact. So it’s always great to understand those. I think it’s also important though to not get too far out ahead of them in that you want to make sure they’re actually happening. Don’t speculate too far ahead of time, but I’d say probably if you can see it start to impact an area, it’s probably likely to continue to impact that area. So bit of a test there to make sure it’s actually going to happen.
Vanessa Warwick: Yeah. I think another thing interesting to look at is where you see big retail parks going in. Because these giant corporates do so much due diligence, they’re not going to invest in an area if they’re not going to have any footfall. You mentioned coffee shops as well actually, the likes of Costa and so on. They do lot of research to see if there is the kind of target audience there. So you can often kind of piggy back off the things, the signs that you see in the area where big companies have done their due diligence.
Paul Mahoney: Yeah. There was a term in the media a few years ago called the Waitrose test.
Vanessa Warwick: Yeah. It’s still going around actually.
Paul Mahoney: Yeah, which is still being used. But that applies to all the, as you say, all the major retailers. They don’t spend a lot of money in establishing themselves in an area without knowing that area’s moving in the right direction.
Vanessa Warwick: Yeah. So it’s a good thing to look at actually. If we move on. Your number six is actually price.
Paul Mahoney: Yeah.
Vanessa Warwick: And of course it’s valuing a property, it’s not scientific. It’s got a lot of different nuances to it. Even surveyors struggle sometimes to value properties. So what’s your version of price?
Paul Mahoney: Yeah. So that one of the key points that I mentioned there is surveyors do struggle. It’s often determined by comparables but if there are no close comparables it’s a bit of a guess.
Vanessa Warwick: Yeah.
Paul Mahoney: So you can’t necessarily just rely on a surveyor and I’d say especially not just rely on a bank surveyor because they tend to be quite conservative. So we all want to pay the best price possible, or the lowest price possible. But it’s not just about price either. I think that’s where some people can go wrong, is just trying to buy cheap property, which is usually cheap for a reason. It’s always cheap for a reason really. Unless you’re very, very lucky. So considering desirability as the other side of the equation. Because that’s what drives demand. Unless of course you’re a developer or something and you’re going to completely change the asset. But if you’re a passive investor, you need to balance price with a desirability.
Vanessa Warwick: No, I like that. And actually one way that I assess the value of a property is what actual level of borrowing the rent will support. So I just do a basic calculation. I will put the calculations actually below this video. Because if it doesn’t stack up financially just what level of borrowing the rent will support, then it’s a clear indicator to me that it’s probably not the right property.
Paul Mahoney: Yeah, absolutely. And as we’ve already covered, the borrowings is a key part. That has a huge impact on the returns on your funds. So you need to make sure that works.
Vanessa Warwick: Yeah.
Paul Mahoney: Yeah.
Vanessa Warwick: Quite easy to stack a deal just on paper there. Now you’ve got number seven, fair value.
Paul Mahoney: Yeah. So this ties into what I mentioned about price. And the point here is not being afraid to pay fair value for a really good property. And again, I think is another bit of a pitfall that people fall into, is a really good property in a really good area is not going to go unnoticed. And that’s usually a property that will perform quite well, over the mid to long term. So I think some people won’t buy something unless they can get a discount or feel like they’re getting a deal. You mentioned BMV or below market value before. I would say nine times out of 10 I see that term, it’s being used a sales tactic rather than a reality.
Paul Mahoney: The definition of value is what someone’s willing to pay for it. So the BMV doesn’t really make sense, based upon that definition. Of course you can get properties that are really well priced and that’s what we always want if we can get it. But don’t be afraid to pay list price if you have to. If 20 other people want to buy it, because it’s a really good buy. Because, in my experience, when comparing the properties where people think they got a deal to the properties where people have paid, but kind of begrudgingly paid fair value, it’s the latter that performs better.
