I get a lot of questions from investors and landlords at all stages of their journeys, in all different situations. In my opinion it’s most important to first know the mistakes not to make before you learn the right things to do. Common mistakes are common for a reason, they have a way of creeping up on the unsuspecting victim, being seemingly great ideas, that only reveal their downside once the landlord is already in too deep.
1. Renting To The Friend
It starts off as a great idea “I have a property, they need a property to rent, why not?” “I already know far more about them than any reference check could ever reveal” “They can even do little bits to help when theres an issue” “I’d trust them with my kids, why not my property” and the list of positives goes on.
However, once the friend is moved in, the clock starts ticking, until the inevitable situation arrises in which you have to decide between your friendship and your bank account. Your friend tells you he got less hours at work whilst you are chatting, but the property’s market rent has gone up over the last 3 years, do you still increase the rent on your friend? You paid £150,000 for an investment and now your friend is getting £50 or more a month discount at your expense. If your same friend called you up every month for £50 in which he never intended to repay, how long would you pay them for? What if they decide to move out and have caused a lot of damage, do you still take the deposit? Do you still look at your friend the same way afterwards?
The worst case is the ‘E’ word, what happens if you get to the point where an eviction is required, usually it will not be your standard 3 months of non payment for section 8 eviction, you will likely have gave them the maximum amount of arrears your bank account can weather before you are now put in the situation in which you have no option other than to take your very own friend into the court system (you better hope you set everything up properly for them tenancy-wise also).
My first memory of this situation was when a landlord I knew asked me to come and give advice on his property, it was a block of 3 apartments in New Jersey, market rents were $1000-$1200 a month, the top apartment was let to an inherited tenant who was there since he had bought the place at 350. The first floor was let to a friend from church for $500, who paid the first month before claiming she had no money, either not paying or paying whatever she could put together to the amount of the odd $100-50 a month. The bottom unit was let out to a family member for free. This man had a mortgage on the property that was sending him underwater further each month, instead of a $3k a month income he instead received a mere $400-450 a month. The mistake this landlord made was not in isolation, in fact it nicely links to the next common mistake, cutting corners
2. Cutting Corners
The landlord in the above story was also motivated to get himself into such a dire situation due to his lack of willingness to pay an agent’s fee, which in New Jersey is the first month’s rent, or $3k. Now this seems expensive for the UK, however is very much the standard procedure in the US to take a 1 month commission. If the landlord had simply let a broker rent the block out, after the first month, the landlord would have made 6 times more a month with a very nice cashflow.
When considering doing something yourself whether it be some DIY or more on the lettings side, you need to ask yourself, how much longer is this taking me? Can I do it upto their standard? Will it be upto regulations? You may be able to plaster a wall yourself if you simply watch youtube videos and get some basic gear, but if you are doing it on the weekends, how many weekends is that taking you versus having it done by a pro in a couple of days, then collecting rent a couple of months earlier? You need to measure the cost of cutting corners or making supposed cost saving measures in terms of what the actual cost is. Saving £1k in plaster fees is not worthwhile if it means your £500 a month rental hits the market 2 months later, not to mention if it ends up as a botch job, you will end up waiting for the plasterer’s next availability as well as paying their fee, now you have the monetary AND time costs!
I could write an essay on all of the corners that I have seen people try to cut and that have either directly caused failure or resulted in a less than optimal investment, maybe I will write one in the future, as a general rule, just make sure that in your gut you know that everything you are doing is done properly, and that you have fully weighed up the potential costs of any seemingly easy corners you can cut.
3. Over Leveraging / Poor Financial Positioning
It can be very beneficial to use borrowing on your portfolio in order to enhance returns, however, it is vital to make sure that you are properly positioned financially. If your investment’s cashflow goes underwater for a prolonged period of time, you can end up in a position in which you are forced to sell, and that sale is likely to be one in which a quick sale is needed for whatever price someone will offer, Or may coincide with a temporary downturn which you could have otherwise held through.
The best way to think about your use of leverage is across your whole portfolio, perhaps also including personal debt, it may be better to borrow more in ways you can get the best terms, and less in more expensive areas, overall your leverage will be the same but your cost is optimised. If you are maxed out on leverage, make sure you have substantial other liquid assets such as a cash position in which you can cover the bad times with. It can be amazing to be maxed out on debt when the market is rising and you are getting much richer by the year in equity, however, it also works in an equal and opposite manner in a downturn, vaporising your equity at the same rate. I have talked to countless people, both in the US and in the UK, who have built substantial wealth through property, the most resounding across the board advice, is to be able to stay in the game for the long term, just be able to stay on the boat. It isn’t worth taking on risks that could blow you up early on, the biggest regret is usually properties that were sold. As Warren Buffet says “The number one rule of investing, don’t lose money”.
