Holiday Let Star

Peter Meek  00:00

The property was £675,000. We're going to spend a couple of hundred thousand. By the time it's been fully renovated, it's going to revalue conservatively at 1.1. If we've got the market right for high end holiday lets, then the commercial value could easily be £1.5. When we do get to refinance it, even on a bricks and mortar, there wouldn't be a lot of money left in, but on a commercial mortgage there will be no money left in.

Narrator  00:27

You're listening to Expat Property Story, a podcast in which I share my story to smooth the way for you to have your own Expat Property Story.

Expat Property-Guy  00:38

Hello there and welcome to episode 12 of Expat Property Story, the show for expats investing in UK property with me, your host the Expat Property Guy. Are you interested in holiday lets as a property strategy? You are? Me too. So stick around for my chat with Peter Meek, who you just heard there. Peter is a UK expat with years of property experience, both in Australia and the UK. Now this is how easy it is for you to follow the show. Hey Siri, subscribe to the podcast Expat Property Story.

Siri  01:12

Okay, I've subscribed you.

Expat Property-Guy  01:15

There are of course other ways you can follow the show, such as heading over to the website, expatpropertystory.com. Subscribers and regulars will know that my Expat Property Story began in 2017. And I've been sharing the details in a chronological order since Episode One. So if you're a new listener, firstly, welcome to our community. And if you want the full version of my story, check out all the previous episodes at expatpropertystory.com My story has just arrived in December 2017. And Christmas is almost upon us. My wife and I have opted to move away from new-build, off-plan developments after a couple of failed purchases, and decided to look into HMOs following the advice of a Property Tribes contributor. Last week, I told you that we were trying to decide between students and young professionals as our target tenants. Around this time, I had discovered a podcast called Inside Property Investing, which I had started listening to in conjunction with The Property Podcast and Property Geek. I'd started emailing guests I'd heard on these podcasts, following up on things they'd said, seeking clarification, or just asking for feedback on our emerging strategy to see if it would work. One such guest was a guy called Stuart Lordan of Lord Panda Properties, who was focusing on the student market in Plymouth. We'll be hearing from Stuart in a few weeks' time. So if you're interested in student HMOs, then hit pause, subscribe to the show at expatpropertystory.com And you'll get that episode as soon as anyone else does. Stuart's argument for targeting students was quite compelling. He had recognised the demand for higher quality student accommodation, which in turn led to higher rent, meaning a win-win situation for tenants and landlords. Stewart's model was slightly different than our plan, as his refurbs tended to be more cosmetic, whereas we were intending to add bedrooms, but both fell into the bracket of the buy refurbish refinance strategy. The principle behind BRR is that by adding value to a property through a refurb, investors are able to re mortgage and recycle their original deposit to purchase further properties. In theory, this is an efficient way of building a large property portfolio quickly. Once the refurbishment has been carried out, your lender arranges for a surveyor to revalue the property. To maximise the uplift in value, clever investors provide 'before and after photographs', a schedule of works and if possible, comparable prices of recently sold local properties. You would then re mortgage according to the new property value using the difference as a deposit for your next property. I emailed Stuart and asked him about the risk that the lender might not value the property at the same price I paid for it and how to mitigate for that. Stuart generously replied that the key was to buy under the expected purchase price, and that the worst case scenario was that they value it the same, and your refurb costs stay in the property. So not the end of the world. This was good enough for me. So student HMOs it was, but which university town or city? We needed to find a location where demand was high, where house prices were low enough for our budget, and where there was no Article Four directive in place. You will remember from last week that  Article Four  directives basically mean that you can't really convert a standard residential property into an HMO. But perhaps most importantly of all we needed to find a UK property partner. This of course is very easy, but finding a good one and one that you can trust... well that's a whole different matter. Tune in next week as we look for someone to trust and hit another snag with our old favourite: mortgages. Mortgageability was also a problem for today's guest, a UK expat from Australia who, together with his wife, decided to take an extended break from work and go travelling. They started their trip back in the UK in early 2020. No prizes for guessing what happened next. You're right COVID-19. It'll all be over by Christmas, most of us guessed. And as I record this in April 2022, spare a thought for those of us stuck here in Hong Kong under strict quarantine restrictions while the rest of the world moves on. But hey, that's another story. We're here for Peter's Expat Property Story. So as the UK went into lockdown Peter and his wife Joanna found themselves stuck in England and unable to return to Australia. They chose to turn an unfortunate set of circumstances to their advantage and get some UK focused property education, as they were already experts on the Australian market, before leaving the UK in 2000, to take up lucrative roles in Melbourne. They had made the decision to sell their house in York in order to get their foot on the Australian property ladder. While this allowed them to build an impressive portfolio of four properties each in Melbourne and Brisbane, it was a decision that would lead to challenges 20 years later, when they wanted to start a UK property portfolio.

