Property TV – Property Question Time – S2 EP 32 – Richard Bush and Paul Mahoney - Nova

Property TV – Property Question Time – S2 EP 32 – Richard Bush and Paul Mahoney

Stephen Galpin:

Hello, welcome to property question time. I’m Stephen Galpin and this is the program where you can have your property related questions answered by a team of property experts. Today is the second in a series of financially orientated programs. We’re concentrating on property finance and joining me today are two specialists in that field. Paul Mahoney, CEO of Nova Financial group, Paul, welcome and Richard Bush, CEO of CrowdLords crowdfunding experts. Welcome to you.

Stephen Galpin:

Good. Well I think we’ll pick up first of all where we left off in our last program, which was just discussing really the ability of gaining finance for property development and how that’s developing and how it will develop now that we’ve left Europe. Richard.

Richard Bush:

How it will develop, who only knows. Well I guess we can comment on how it has developed and there’s been quite a lot of change in the market from what we’ve seen and Paul mentioned in the previous program about average rates being about 1% per month. What we see now is that development finance is a lot cheaper and typically you can get it between six and 8% per year, but they’ll cut it off at about 60% loan devalue. So you’ll need some top up finance, from a more expensive resource. So, and that has been driven I think by one the banks wanting to lessen their risk and uncertainty about the property market generally. As Paul said, that lenders typically want to minimize their risk and they’re doing that by lowering the amount that they’ll lend, but they’re willing to take a low rate as a result.

Stephen Galpin:

Okay. But isn’t that going to be a step that puts us backward in the supply and demand race?

Richard Bush:

I don’t think it will because typically what happens is that people like us and other sources of finance will step in and make up for that 15% loss that now exists. So I think it just means that the raising finance is more complex. So it’s good to get a good broker who will bring in the right partners to work together to fund the development.

Stephen Galpin:

Okay, well that works for property development. But Paul, how does that work for the private individual? Not quite so easy, is it to find another 15%?

Paul Mahoney:

I think the point about the supply and demand thing is that there should be more of an onus on government to incentivize what actually drives supply. I agree with what you said earlier about it’s all well and good for them to throw on their high vis jackets and say they’re going to build. But that’s not what builds new properties. So what does build new properties is things like more availability of development finance, cheaper development finance, easier planning process, more money going into funding new builds. Not just from a finance perspective but also buyer’s perspective. For example, there’s a policy in Australia where I’m from where you get better tax depreciation treatment for new properties. So that incentivizes people to buy new properties and helps fund new developments.

Paul Mahoney:

Now the government seems to have gone the opposite way on that recently but I don’t think that it would be a bad thing for them to be considering things like that to help actually fund these new builds. Because they’ve been promising this for over a decade. They’ve never delivered on it. Yeah. And I can’t really see anything major changing that’s going to change that.

Stephen Galpin:

Well I have this concern, so my opportunity to have a little run, I mean there’s a number of things. Assured shorthold tenancies were brought in in the late eighties to make sure landlords could get their property back once they’d let them. So you let for a set period of time and you know for sure you’re going to get it back. Why was that done? To get more landlords providing rental homes for the market. What has this government done? They’re going to bring in this no fault, no eviction nonsense.

Stephen Galpin:

Well I can’t remember how many times I’ve said this, but a landlord will draw up a lease, a tenant will see that lease, you both sign it. So why don’t you just do what it says? It’s quite simple. So if you want to let your property for six months, do it. If you want to let it for two years, both of you do it. If you want to let it for five years, both of you do it, it doesn’t seem to be an issue that the government needs to get involved in. I really don’t. And again, we talked early about tax on buy-to-let property. Well it seems to me that government are almost penalizing the sort of smaller landlord.

Stephen Galpin:

Now the logic is if you talk to accountants, they say, well the government want to deal with bigger people because it’s easier. It’s less people to chase for tax. It’s less tax avoidance. It’s tax that they can monitor more carefully but buy-to-letters provide an immense number of homes onto the rental markets. And if we start cutting it down, prices are just going to go through the roof.

Paul Mahoney:

And I think to argue the other side of the point that I made before. Although yes, we need more supply. As a landlord, it’s not necessarily a bad thing there’s a lack of supply. That’s what’s driving up prices. It’s more of a social issue that we definitely need more houses in the UK, but if you’re buying the right properties in the right areas as a landlord, the fact there’s a lack of supply is what’s going to increase your rents and it’s what’s going to increase your prices.