Vanessa Warwick: I’m so glad you said that Paul, because one of my criteria is thinking about when I want to come and sell that property. You just said if you’ve got 20 other people competing for that property, you know that it’s desirable to the owner occupier. When I come to sell, I want to be able to go to the owner occupier market and achieve the best possible price for when I’m exiting from my investments. I don’t want somebody to come and see it and went, “Oh well, it’s too close to that train line,” or something like that. I think you’re absolutely right. That longer term, it’s better to, as you say, go for fair value. And I think those sorts of properties also, they survive a downturn a lot better as well.
Paul Mahoney: Yeah, I agree. And yeah, that’s another point. That we sort of really make sure our clients understand it, is not just buying what I call sort of investment stock. You’re not just buying properties that only make sense to landlords, but also making sure their desirable to the owner occupier side. So the market, that’s a big side of the resale market and your exit strategy.
Vanessa Warwick: Absolutely. We’re moving on to number eight, economic changes and legislation. Well, as we’ve been saying all this week and all the time on Property Tribes, actually none of us have a crystal ball. We can only work with what we actually know about what’s in statute, what’s in legislation. You’ve got to apply that to any investment you’re looking at.
Paul Mahoney: Yeah, absolutely. We’ve had quite a lot of these lately, especially legislation. And potentially some economic changes upcoming or a lot of people would think so, anyway. So I suppose the thing here is making sure that you’re protecting against the downside. So if you’re stress testing your portfolio and you’re looking at well, what happens if interest rates rise substantially? What happens if I do struggle to re-mortgage? Or whatever that might be. Making sure you’re testing those scenarios and making sure that your strategy and your portfolio still works.
Vanessa Warwick: So kind of future proofing.
Paul Mahoney: Absolutely. Yeah.
Vanessa Warwick: Yeah. I like that. We’re at number nine now and you’ve got vendors. So explain what that means.
Paul Mahoney: So it’s essentially the person you’re buying from. So this isn’t as relevant if you’re buying secondhand property but it becomes very relevant when you’re buying new build or off plan property. And we tend to like that type of property in the right circumstances because they’re much more passive. I’d say most of our clients tend to be more hands-off type investors. They don’t want to get involved in the nitty gritty of fixing properties and all those types of things. And properties that come with a range of warranties do that quite well.
Vanessa Warwick: Yes, I totally agree.
Paul Mahoney: But you want to make sure that your especially dealing with a developer, that they have a strong track record of delivering on their promises and good quality properties. We do a lot of due diligence on developers in what they’ve done in the past, their financials, making sure that their properties aren’t falling down a few years later and all those sorts of things to make sure that we’re comfortable and confident in dealing with them for ourselves and therefore, of course, for our clients. So that becomes absolutely important when you’re buying new or off plan properties, even more with off plan properties and making sure the buying structures and the protections that are in place to make that as low risk as possible.
Vanessa Warwick: Well, again, Paul, this is all good stuff and I think just as a side, when you complete on the property, a new build, you must have it snagged. We’ve had some properties where there were maybe four snags and then we’ve had another one where there were 200 snags. So again, you’ve got to protect your asset and do your snagging if you’re buying new build.
Paul Mahoney: Yeah, absolutely. And that’s a service that we provide to our clients actually. For those that don’t want to… If they might’ve bought in Manchester or Liverpool or wherever and they don’t want to go out there and do it themselves or pay another service, they don’t know to do it, we provide that service to our clients.
Vanessa Warwick: That’s good to know. And so we just start on number 10 now. And that is type of property. We have touched on this briefly. Clearly you’ve got the choice of flats, maisonettes, standard terraced houses, detached houses. How do you kind of do your due diligence on that?
Paul Mahoney: Yeah, so we tend to take the view of focusing on the benefits rather than the features. And what I mean by that is, especially when it comes to investing and as we’ve discussed, it’s about being commercially minded and sort of making money from your investments. We tend to look at it as well, where’s the best possible place to invest, the best location with all the right driving factors? And narrowing that down to where we’re comfortable and want to invest. And then allowing that to determine what the best property is for that location. So as I said before, if we’re focusing on very central locations in major cities, that tends to be flats. And some people will say, well, their lease hold, there’s the service charges, all of those things can still stack up and still make a lot of sense as an investment in the right circumstance.