Peter Meek  06:35

We came back to the UK to go travelling. Couldn't go travelling. So we're sat twiddling our thumbs and thinking what are we going to do for the next 12 months? So we're sort of stranded here, we couldn't travel, which was our plan. So we thought well, what do we know? Well, we know property. So lets start investing in property here. And our long term goal is to have good pensions, potentially in both countries. So we can choose where we ultimately want to retire. We actually signed up for some property education courses. And despite the fact we had eight properties in Australia, and I thought I knew quite a bit, I realised, I don't actually know very much. What we were struggling with, is we wanted to buy in and around York as we love it around here. And we're trying to say, well, what what strategies would cashflow? Holiday lets cash flow and freehold to leasehold title splits also is a way of generating lumps of cash. So those two strategies combined means it's a really good strategy for us in York. But getting their Expat Property Story started was not without its challenges, particularly as they had no footprint in the UK, We couldn't get mortgages as non-residents. And because we've made the mistake of not keeping a property here, we had no financial footprint. We had a bank account, but we had no income. And that actually made it quite difficult to start our property journey here. One of the interesting ones was my wife... we got married when I was in Australia, she hadn't changed her name here. And with COVID, trying to get that changed, it took nine months almost to do that. So that was one of the issues. No income here, because we weren't planning to work. And we looked at properties to do ourselves, because we have quite a bit of equity to deploy. But we thought, well, we've got two choices, we can buy some really cheap properties, for cash and create a history there. Or we can buy what we think of as better assets, but with joint venture partners, and we sort of piggybacked on the back of their credit rating. And so that's what we've done.  By using joint venture partners, they were able to overcome their mortgage difficulties and look for high cash flowing assets. They decided on HMOs and holiday lets. We've got a really nice HMO in Manchester with a JV partner and a block of five flats on one title in York, in a really great location and we're just renovating that and the plan will be holiday lets but there are lots of... quite a few good exit points on that project. You know, we put in some money for the deposits, but we sort of piggybacked on the other party's cash flow and job employment history to get the mortgages because we wouldn't have been able to have bought those assets on our own. When you talk about having joint ventures with people who are based in the UK, what are they doing? Are they shareholders in the business? So both of our companies, you know, it's my wife and I, they're both with a couple. So yeah, we've all got 25% each. With the HMO projects we're putting in more than cash because the other guy's finding the deals and doing pretty much all of the work but on the holiday let one it's all 50:50. We're all putting in the same amount of money and we're all bringing in different skills to the table and I think if it is a genuine joint venture, you have to be comfortable that you're bringing something to the table and that may just be cash, but if you can bring cash and skills, I think that that's good. We spent quite a lot of time making sure they were the right partners for us and it's a little bit uncomfortable because the one in York, we're really close friends. We've known them for 20 years, but we still went through the process. What if one of us gets divorced, someone dies, we worked on all these scenarios, which was really uncomfortable, but really important. So that we've documented: these are all the different scenarios. To be honest, it's actually nice doing it with other people on finding people with complementary skills to you, you share the excitement, you share the pain, but you extend the capability of the group because none of us are smarter than all of us. Right? Are you nervous about going into business with very close friends? It's a good question. There's absolutely a risk. But the number one criteria is if it affects our friendship, and this is point number one, you know, we've all agreed we will sell the business because our friendship's more important. They've got quite a lot of properties in and around York, but just buy to lets so they've already done really well in a property, they're interested in doing something else. We brought along, obviously, quite a bit of knowledge from all the education that we've done. And we've sort of partnered up with the money. And I think the plan is that we'll probably try and do this three or four times. Everything is split 50:50, then they put in 50% of the money, you put in 50% of the money, who does the day to day work? We'll get it managed by a holiday lets business and we understand that you pay quite a bit of money for that. But the reality is, none of us want to be spending our time stripping beds and hoovering up, we're happy to trade off some margin to get that time back. And actually the best use of that time is to find another property, like the one that we just renovated and do it again. Because you know, if done well, it's going to generate probably a couple of 100,000 pounds of equity growth, and it's still going to cashflow really well with us doing very, very little hands on stuff. Are you okay to go through the numbers on it, you know, say how much you paid for... The property was £675,000, we're going to spend probably a couple of hundred thousand. By the time it's been fully renovated. We're very comfortable it's going to revalue conservatively at £1.1 and probably £1.2. And then based on our cash flow assumptions, if we've got the market right in your high end holiday lets then the commercial value could easily be £1.5. But even on the lower numbers will have generated a couple of £100,000 of equity in the deal. So when we do get to refinance it even on a bricks and mortar, there wouldn't be a lot of money left in but on a commercial mortgage, there will be no money left in Maybe you could very briefly explain what a commercial mortgage is as opposed to a bricks and mortar mortgage. A commercial mortgage is a mortgage where the loan is based on how much cashflow the asset generates. And it's similar with HMOs. As a house, they're worth 200,000, but they might generate four times as much rent as a HMO. So as a commercial entity, it's worth more and the same with this block of flats as holiday lets they'll probably generate two and a half times as much cash flow as holiday lets as they will as a buy to let. And so companies are going to be much more comfortable lending you a little bit more money. Now just because we can get that loan, it doesn't mean that we will, our long term strategy is to rinse and repeat this, probably three more times in the next five years. So we've got enough time to validate the model before we do the next one. And then again and again.

