Packaged deals are not for me

My search for my next rental has taken me all over. I have been to seminars both locally and as far as London. Viewing after viewing and I have still failed to find a decent property.

The latest search has been to look at on-line investment opportunities. A particular investment agency recently caught my eye.

One of the property deals they were offering was of interest:

3-bed house ADVERTISED.

Key investment facts

  • Purchase price £45,000
  • Rental figure p.a. £6,000
  • Rental figure pcm £500
  • Management fee p.a. (8%) £480
  • Net profit p.a. £5,520

Now all that sounds amazing. But what really pulled me in was that the property is ADVERISED as having a 5-year rental guarantee. The rent of £500 pcm is guaranteed until March 2024.

My inner chimp was getting excited and was ready to send over the money to secure the deal. I needed to stop, calm myself down and look further into this ‘to good to be true’ deal.

When I got in touch with the agent, not only was it a different house in a different street (similar area), it was a different deal.

2-bed house – the house they ACTUALLY have available.

Key investment facts

  • Purchase price £39,000
  • Rental figure p.a. £5100
  • Rental figure pcm £425
  • Management fee p.a. (8%) £408
  • Reservation fee £2,700 including VAT – why not just fucking say the ACTUAL fee of £3240

In addition to the small factor of it being a different deal, the reservation fee is excessive compared to the purchase price. It means you are paying over 8% of the purchase price for someone else to find you a deal. I wasn’t really a fan of packaged deals anyway but is this southern fairy having a laugh!!!

At this point I am half way out of the exit door but I plough on and do some research.

The area is very poor and I also find that similar properties are on the market for 25-30k. The figures still look good but when you see how poor this particular street is, the price is high in comparison to other available properties. The £3240 finders fee is pissing me off at this point.

I am very skeptical about packaged deals at this stage and this has only added fuel to the fire. Packaged deals might work for others but not for me. To charge £3240 for a couple of hours work is laughable.

This wasn’t a complete waste of time as it has made me aware of a local authority that guarantee rent for a period of 5 years. It is a local authority that I am going to be speaking to over the next few weeks as I very much like the idea of guaranteed rent for 5 years. This type of passive investment is right up my street.

Another Loss on Single Shares

It has been reported this week that ‘Anglo American’ has agreed to buy ‘Sirius Minerals’ for £405m in a deal that will rescue the deep mine currently under construction in North Yorkshire.

I have mixed emotions about this development, as I know of many people who have lost significant sums of money by investing in this single share. A former colleague of mine made an investment of £20,000 at a share price of 20p.

As the shareholders will receive around 5p per share (As reported in The Guardian), my former colleague will receive around £5,000 or 25% of his initial investment. I have friends who have invested £10,000 and one who has around £80,000 invested. I am not sure what price they all bought them at but you get the picture.

This single share has been a hot topic in my local area (Teeside) and I am sure there are many fellow Teesiders who have lost significant amounts of money on this investment. As I have said in previously, single shares are risky and this story really drives the point home.

On the plus side, the buy-out means that thousands of jobs will be saved and the area really needs some good news on the job front. Our area is built from heavy industry and we are proud of our industrial roots. We have lost the steel works and many more power plants and chemical plants have vanished as we have moved away from the industrial age.

Although I was aware of the risks of single shares last summer, I still had a little dabble with Sirius. My initial investment of £727 (seems a random figure and this is due to costs been deducted) is now worth £432.61. This is a loss of -£294.65 (or -40.52%).

Will I ever learn? Well, I fucking hope so as I have had my fill of poor investments.

Let me compare this with the set and forget investment I have in my ISA. It is a Vanguard Lifestrategy 80/20 fund. This is basically a stocks and shares fund that tracks a large proportion of the stock market (e.g. 100 of the top performing companies across various countries – North America, UK, Europe and even developing countries). For more detailed information on my interpretation of investments you can refer to an earlier post – ‘Investing Basics.’

My ISA (I use Vanguard as the costs are really low) LS 80/20 fund has returned +7.72% since my account opened. This means my £4000 investment (£800 for 5 months) is now worth £4177 (an increase of £177). The £177 may seem low but the set and forget method is all about patience and looking at the bigger picture. It is about focusing on compound interest over years of investing.

I am not expecting +7.72% going forward as there will be ups and downs. Some years I might get a return of -1.5% and other years it might jump to +16%. My expectation is that I will get an average of around 7% (with reversion to the mean kicking in).

It is ironic that the historical figures I keep hearing (when tracking the entire stock market – or a large portion of the stock market) are between 7 and 8% and my fund returns are within that range. With over 100 years of data, the books I have been reading (e.g. ‘The Little Book of Common Sense Investing’ – J. Bogle) seem to think that 7% is very achievable.