Stephen Galpin:

But it does mean you are paying more. It depends where you are today-

Paul Mahoney:

But there’s an old saying that the best time to buy property is 20 years ago and the second best times today. So it’s about getting on the ladder I suppose and taking advantage of the effects that’s going to have.

Stephen Galpin:

Yeah. I think my sort of final beef really is that we all sit here debating it and I’m sure we will come up with our own good ideas and good views, but when was the last time… You’re somebody at the coal phase, as it were, sorting out money for people to buy properties and creating investment strategies on property and when was the last time the government came and asked you anything?

Paul Mahoney:

Exactly.

Stephen Galpin:

That’s the problem. Okay. Paul, your first question after we’ve had that chat, how would the pattern recommend I include property in my private pension plan. I’m fairly young. I want a risk free plan, but one that takes advantage of any increase in property values. This is something I could understand rather than stock market performance. I sympathize.

Paul Mahoney:

So, the biggest red flag I see in that question is the term risk-free. There’s no such thing really. The only risk free investment in the UK is up to 85,000 pounds in a bank account. Assuming that the financial compensation scheme pays out, that’s the only risk free investment. And if you’re doing that, you’re expecting to get 1% if you’re lucky in the current market or you can put money under your bed but then it gets eaten away with inflation. So that’s risky as well.

Paul Mahoney:

I think far too many people, especially people going into property view it as being risk-free and it’s not. Especially if you’re taking leverage, there are risks in any investment that you need to understand and you need to be a big boy about it and realize it’s your responsibility. Far too often I hear people blame their advisor for a bad investment they made, but your advisor gave you information and you acted on it.

Paul Mahoney:

That’s a very important point I think to be aware of when it comes to investing and comes to making money. Same as in business. No one is in business without risk and that’s why business people, if they’re successful make a lot more money than employees, but they started out by taking a lot of risk. So I think that’s an important point.

Paul Mahoney:

Right, including property in their pension. This depends on what they mean by that. If they want to include property in their general pension, they can probably get exposure to property funds and rates and those sorts of things if that’s what they mean or more so what I specialize in is property as an alternative to your pension. So still having a pension, still building a pension but building a portfolio of properties alongside that where we have a lot more control and probably a lot more certainty around being able to better utilize our resources through leverage and building a portfolio to generate income that will be used as a quasi pension if you like to fund retirement.

Stephen Galpin:

Richard?

Richard Bush:

Yeah, I agree. I think it is and I’d like start with that because I don’t like conflict but I think there is tremendous opportunity to build value for when you retire alongside your pension and as we’ve discussed before, you can take some of your pension fund and invest it in property, but treat it like your pensions. So don’t touch it when you’re tempted. But as Paul said, it gives you control over what happens to that money and it is in line with the property market and it’s narrow that you understand. I can see why people would do that.

Stephen Galpin:

Yes. I mean Paul raised a very good point about some people do blame their advisors and I mean we see this in life. I mean I’ve sat in court as a magistrate for 15 or 16 years and I can’t tell you how many times somebody says, well, my solicitor never said that. And you have to say, well what was it you asked your solicitor they’re not mind readers and no professional is. So you’ve got to make sure that your advising professionals really understand what you want. And again, I know one of Paul’s sort of bedrock points is that you need to decide where you are today and where you’re going. I mean, I’ve heard Paul say that a lot of time.

Paul Mahoney:

I think just one point. I mentioned how to start out. I’m a big believer that when you’re starting out you should start very simple and as low risk as possible. So if this is your first property investment, don’t rush into a small development because that’s a lot more complex. Go for something much more passive and easier to understand like a traditional buy-to-let for example in a central location that you’re very, very confident in demand. That’s a really good starting point. And then building in complexity from there.

Richard Bush:

And that does mean that they have to be realistic about the returns that they’re going to get because the more safe it is or the less risky it is, the less the return. But it’s better to learn there than it is to learn in something that is high risk and therefore-

Stephen Galpin:

Well again, good professionals and providing, as I say, you ask the right questions will guide you on what your expectations can be and realistically can be, I think. Paul, do you not agree?

Paul Mahoney:

Yeah, I do.

Stephen Galpin:

Okay.

Richard Bush:

They’ll also point out the potential downside [crosstalk 00:11:01] when you give advice you’ll point out the-

Paul Mahoney:

Absolutely.

Stephen Galpin:

Richard, what is the panel’s current view on fixed rate mortgages? IE, the view that rates will now stay low for the foreseeable future.

Richard Bush:

Who knows? I think the-

Stephen Galpin:

Get your crystal ball.