Expat Property-Guy  13:14

Can I play devil's advocate here?

Peter Meek  13:16

 Okay, course.

Expat Property-Guy  13:17

So if you've got them on a commercial mortgage, if the holiday let market for one reason or another collapses?

Peter Meek  13:23

Yeah.

Expat Property-Guy  13:23

How do you service that mortgage? Because that mortgage is going to be quite hefty, isn't it?

Peter Meek  13:27

We may go to a commercial mortgage, but only at 50%. As part of the due diligence process, we looked at what we felt we could let these properties for as a buy to let. And that's what we've done all of our numbers on. The holiday let is incremental cash flow, whether we decide to access it, or refinance it is up to us but even as a buy to let based on the calculations, we'd still get almost all of our money back

Expat Property-Guy  13:51

And if you ran it as a standard buy to let property that will still cover the mortgage.

Peter Meek  13:56

Yes, easily.

Expat Property-Guy  13:57

Okay. Is it in York itself?

Peter Meek  13:59

Yeah, it's literally 300 metres to the station 40 metres to your minister and, and then about 500 metres to the hospital. So it is really in a fantastic location for holiday lets. And how did you find the property? It was on Rightmove. It was sealed bids. We finished third, which was very disappointing. But one of the things that you learn when you talk to other property people: always, always follow up. So I followed up three weeks later, got crickets, no response from the agent. Followed up another three weeks later. And the people that won the original deal, were obviously messing the owner around a little bit and he was a bit irritated. So we said look, can we have another look at the property, we may be able to increase our offer? And they said yes. And we went to see it. The only time we said we could do is Sunday afternoon knowing full well that the estate agent wouldn't want to show us through and we met the owner. He walks us through the property so that that's actually something I would never have thought of without the education so we got to know the owner. I've built a really good relationship with him. He's a nice guy. And he said, Look, I'd rather deal with you. So we got the property despite the fact that we were the third highest bid apparently. That's all just from establishing a good relationship with the seller and working out what his needs were, were you able to move quicker than the others was that part of it? His big need was to settle before the end of the financial year. So we sort of had April, the six as the absolute deadline. And we literally came in on April the third. So we delivered exactly what he wanted. And we, we took the property tenanted, and this is in the middle of COVID. And there were all these restrictions about what you can and can't do with tenants. And so we knew that there was a chance that we will be holding that property potentially for 12 months with the tenants in place, and we wouldn't be able to do anything with it. But as luck would have it, they were all happy to move on. And we were able to get access to the property quite quickly after settlement. Yeah, three months after settlement. So that was good. We bought it in April last year, the renovation started in late August, will have been about eight months by the time we finished. So it's five flats in a Victorian townhouse. We've wanted to do it painstakingly, meticulously, right, so that the building looks beautiful. So it's quite a big project. So did you need planning permission for that?  For some of the external stuff? Yes.

Expat Property-Guy  16:23

I'm imagining listeners all over the world listening to this thinking, how can I do this? You have someone in the UK to help: your joint venture partner? Are they kind of hands on or they just kind of putting in the money? I'm trying to imagine someone saying, 'I want a bit of that? How can I do it?'