Paul Mahoney: For example, the lease is substantially long or sufficiently long. For example, if the lease is over 150 years, it’s very unlikely to cause you personally any issues because we are finite. The lease is probably going to outlive us. So that’s important to understand. Understanding things like server charge and the costs and things that go into it as well. So long as we’re comfortable and confident with the net outcome after being conservatively accounting for those things, then that can make sense. And of course all the other types of properties can make sense as well. But I think a lot of people tend to come in, tend to look at property with sort of preconceptions. For example, an old one which we still hear sometimes is the value’s in the land. And in my opinion, it’s absolutely not. The value is in what someone wants or needs. So you can have… You’ve just got to look at central London, you’ve got one bedroom apartments worth 2 million.
Paul Mahoney: And that’s because there’s a lot of people that want to buy them and there’s a finite number of them. And vice versa, you’ve got 10 bedroom castles in Scotland worth 50 grand maybe, or around not much more than that. And that’s because no one wants to live there. So it’s about supply and demand and how much people want those properties. And going back to what I mentioned before, a lot of people are looking to live in central locations now. It’s something that we call trading space for place. People don’t necessarily want a massive property anymore. And people are having kids later, they’re more than willing to to live in their centrally located property for a lot longer than maybe people were 10 years ago. So I suppose the point here is being open minded. Investing in the right properties in the right locations, regardless of what they are, based upon their own information.
Vanessa Warwick: No, I think open-minded, we should have actually added it into our video about mindset because I think you’re absolutely right. I think just a little tip from me on flats, if you’re going for a two bed flat, I would always go for a two bed apartment that had equal sized bedrooms and also had en suite as well as bathroom because then you open your market up to two kind of sharers, to two single people or maybe a couple with a small baby. I think just think about those kind of options when you’re looking at properties. And little things like what can you see out the window? Nick and I, we never forget it. We went and viewed a flat in London where it looked out over a bin store, and that was your view. Whereas there was a flat at the front of the property that had a much nicer view. So, again, we go back to kind of walking through the property, walking around the area, looking at it through the eyes of the tenant.
Paul Mahoney: Yeah. And I think that comes down to due diligence as well. Things like the floor plans can make a big difference. And some cases in a block of flats for example, you’ll have one property that’s a lot better than the next and might be a very similar price. But obviously the one that’s a lot better is going to have more demand. So that that ties into making the right choice I suppose.
Vanessa Warwick: I think it does. And finally, I think we would say, Paul, you… And disagree with me if you feel that you want to, but I would never ever, ever, ever, ever buy an investment property without going to look at it. You’ve got to walk the streets, you’ve got to walk the journey from the transport link to the property. You’ve got to make sure that you understand it from every angle. As you said before, it’s the biggest investment you’ll ever make.
Paul Mahoney: So, to be completely honest with you, I probably wouldn’t either. But I think that says more about us as people than it does for everyone because a lot of our clients do invest in properties that they’ve never seen. But they do that because they’re comfortable and confident with what we’ve shown them and educated them on, and therefore they don’t feel as though they necessarily need to, but others do. So really, I think that comes down to what you feel you need to do to be comfortable.
Vanessa Warwick: Well, I think that sums up what being a property investor is all about. You can do it in whatever format works for you. But I think… This has been very interesting actually, Paul, thank you for that. So these 10 points are in chapter five of Paul’s book, The Property Pension Plan. We’ll put a link to the bottom where you can get a free copy, just for the price of the postage and it goes into a lot more depth than the chapter. So I’m sure that everybody’s found that very useful, Paul. Thank you.
Vanessa Warwick: Tomorrow we’re going into part five of our week and we are going to be talking about three very important aspects of being a landlord and property investor, and that is tax, finance and management of properties. So join us for the final installment of Buy-to-let Blueprint tomorrow.