Richard Bush:

Yes. My general view on the question where are interest rates going is who knows because they are impacted by the macro economic situation and the situation in the UK as well as other factors to do with the economy in the UK and so on. So having said that, I’m a great believer in fixed rate because at least then you have certainty of what the cost is going to be. And if you don’t take that option you’re basically gambling on whether you’re right or wrong about where interest rates are going to go. So my personal approach is always to go for as much certainty as possible. Yeah.

Stephen Galpin:

I mean what’s always interested me, I’ve never understood why a mortgage rate would have to follow the bank rate. I don’t understand why whoever it is that’s lending you the money, presumably borrowing it from somebody else at a margin, can’t say, “right, well this is a 15 year mortgage, so we’ll take this at 15 years and there you are, you’ve got it fixed at that for whatever.”

Richard Bush:

I guess there’s two sides on it, there’s the cost of money, which is pretty well dictated by the libel rate and then there’s the opinion on risk what’s going to happen during that time and they’ll price in variations in values. And so the start point is always how much is it costing to get that money in order to lend out. So I guess that’s why I say it-

Stephen Galpin:

Can’t that be fixed for a period of time too?

Richard Bush:

I don’t know if it can because it’s open to the macro economic situation.

Paul Mahoney:

I suppose there’s also the opportunity cost of money where with most mortgage products, aside from term products, they’ll give you an introductory rate, which means you might borrow at 2% but after two or three years, the rate goes to four, which means that, therefore they probably get some people who just accept that 4% rate. But actually most people will remortgage their property every two or three years. And lenders obviously know that and that’s why they’re doing it because it allows them to recycle their money. So I suppose that that gives them the flexibility as well.

Richard Bush:

I think people need to be careful though because there’s quite a lot of lenders will offer a discounted rate for the first two years and you think you’re getting a good rate for the first years, but they’re adding the extra 2% that you’re not paying to the amount that you owe.

Richard Bush:

So you’re actually paying that extra 2% but it’s going to-

Stephen Galpin:

It’s just a temporary subsidy.

Paul Mahoney:

So there’s always an arrangement fee. In some cases it’s very small and in some cases it’s quite large and usually you’ll find that the lower the initial rate, the higher the fee. So there’s always a bit of a balancing act.

Stephen Galpin:

But so in Britain, in broad brush terms, is a mortgage easier to get today than it was five years ago? It sort of-

Paul Mahoney:

Depends what you’re talking about. Whether it’s residential, or buy-to-let, because the two are quite different. It’s definitely easier to get buy-to-let because there’s just substantially more products. And I think with residential, it depends on who you are. It’s definitely easier for a first time buyer. What I find a little bit silly about the, and I was going to mention before we ran out of time, I find a little bit silly about the residential mortgage market is how difficult they make it for business owners in that I took a new mortgage a year ago and one of my employees got a better rate than me.

Paul Mahoney:

I’m substantially better off than him and he works for me-

Stephen Galpin:

Don’t tell him that, he’ll want a rise when you go back.

Paul Mahoney:

Well look, from a financial perspective, I’m in a much better position. He works for me. So if my business fails, he loses his job. But they still view me as high risk and I just can’t understand that.

Richard Bush:

What do they know about you Paul-

Paul Mahoney:

Well, it just doesn’t seem to make sense, and that seems to be standard practice with lenders. If you’re self employed being a majority shareholder of an established business, you’re considered more risk and I just can’t understand that.

Stephen Galpin:

Well, before we go into Paul’s past, I think we better take a break. So join us again after the break.

Stephen Galpin:

Hello and welcome back to part two of our special edition of property question time featuring financial matters. And again, joining me is Paul Mahoney. Welcome back. Paul and Richard Bush. Richard, welcome.

Stephen Galpin:

Paul. I have a buy-to-let property with a buy-to-let mortgage. I haven’t been able to let the property for some time and I’m considering moving in and making it my home for perhaps the next couple of years. This I understand would be a breach of my mortgage terms and therefore I wonder if the panel would recommend that I notify my lender and whether this would cause them to call in the loan or even though later I want to revert back to letting the property. I’m not sure what the consequences will be.

Paul Mahoney:

Okay. Yeah, that’s a good question. Definitely something that’s they’re better off having asked than having just done what they’re planning to do. Lenders are very strict on this.