Peter Meek  16:40

Well, I think it's finding a joint venture partner that is doing the day to day work, but ultimately, our JV partner in Manchester, the plan with that business is, bizarrely enough, he's Australian as well, he wants geographical freedom as well. So we'll get that business to scale. And then we'll either recruit people to run it, or we'll use VAs, basically outsource that. But we met him through the property education and then networking. And like I said, we did quite a lot of due diligence, we talked through what the needs of the parties were, we actually... testing him out, we lent him a bit of money for one of his projects, and the communication was fantastic the pay, you know, the payments were good. So that's a good way of testing people. Yeah, lend them a little bit of money. If you like what you see then potentially dive in a bit further. That's what we did with that JV partner and the other JV partners, we've known for 20 years. At the end of the day, the most important thing is you end up with people that you feel comfortable with, and they've got the skills that you need. And ideally, you've got complementary skills to bring to the table as well, Now that they've proved that the model works, Peter and Joanna plan to do it all again, Literally, just before this conversation, we've just had approval to refinance the HMO. We actually bought that with a bridging loan. But that will get refinanced and that will give us enough seed capital to basically rinse and repeat in terms of HMOs in Manchester. And the plan with the holiday lets in York is we could refinance, but I think what we'll probably do is let the business trade for a couple of years, because I think it'll do really well. And then we'll potentially get a, you know, commercial finance on that at a much higher level and certainly get all of our money back. The great thing about holiday lets is you get this thing called capital allowances, which basically offset I'm sure you know about your offsets tax. So as the business generates profit we'll sort of start taking our Directors Loans back quite quickly. And then we'll refinance in a few years time when we've got a really strong history saying, well here's how much it's going to generate so it'll make it much easier to be mortgageable.

Expat Property-Guy  18:46

Can you possibly offer our listeners a very brief explanation of capital allowances? I mean, my understanding is that the bigger the refurb you do, then the better your capital allowances will be...

Peter Meek  18:56

Basically, the way that it was explained to me and I quite like this is if you turn the house upside down, and you shook it, anything that didn't fall out, is potential for capital allowances. So for this project, it's completely bad to brick so all the kitchens, all bathrooms, everything is allowances, but then there's also things like, this house has got a misting system for fire safety, all that stuff is claiming as well. So yeah, to give you an idea, it's almost 30% of what we paid for the property will get in capital allowances, it basically means that there's no tax to be paid for the first however many years.

Expat Property-Guy  19:35

Yeah, it's a very handy strategy to target properties where you can make use of those capital allowances. One thing I have learned about them is that you have to check before you buy a building that capital allowances haven't actually been taken out on that building previously, because it's only available once is that right?

Peter Meek  19:52

That's correct. So as part of the buying process, we have to check to make sure no capital allowances have been taken out of the business and It was a really nice guy, it was just a tired landlord, we put in this clause saying yeah, saying no capital allowances had been taken out. And he didn't really know what... it was fine it because it wasn't gonna cost him anything. So that was in the exchange document that he signed over to us. But you're right, you can only do it once. So you told your solicitor about that in advance and put the clause in?  Yeah,

Expat Property-Guy  20:23

Going forward, Peter and Joanna are aiming to use direct marketing strategies to find motivated sellers.

Peter Meek  20:30

We're targeting specific properties in terms of finding properties that we think would that might work and then doing a bit of due diligence, checking the Land Registry to find who owns these houses. So we, we've got a hit list that will be targeted over the next five years. And we need one every two years. So it's not like we need loads of these things. It'd be nice if we could find some with, on some options, and some creative finance, all these skills or tools that I've learned, but we don't necessarily need that. We can just buy them, renovate them. Ideally, refinance them, and rinse and repeat. Yeah, that's the strategy. And how do you expect to do that from Australia? Well, it's got... the addresses, I can get letters sent from anywhere in the world. And probably at some point, as the business grows, look at virtual assistants, we use them in one of the business that I'm linked to in Australia, the stuff that you can instruct people on you can get done from anywhere. So I put quite a high value on my time. So for example, with finding some of the properties, someone who's already walking around, putting mail fliers into houses, slip them 100 quid and say, Look, I want to know all the properties that look like they need renovating. I want to know all the properties that are this big for us. Yeah, we're looking for blocks of flats. So I want to find houses that have got multiple doorbells. Because if it's got multiple doorbells, I know that there's multiple tenants here. If I go on to the Land Registry, it will say, Okay, it's on one title. Yeah. So you then know it's an investor.

Expat Property-Guy  22:01

So you're targeting investors.

Peter Meek  22:03

Yeah.

Expat Property-Guy  22:03

Tired investors, tired landlords.

