If you go onto YouTube or Instagram or Facebook, or listen to podcasts, and see what other people are doing in property, it feels like there are more property investment strategies than there have ever been. And I think that’s a danger. Not because you’ll necessarily end up choosing the wrong one, but because with so much choice and so much to think about, you could end up choosing the wrong one for the wrong reasons, which is exactly what I did.
The result was that I went off track, I lost momentum, I got very stressed, and it was all completely avoidable. So I want to show you exactly what happened, so that you can avoid the problem I ended up with.
When I started, there were only two
When I started, which admittedly was back in ancient history, there were really only two property investment strategies. You either bought a property to rent out, what we’d now call buy to let, or you bought something, did it up and sold it on, what we’d now call flipping. HMOs existed, and colloquially they were known as bedsits, but they tended to be much larger properties, so they weren’t something a small starter investor like me could take on. And things like lease options and commercial conversions came along a lot later, and they certainly wouldn’t have been for somebody in my position.
So in a way I was quite lucky. I didn’t have a large list of strategies to choose from. I just had the two, and most of the time I went with buy to let. The flips were more of an occasional thing, if I happened to come across the right property at the right time, which hand on heart I now regret a little bit. Looking back, I wish I had done more flips alongside my buy to lets, because it would have been a great way of building capital within the business.
Picking up other strategies the opportunistic way
As time went on more strategies did appear, and I have picked up other strategies along the way, but in a very opportunistic, pragmatic way, rather than what we could call a strategic way. For example, after the credit crunch back in 2008, I felt that I couldn’t go on buying buy to lets, mainly because I assumed lenders were being much more selective, which they were. I assumed that with everything going on I probably wasn’t the sort of borrower they’d be looking for.
But a couple of lease option opportunities came along and I grabbed them with both hands, because here was a way of expanding the portfolio without having to apply for a mortgage or put down a 25% deposit. I did a handful of them, but I didn’t spend any time looking for them, they just came to me, and they weren’t one of my mainstream strategies. I definitely didn’t do them at the expense of concentrating on my buy to lets. And if that had been the end of the story, that would have been fine.
The friend who was doing HMOs
But about ten years ago, as part of a property community, there was a friend of mine who was doing a lot of HMOs in a particular northern town, and he seemed to be very successful at it. At that time I wanted to grow my buy to let portfolio, and I could see that I had a choice. I could go out and find, say, ten buy to let properties, and then try to raise the finance and find ten 25% deposits to put down. Or I could buy a couple of HMOs, each with five rooms, and have the same number of rental units in two purchases rather than ten.
What made it very attractive was the model he was using. You took, say, a three bedroom terraced house and turned it into a five bedroom HMO, all with en suites. And yes, that was possible if you found the right house of the right size, configured in the right way. In those days, in that town, a three bedroom terrace would cost you around £80,000 and the work for the conversion would be around £40,000 or £50,000, so the cost was roughly £120,000 for each property.
But, and this is what really made it an exciting opportunity, the lender who was lined up to grant the mortgage valued HMOs as commercial properties, in other words on an income basis rather than on a normal bricks and mortar basis. Based on the multipliers they used, the properties I was converting would value at around £180,000. Now, they weren’t going to lend £180,000. There were various discounts they took off, and it was a 75% loan to value mortgage anyway. On the basis of their valuation model, spending £120,000 could release about £126,000 of mortgage, but this particular lender had one proviso, which was that they wouldn’t lend more than you’d put into the property. So the loan was capped at what I put in, and if I put in £120,000, I’d get the full £120,000 back out.
So I could effectively buy ten rental units, assuming I did two HMOs, and end up getting all of my own money back out. It was a quick way to grow the portfolio, and I was doing it with somebody I regarded as a friend, whose company I really enjoyed and who I trusted.
What went wrong
If I’m going to be honest, I always had a nagging doubt that perhaps there were too many HMOs in that location and the market was becoming a little bit saturated. And in time, I think my suspicions were confirmed. By the time the second HMO was up and running, the managing agents couldn’t find the type of tenants I’d been hoping would want to live in my properties. And within a relatively short time, what had been two lovely HMOs, all newly refurbished with en suites, began to feel more like hostels than anything else.
It all came to a head one day when one of the tenants in one of the HMOs was found dealing drugs and had effectively driven out the other tenants. He then stopped paying the rent, so I had an HMO producing no income at all, with one tenant behaving rather badly. And at that point I thought, I can’t be doing this anymore, and I started the process of putting both properties on the market.
Selling them
It took about two years to sell both, which was very stressful. The reason it took so long is that the number of buyers looking for a ready-made HMO is far more limited than the number looking for a buy to let, and one of them hardly had a great track record. Without going into the full details, I sold both properties for around £140,000 against the £120,000 I’d put in, so it was roughly a £20,000 profit on each one. Because I’d already got all my money back out on the refinance, that felt like effectively free money, and I’d had a little bit of rent along the way.
But I’d much rather have held those properties for twenty years or so and watched the capital values and the rents grow, rather than selling them almost as a distressed seller. Distressed in the sense that I was unhappy about their performance.
What I got wrong
What I don’t want to do is make it sound as though HMOs don’t work and you should never do them. That’s absolutely not the case, because I’m sure they work in the right areas, especially if you’ve researched the local rental market and understand exactly how it works for HMOs in that area. My mistake was that in my enthusiasm to try a new strategy I didn’t do enough research, I didn’t do my due diligence. If anything I was a little bit lazy, and I thought, well, if my friend’s doing it and making it work, that’s all the due diligence I need. So I didn’t put in the time to make sure I was doing it properly.
There were really two things I didn’t check and should have. The first was how many HMOs there already were in that town, and in that part of town in particular. And the second was what the rental market was like, and in particular how many people were actually looking for a room in that area.
Why I was doing it
The reality is that if you look at the reasons I had for doing HMOs in the first place, they were good reasons. I’d get all my money back out, I’d grow the portfolio quickly, and I’d be doing it with somebody I liked and trusted, so there was even an element of fun to it. But not one of those reasons was about whether an HMO was right for that town, right for those tenants, or right for me.
So if you’re looking at that long list of potential property investment strategies, before you go down any particular route, ask yourself why you’re doing it. If the answer is that it solves a problem you’ve actually got, then that’s fine. But if the answer is that somebody you know is doing well out of it, or it seems exciting, or all the numbers look good on paper, or you’re just bored of what you’re doing, that’s the moment to stop and do the checking I didn’t do. It doesn’t take long to be deliberate about why you’re choosing something. But if you don’t take the time to make sure it really is the right decision for you, like me, you may come to regret it.
Here’s to successful property investing.
Peter Jones
Author, property investor and ex-Chartered Surveyor
PS. By the way, if you’d like a deeper dive into property investing based on the real-life experience of an investor who has built a substantial multi-property portfolio, my popular e-book, The Successful Property Investor’s Strategy Workshop, explains how I built my own portfolio from scratch and the principles that can help you do the same.
For more details please click here: https://thepropertyteacher.co.uk/the-successful-property-investors-strategy-workshop