Paul Mahoney:

The reason they have to be very strict on it is it’s a lot easier to get a buy-to-let mortgage than it is to get a residential mortgage. Service abilities is from the rent with a buy to let, whereas with a residential that’s from your personal income and your personal situation and obviously residential is a very regulated part of the market. So what some people have tried to do in the past is what they call backdoor buy to let, meaning that they can’t get a residential mortgage so they get a buy to let mortgage instead and then go and live in the property and the lender will call in the mortgage if you do that.

Paul Mahoney:

I haven’t heard of any lenders being okay with allowing you to do it. Generally this person will have to remortgage the property onto a residential mortgage.

Stephen Galpin:

Paul, I’m kind of reading between the lines here and I’m going to ask you the naughty question. How do they know?

Paul Mahoney:

If you have… So they’ve got quite a complex sort of information sharing system. For example, if you have any bank statements going to that address for your personal name, they’ll probably find out through that because lenders share information, I think it’s called the hunters system or something along those lines. I can’t remember the exact name, but there’s a chance they’ll find that from that if you have your council tax or you council registration to that address. So there are numerous ways they can find out. Or for example, when it comes time to buying another property and of course that’s your residential home, but you’ve got a buy to let mortgage on it. So there’s numerous ways they can find out. It’s not worth the risk really because you don’t want get blacklisted by a lender. You don’t want to get fine or you don’t want to get your mortgage called in and not be able to get another one because that could be disastrous as well.

Stephen Galpin:

And so what you’re effectively saying is that he does need to re mortgage and there will be a test of his ability [crosstalk 00:18:05].

Paul Mahoney:

This will all depend on their personal situation as well. Can they actually afford to live in that property will be a question. A question lenders quite often ask or what they quite often look at is if you’ve got a home and you’re buying a buy to let is they’ll look at if that buy to let is a nicer property than your home. And they’ll also look if it’s closer to your work. And the last question is about that, to make sure that that’s not what you’re doing.

Paul Mahoney:

So they are quite onto it and perhaps that’s why sometimes lenders are a bit painful to deal with and they ask what you would think are a lot of very silly questions because they’re trying to find fraud essentially, which is why it is like that.

Stephen Galpin:

Okay. Is there much of a difference in interest rates between buy-to-let and private mortgage?

Paul Mahoney:

There is a little bit of a difference. There’s not as much as there was in the past but there is a difference. The better residential mortgage rates are down toward 1% whereas the better buy to let rates are just below 2%.

Stephen Galpin:

Okay. Richard, crowdfunding, do you often get people that perhaps can’t get a conventional mortgage looking to crowdfund a home?

Richard Bush:

Yes. We’ve had quite a lot of people applying to crowdfund their private residence, but obviously we’re not allowed to. It’s very regulated as Paul said, and I completely agree with Paul. It’s not worth even considering. If there’s a buy-to-let property on a buy-to-let mortgage, you’re not allowed to live in it. And if you’ve lived in it before in not allowed to get a mortgage on it for buy to let purposes. If it’s your all residents and don’t even think about it, it’s not worth it.

Paul Mahoney:

Another thing to consider is that if you do it, technically a broker is supposed to report you. If you go to a broker to try to fix the situation. So depending on your broker, you might find yourself getting dobbed in basically, because essentially it’s part of the FCA regulations that you do have to tell the lender if you find out that information.

Richard Bush:

When we launched the business, we did offer the opportunity for people to, and this is legal, for people to crowd fund a buy-to-let property but live in it as a paying tenant because they’re not owning the property themselves. It’s owned by a company. So they are able to do that. It’s not very cost effective. If you’re looking for a way of getting-

Stephen Galpin:

I think there’s a lot of advice around it that often says, well, buy a limited company, name it, it’s ring fenced. [inaudible 00:20:33] but it’s an expensive isn’t it? You’ve got accountancy fees, you’ve got registration fees, you’ve got the obligation to produce your accounts on time or get fined pretty heavily if you don’t. So not always an easy solution.

Richard Bush:

It’s not, not for a single property and not that it’s going to be your primary residence, but if you’ve got five buy to lets, it makes perfect sense that you do that. It’s stupid not to, really.

Stephen Galpin:

I mean, when offshore trading was sort of quite prevalent, it was quite effective to buy in an offshore company and then just sell the bearer shares for that company. But I mean I think that sort of thing was jumped on years ago, wasn’t it? So stay on the straight and narrow. That’s the message.

Paul Mahoney:

Yeah. That person just needs to go and speak with an independent broker, try to get a residential mortgage on the property, if that’s what they want to do. Find if that’s possible, then make a decision what they should do.

