The Numbers Don't Lie

Hi Arsh 

 I am looking at a property at the moment, but I can’t seem to make the numbers stack. I am not sure whether I am being too pessimistic.  
 
How do you deal with this? 

Mr G – Wolverhampton 

Thanks for getting in touch Mr G, and its great to hear from a fellow Midlands property professional and YPN subscriber. 

As far as I am concerned, this is a very straightforward question to answer. The answer is : THE NUMBERS DO NOT LIE.  Let me elaborate on this giving you a few different scenarios. 

I would like to start with saying – I get it…sometimes you really want the property to work and therefore you say to yourself, it will work if I take this figure out or add a little more here. The fact is, that you are trying to convince yourself that it will work. 

THE GOLDEN RULE 

Calculators and Spreadsheets are your friends – do not try to massage the figures to make a deal work.  

When I look at a property, I look at the worst-case scenario and work off those figures. Whether this is for a development, a potential HMO, a serviced accommodation unit or a simple buy-to-let.  

My first aim is to look at the Capital Investment required and also the break-even point. If I find that my capital would work better on other projects, then clearly the figures will demonstrate that. 

I will try and outline how I use spreadsheets daily to see how the numbers work on each type of property. 

HMOs  

Whether you like them or loathe them, the HMO market is still extremely strong.  

When I look at a property and consider converting it in a HMO, the first thing I look at is : 

• How much is the property to purchase 
• Approximate cost of conversion 
• What is the minimum the property would generate (worst case scenario) 
• What is the maximum the property would generate (best case scenario) 
• Demand – how many rooms are currently being offered within the location
• Competition – the standard and also how what they charge for a tenant to move in 
• The Cash flow on a worse case and best case scenario 
• The Return On Investment on both scenarios  
• Break Even Points on both scenarios  

I also look at how much each room would cost me on a unit-by-unit basis. This includes: 

• Purchase price ie £150,000 
• Buying Costs ie £10,000 
• Conversion Costs ie £50,000 

Using the figures above, based on a 5 bed HMO, on a total cost of £210,000, this would equate to £42,000 per unit. I also take into consideration whet else £42,000 could purchase within the area and how this would compare. In Wolverhampton, an ex local authority 1 bedroom flat could start from £50,000, therefore I would question whether spending £42,000 on a room is a better investment than a 1 bedroom flat. There are lots of pros and cons for each strategy, the main con being that it is rare that you will find a whole block of 5+, 1 x bedroom flats for sale at £250,000.  

If you get the figures wrong and ignore the findings, you may find yourself with a losing or break even at best investment. More importantly, your funds may be tied up in the property, which could bring your growth strategy to a halt.  

Rent 2 Rent 

I love this strategy. It is where you take control of someone else’s asset and generates cash flow from it without the need of large deposits, mortgages, solicitors and surveyors. 

Although this can be an extremely risk free strategy, it is extremely important to understand the numbers. Do it right and it will create an abundance of cash flow. If you decide to push and massage the numbers, all you will have done is take on a property where you will have guaranteed the rent to a landlord for a certain period of time. Have you just taken on someone else’s headache? 

Within the property industry, I speak to investors also daily who want to talk to me about the numbers of their property that they want to take on. When I look at the figures, I would expect to see the very basics such as : 

• Potential Income (Best case and worse case scenarios) and evidence to confirm both 
• Rent to landlord 
• Utilities cost – preferably a breakdown of each cost 
• Management costs – what do they entail? Management + Tenant find costs, reference costs etc? 
• Broadband costs included? 
• Cleaner costs included? 
• Maintenance contingency included? 
• Voids contingency included? 

From the above, it will give an indication of the cash flow for :  

• PCM 
• Per annum 
• Cash flow over the whole period which you are considering for the property 

The investors I speak to have not considered almost half of these costs and then wonder why their HMO is not making money – the brutal answer is, it was never going to make money. This is due to the fact that they failed to prepare, therefore they have to now prepare to fail.  

Developments  

Believe it or not, the principals are the same: 

DUE DILIGENCE, DUE DILIGENCE, DUE DILIGENCE.  

However, instead of researching room rents in a location, you may now start looking at sales values and demand.  

The key to any successful development lies within a few key ares which include: 

• Buying the property /land well 
• Maximising the space / site with the number of units  
• Getting the right build team who will deliver on budget and on time  
• Understanding the costs of holding / building / finance costs  

Again I see lots of investors who use the following calculation as the basis for their appraisal: 

• GDV (Gross Development Value) = £2,000,000 
• Purchase Price Of building / Land = £500,000 
• Build Cost = £1,000,000 
• Profit = £500,000 = 25% 

Once you start to factor in finance costs / holding costs / contingency costs, this could very easily each into the margin, almost to the point of becoming unviable. 

On developments, I find that investors have different types of key indicators for success. These include: 

• Percentage of GDV after all costs  
• Monetary value ie £500,000 

Personally I like to work on the % of the GDV as this is the true indicator. I like to work on a minimum of 20% after all costs taking into considering a buffer for delays / increased lending costs and contingences. If you are refurbishing you must add some cost for things that you will unearth ie additional works, wood rot, new windows etc  

Nuggets For Success  

Tip 1 – Search everywhere for evidence of room rates and sales values   

Take the time before signing any contracts to do all your due diligence. I never just take the figures from spareroom as evidence. Yes, it does provide a base to start from, but you have to take into consideration, that the rooms listed on Spareroom are available and have not yet been rented. This could be due to the fact, that they may be too expensive or the demand may nit be there.  

Estate agents can also be your best friends. They are always happy to help by giving you info on what properties they have on the market and why they believe they have nit sold. Use this information wisely and market your properties within the parameters they have suggested.   

Tip 2 – Get agents on board in the area 

To get a true indication of the market, I always advise spending an hour to agents in the area who manage HMOs and get a clear idea as to what they believe they could achieve in the area, and ask, on average how long it takes to rent a room.  This will allow you to build in contingencies to cover for void periods etc 

Tip 3 – Be Ruthless  

Do not be afraid to negotiate with the landlord. The last thing you want to do is take on his/her property and then try and break a contract within 6/12 months due to the property being unfeasible.   

What is your USP (Unique Selling Point) – what makes you different to all the other rent 2 renters out there? Why should the landlord give you their property? How do they know that you will treat their property with respect? 

Calculate the risks and also make an offer on the property on the basis that you know that you can deliver.  

The same goes with offering on a property to purchase. If you offer too much, you may find that you may withdraw from the transaction, which is not good new for the vendor or the agent you are dealing with.  

So there you have it guys. I hope you have found this months article interesting. If you still have a question which you would like answered in next months article, please feel free to email me : [email protected] and I’ll aim to answer as many as I can over the following months.  

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