In 14 years I will be 50. I use this age because I want my FI (Financial Independence) when I am 50 (if not sooner). I am going to look at how my ISA will look if I get similar returns for the next 14 years.

With my initial contribution of £4177, I will look at my investment when I am 50. This is taking into account compound interest and based on the interest that my fund has returned thus far (7.72%). It is also base on a monthly contribution of £800. Putting this information into my compound interest calculator, I will end up with £239,689. Breaking the figure down, that is £138,577 in contributions and £101,112 in profit (compound interest).

It is clear that with a bit of time and momentum, compound interest can seriously work in your favor. Most of the people I talk to on a regular basis, don’t give compound interest the time of day. In fact, it is fair to say they have no idea what it even means. Not that I did until fairly recently but that is another story.

My interpretation of tracker funds versus single shares is very much tortoise and the hare. Although my inner gambler likes the idea of winning big money in a short space of time, I have to be disciplined and be more like the tortoise. The tortoise that is patient and is able to think long term over short term.

The Dormant Landlord

The vast majority of my property journey so far has been spent as a ‘Dormant Landlord’.

After being a landlord now for 17 years, roughly 12 of those were spent with me being very inactive and I had my head buried firmly in the sand. This was due to being in negative equity (about 50k worth) and a few other reasons.

Now I have pulled my head out of the sand, I consider myself a regular run of the mill landlord. My negative mentality has held me back in the past but I can’t let it creep back in as I push on. The thing is I’m not content with being a landlord, I want much more.

I want my passive income (profit from rent and other investments) to exceed my expenses. In fact it isn’t just a want, it is going to fucking happen sooner or later. I just need a bit of momentum. The fact that I found myself in the Tunisian desert (sandwiched between Libya and Algeria) at the end of 2019 shows I’m willing to go just about anywhere to get where I am going.

The way I am going to do it is a mix of rental income and income from my Lifestrategy 80/20 fund (I will be reviewing my funds performance over the last 6 months next week).

With regards to the fund, I have got my head around the fundamentals of investing in the stock market and have chosen a fund I am happy with. Then it will be left as it is a set and forget strategy (again more on that next week) and I will check on it twice a year.

Property will be more involved as I manage the Buy-to-lets along with Mrs Duffy. The aim is to get 20+ rentals and this will mean FI (Financial Independence).

At the moment we manage our 4 rentals with a simple excel spreadsheet. This is fine and I now feel that we are organized. In previous years, we would have properties that weren’t insured or didn’t have a Gas certificate. Not intentional, it was down to a serious lack of organization – not fucking good enough.

I feel being a landlord is quite straightforward. That is if you are organized. You can also get horrendous tenants that can be quite stressful but you learn to take more care (due diligence) in choosing tenants as the years go by. You also learn to manage them and keep on top of rental arrears etc.

If it goes to plan and we get more and more properties, we will need an automated system. This will be done using software and letting agents to manage our properties.

My feeling is that when we get to about 10 rentals, the excel spreadsheet will no longer suffice and it will be time to use processes and systems to help us scale up and grow as a business.

This will help me move from landlord to property investor. A landlord does all the day-to-day tasks that come with managing a property like finding tenants, arranging all the legal documents and collecting rent. I want a more passive method and that is why I will eventually get all of the rentals managed.

When I have read property blogs and books (a book I strongly recommend is Property Magic by Simon Zutshi) it is clear that a property investor is more hands-off than a landlord. The property investor has the systems in-place so they are not getting calls from tenants (like I have a blocked toilet and I need you to come round and un-block the toilet and wipe my arse at the same time) and they have more free time to focus on buying more properties and growing the business.

Time will tell if I can move from ‘Dormant Landlord’ to landlord to Property Investor. One thing is for certain is that I won’t be having another 12 year break if I get any further bumps in the road.

If it goes wrong and I don’t quite manage to become an investor I can handle it. What I can’t handle is sitting on the sidelines and doing nothing – If I fail I will keep going. From all the self-development I have been listening to I like a quote from Will Smith: “Fail early, fail often, fail forward.”

Quantity Over Quality

As it is the start of January 2020, I have decided to change my strategy when it comes to property developing.

Instead of searching high and low for the perfect property (rental number 5 again…), I am going to increase the volume of properties I view.

This will give me valuable experience and help improve my understanding of the property game. Talking to estate agents and building relationships will also improve my property development prowess – at least that is the intention.

The more I get into self-development, the more I realize that action is the order of the day. It is ok gaining knowledge and setting goals but without putting the lessons to use, it won’t help you get to where you are going. I forget where I have heard this quote (probably Tony Robbins) but it is definitely worth passing on: “Knowledge isn’t power; Knowledge is potential power.”

Looking on right move and going to the odd property seminar has only got me so far. I am ready to buy more properties but I am not putting myself out there enough.