Stacking your properties on a dynamic excel sheet and playing around with the numbers can help you to get a better understanding of your borrowing position, If interest rates doubled, how would your cashflow look? What about prolonged vacancies? 1, 2, 6, 12 months? Prolonged vacancies, plus increased rates, plus a new boiler? How much stress can your investment take before it is under water? These dire case scenarios may never happen, but it is worth assessing how much risk you are willing to take and understanding the possible underwater scenarios, ideally before making the investment or before placing a mortgage/debt against a property.
4. Not Buying The Right Property For The Investment
If you are wanting to do a full back to brick 6 bed full ensuite HMO conversion involving cutting new drainage channels beneath the house, you should avoid buying something that is move-in ready, featuring a top of the line kitchen with brand new plaster throughout. You are going to be paying a premium for nice features, only to rip them all out and replace again. The exception being the rare case you can acquire the property at a proportionate discount for a different reason. An ideal property will be in a state where most or all of the things you plan on knocking about are already in need to replacing or are not there at all, as you will then be adding value and building equity as you develop. The more extensive the works needed, the greater the expertise typically required, the greater the risk contingency you will need, and so the additional discount you will need to attain on purchase as the difference you will need to see from the finished value.
For HMOs there is an art in itself to finding the right floor-plan and being able to maximise what you have (which we can advise on). Buying a new build house and renting 2 individual bedrooms may make you extra returns, however for the same budget you could have found something with more bedrooms and extra reception rooms that simply become extra bedrooms, or walls you could have rearranged, bathrooms that could become bedrooms, multiple en-suites, etc.
Think what type of strategy you want to pursue, what tenant market you are going for, what works you are comfortable technically and financially with carrying out first, then find the property. You may find with a criteria like this, you may scroll through every page of the listing portals and sometimes find ABSOLUTELY NOTHING, do not worry, understand that perseverance pays off, you can wait, and you will be ready to pounce when the right investment hits the market. If over a long period of time you still find nothing, you may find either you are in the wrong market, or your criteria was too strict. There is definitely a balance to be made between what investment can you easily find all day, and what is closest matching to your goals. If you use investment sourcers you should be cautious, is the investment truly great, or are you just being sold on something which offers off the shelf returns so they can get their fee, we offer a transparent sourcing and refurb service alongside our agency services due to our building connections and our daily activity in the Stoke-on-Trent market.
5. Not Knowing The Area
The North-West is known for it’s great Yields in comparison to purchase prices comparative to the south of england, and so a large proportion of out of area investors and landlords are drawn to Stoke-on-Trent. An area that looks great on google maps may be far from the case. There are definitely areas that are more optimal for different tenant types, along with bad streets in otherwise good areas, and good streets in otherwise bad areas. It’s no use buying a property to convert into a Professional HMO if it is out of the area in which professionals want to live. Often a lot of deals on the market can sit there for a long time, or be cheaper than others for a reason, only for an unknowing out of area buyer to swoop in and think they have found a prize, only to realise why it was at a cheap price or available for so long on the market once visiting or attempting to rent it.
Definitely try to visit if you can at different times of the day, on different days if possible, so you can get a good idea of the area, you may realise that it is located right behind a nightclub, or that your doorstep is the local hangout for drug users. It is a good idea to have a visit round local shops, restaurants, bars, etc from the specific area as well as the larger area as a whole and ask their opinions of the area. You can even go as far as seeing how the neighbours are, bringing them a bottle of wine and having a chat about the house and area. You should also be able to get a very good opinion by asking local agents such as ourselves.
As before, with selecting the right type of property first, it is also better to have in mind what type of investment you are looking for, then to explore the areas in which this kind of tenant prefers, along with likely areas and streets to find a property that fits.
Knowing the main possible ways in which failure can occur will help you minimise or even completely sidestep failure over time, although it is not beneficial to spend your time worrying about the downsides to everything, property is a game which usually entails investment of a large portion of an individual’s net worth, and so it is very important to minimise risk where possible. If you know how to avoid the main mistakes, it leaves your mind open to pursue your goals with more confidence and intensity.
Hopefully this has helped you in your investment and landlording journey, please feel free to share this to anyone you think may benefit from the information shared here. Perhaps you know someone who is already making one of these very mistakes! Stay tuned and be sure to subscribe to our email list in order to see future posts.