Stephen Galpin:

Okay, great. All right. Richard, your question. I’m planning to commence my first small development project and I’ve had my requests for funding turned down by three mainstream banks all citing my lack of track record as the reason for rejection. Is crowdfunding the answer to my problems?

Richard Bush:

Afraid not.

Stephen Galpin:

Afraid not.

Richard Bush:

Simple answer. We’re probably more accommodating for people that have limited experience than most lenders, but at the end of the day we’re recommending to our investors that they support this person. So we have to be very confident about their ability. If they have not done it before, it’s quite a high risk using other people’s money. Having said that, we do have a number of people that we work with who have limited experience and our recommendation in that situation is to build a team around them. There isn’t hardly ever one person that does a development. You’ve got the architect involved, you’ve got accounting consultants, et cetera. So as long as you build a team of people around you, then us and other crowdfunding platforms and many lenders will look at it. But if you go on your own and say, “I’d like to be a developer, please can I have some money?” They’re going to say no, and I don’t blame them.

Paul Mahoney:

And I think one mistake that person’s made is just to go and speak with their three high street banks. They were never going to lend them the money and they weren’t to know that. So fair enough. But a lot of people do this with buy-to-let as well. They just go and speak with their bank, usually the one that they’re already associated with and they don’t meet the criteria. And then they feel as though they can’t get finance. But there’s a very broad market out there from high street, which are the cheapest but most stringent to people who will almost lend to anyone but are very expensive, and for this person, perhaps crowdfunding isn’t for them, but there probably is someone for them and it will probably cost them an arm and a leg for their first experience, but if-

Stephen Galpin:

How would you approach such people? Where would you find them?

Paul Mahoney:

Speak with a broker, speak with a development finance broker specialist and they’ll find them, they’ll know them.

Richard Bush:

Speak to the platform that you’re looking to get money from. We often introduce people to other people to work together, it’s not uncommon. We have a number of investors will invest supporting other developers in order to learn how to be a developer because they get involved in the day to day and then they’re in a position to do it themselves and the platform knows them and other developers know them. So there’s way of doing it. But you have to be patient. You can’t expect to just jump in.

Stephen Galpin:

Well, again, many times on this program, Paul knows very well, creating your team is key.

Paul Mahoney:

Yeah, exactly. And as a first time developer, meaning that you’re not a developer yet. It’s usually a good idea to joint venture with people. I think because doing it all yourself, you’re going to make mistakes. Whereas if you, even just one other person, you partner with someone who does know what they’re doing, you give away a bit of the profit but it’s better to succeed the first time than not to succeed the first time, because if you get your fingers burnt the first time, you’re going to be once bitten, twice shy. If you do it well the first time, even if you don’t make any money next time you should make money.

Richard Bush:

If you do it the first time and you fail, you’re not going to get money the second time. So like you say, first-time success is critical.

Stephen Galpin:

I think that’s right. I’m quite interested, Richard, how would a crowdfunding operation filter those applications? Do you have typically a panel of people that will look at the proposal and sort of take it from there?

Richard Bush:

We have a credit committee, but that comes in later in the process. The most platforms will always meet potential borrowers or developers before they even get that far. So for us, the character, the experience, the motivation, et cetera of the applicant, the potential developer is the most important aspect, so we will spend a lot of time with them, meeting them, looking at their previous projects, taking references and so on and once they pass that hurdle, then we look at the project and then the credit committee will get involved.

Stephen Galpin:

Is that a lengthy process?

Richard Bush:

Yes. Yeah.

Stephen Galpin:

Typically?

Richard Bush:

For the first time we will take at least three months from when we first shake hands to when we’re ready to look at a project.

Stephen Galpin:

So virtually the same as sort of bank lending then, really in terms of time?

Richard Bush:

Perhaps longer.

Paul Mahoney:

Yeah, probably longer depending on the lender, obviously. There are some lenders that specialize in being quick, especially short term lenders. And there’s also some lenders that pride themselves in not having a credit committee. You’re dealing with one person who makes the decision. Just depends on who you’re dealing with. But it does tie back to my point about the joint venturing, or at least getting a track record, because a lot of it’s about your CV. If you can show success in the past, then you’re a better risk aren’t you.

Stephen Galpin:

Okay. Well, there we are. Let’s hope we’ve set everybody straight on the road to good and profitable development. I do thank you both very much. Paul Mahoney, CEO of Nova Financial group. Thank you, Paul and Richard Bush, CEO of CrowdLords. Thank you very much indeed for your contribution. That’s all we’ve got time for today. So join me again next time on property question time.

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