The new target is to make 20 calls per week relating to property. This could be to arrange a viewing, or speak to a letting agent regarding rental demand in a particular area or anything property related. If you are a serious property investor this figure probably seems pretty low but it is more than my 1 or 2 calls a week so it is a step in the right direction.

This idea is similar to a salesman / or saleswoman increasing there sales calls. I have read a few interesting self-development books and sales are very important in both business and property. Two areas that I need to improve on.

One of the sales books I have read is Go for No (R. Fenton and A. Waltz) and this is a book that has influenced my new quantity strategy (increasing the volume of my sales calls if you like).

This book is all about changing the meaning of rejection and getting to a place in our heads where it empowers us. Instead of avoiding rejection, it is about making a decision to seek rejection and to actually Go for No!

I don’t think I will actually target shit loads of No’s but I get the message of the book and it has helped the way I respond to a bump in the road. The house that fell through only last week didn’t bother me and I moved on. If I make 100 calls (for rental number 5) and get no joy, I will move on and won’t beat myself up.

My gut feeling that rental number 5 will come before I make 100 calls and I have had a little bit of joy this week with a flat.

The flat is up for £55,000 and I bid £45,000. After doing my calculations, the ROI (Return On Investment) was 20%. That is if the offer was to be accepted.

I have received a call from the estate agent and the vendor is willing to accept £48,000. Although this would mean the ROI falls below 20%, it is still an excellent return and way above the interest I would receive if I left my money in a High Street Bank (in and around 1%).

This time round I have even factored ground rents and service charges into my calculations. See if nothing else, I am learning as I stumble towards my 5th rental. In previous years, I would have bought a property without doing any calculations and I wouldn’t have thought about factoring ground rents and service charges prior to making a bid.

In summary, I recommend you read the book I have been waffling about – Go for No. If you are into self-development and read a few books, put what you have been learning into action and hopefully you will go from where you are, to where you want to be.

Rising Damp

Going into Christmas 2019, I was quite happy as my 5th rental was almost secured. Working out the ROI (Return On Investment), on the total money invested, I would be getting 16.4%. That is £4440 (total profit per year) divided by £27,000 (total invested).

Coming out of Christmas 2019 and into 2020, I received the survey report from my Financial Advisor. See below:

A retention of £6,500 has been applied for the following. 1). There is evidence of rising damp to several sections of ground floor walls and penetrating damp to sections of internal wall and ceiling to the first and second floors.  The applicant must obtain a fill timber and damp report from an approved PCA member identifying the cause and remedial works required, together with an estimate of costs. These works should be implemented within 3 months and, upon completion, a minimum 20 year insurance backed Guarantee provided, a copy of which must be forwarded to the lender. 2). The corrugated asbestos sheet roof covering one storey rear addition are in need of replacement. The applicant must of obtained in full report from an approved PCA member detailing the remedial works required, together with an estimate of cost. These works should be implemented within 3 months. 3). The timber decking within rear yard id rotten and slippery and needs to be removed for safety purposes. These are small gaps within the party walls within the roof space. The gaps should be filled to comply with current Building regulation Requirements, ie. to provide a minimum 60 minute fire resistance. We shall proceed to offer on this basis providing all the remaining information has been received. Please note a re-inspection will be required which will incur a £100 fee.

Other than the rising damp that seemed to be an issue, what jumped out was the £6500 upfront fee I would have to pay on completion. I would get the work done then get the money back but it wasn’t the point – my budget was decimated.

Putting this additional £6500 into the ROI calculation meant that my new ROI was 12.2%. Still decent enough but the initial outlay was my biggest concern.

My FA said I could negotiate a new price but even with a few grand knocked off, I was almost certain that I was ready to pull the plug on the deal.

I went back to the property for one last look. This would help me make my final decision.

After seeing the property again and taking more time to see what work needed to be done, I made my mind up. A new bathroom was needed, the kitchen needed replacing and the boiler looked on its last legs.

With rising damp costing me £6500 initially (the cost of the works would total roughly £6000 and then I would get the retention fee back if you catch my drift), and another £6000 minimum on the internal issues, my initial investment has moved from £27,000 to just shy of £40,000. Fuck that.

Granted, it isn’t an ideal start to the year but shit happens and my attitude is that DUFF Properties moves on. Although I currently have 4 rentals, they are privately owned (mainly in Mrs Duffy’s name). What this means is DUFF Properties still has 0 houses but that is a minor detail we wont dwell on.

I have booked 2 viewings and will continue to push for rental no.5. I have a few weeks off work so I will be working hard to get the right deal for the next house.

What I can say from this experience is that you really have to keep your emotions out of property investing. I worked out my calculations and was happy with the deal. The rising damp survey came back and fucked up the deal. I wasn’t emotional as I pulled out and will move on to the next deal.

To steal a quote from a recent property seminar: “Use formulas not feelings.”