Peter Meek  22:05

That's right. And with section 24, you know, they're probably making a lot less money. Now. They, if they haven't tried to convert across to a limited company that's quite difficult, and they're out there. You just need to find them.

Expat Property-Guy  22:18

And how do you target them, you just write them letters,

Peter Meek  22:20

Basically, yeah. And you have a bit of a campaign. And that's the same with the HMO HMO was interesting, because it was a landlord letter, our JV partner went to see the property with the letting manager and then they decided it wasn't a very good property. But the letting manager said another one of my clients is looking to sell and he showed us that and that was the one that we got. So that was a really interesting insight that letting managers are, you know, a really good source of leads. They've got landlords that are looking to move on, they don't necessarily want to lose that income stream, he introduced us to the seller. So that's how we got the HMO. I asked Peter, about the differences between the UK and Australian property market, Australia is an amazing market for capital growth. And you know, Section 24 doesn't apply there. If you don't make any cashflow. It doesn't really matter because you offset it against your income. It's all about capital growth. But ultimately, in sort of five years time, when we finally want to slow down a little bit more, we've got the cash flow coming in and holiday lets and HMOs. And even buy to lets here generate much higher income than they do in Australia.

Expat Property-Guy  23:24

That was what I was going to ask you. We do have some listeners who are from Australia, and we even have some listeners from England who are thinking of moving to Australia, what advice would you give to people who are moving to Australia from England? Should they carry on investing in England? Or should they divert their money into paying property in Australia,

Peter Meek  23:43

As long as you can buy property, what I would say is, if you're going to leave Australia and not go back, do not sell property in Australia, as a non resident, you lose a lot of the benefits that you get over there. So we genuinely don't know where we're going to retire. So we know we're going to be spending years in Australia and years in the UK. We want to be able to have the flexibility. So we say at some point we'll say 'right it's Australia,' we may or may not sell our UK properties then or we might say okay, so UK, we may or may not sell Australian properties, but what we WILL do is we'll run down the debt so that we don't have a lot of debts in either country when we do finally retire. And in Australia offset mortgage is a really common. Less so in the UK. So if you refinance a property, our home went to $600,000 Whilst I was working because I had a good income, I was able to access 80% of that and just park it in an offset account. So I'm not paying any more interest for it.  What's that in pounds Peter? £260,000, right? Which is a nice pot of money, right? So I think having money in offset, it's a really good strategy because it gives you flexibility. You know, I haven't worked full time for two years and because we had all this money and offset accounts, it really doesn't matter. We call it the bugger you factor where I always want to be able to... if I don't do anything, nothing happens to our life for 12 months. So I can say no bugger  you, I don't want to do that job. And I think, I think that's what property gives you. It gives you this ability to create lumps of cash, that gives you massive security. And if you can generate cash flow as well, and you're never going to eat into those lumps of cash. My final question for Peter was about risk.  I think risk is the opposite to reward. And I think the more knowledge that you have in your network, the lower the risk. Yeah, so there is a relationship between risk and knowledge. And I think that's a Warren Buffett thing... if you know something really well, then the risk is a lot lower for you than the next person that goes along and doesn't know it. And I think if you don't risk anything, you risk everything. And I think you've got to take chances in life and property we believe is a very low risk asset. And we're always trying to minimise risk by having multiple exit points. So it's about mitigating for risk.  Yeah.

Expat Property-Guy  26:06

Did you bring a joke for our listeners?

Peter Meek  26:08

What do houses is like to wear? I don't know, what DO houses like to wear? Address

Expat Property-Guy  26:14

 We are collecting fantastic property jokes! That's one of the best yet Peter.

Narrator  26:19

Postcode Challenge

Expat Property-Guy  26:21

Now we have a new feature on Expat Property Story. And it's a test of guests' knowledge of their chosen postcode. So the postcode you have chosen is YO30 7DD,

Peter Meek  26:34

So that gives you an idea where our holiday let is. Right?  I would say more males.

Expat Property-Guy  26:37

Okay. So it's multiple choice. Best of three, you only need to get two of these correct to win. Okay, your first question is: in that postcode, are there more males or females? You are correct on that one. There are 226 males and 203 females.

Peter Meek  26:57

Yeah, just give or take 10 or so that was about right. Yeah,

Expat Property-Guy  27:01

it's quite close. Okay, the next one: in that postcode, the demographics are AB, which is high managerial professionals, C1, junior managers and clerical workers, C2 skilled manual workers and D,E semi-skilled or state benefit, unemployed. Which of those four would you say represents the highest number?

Peter Meek  27:22

Yeah, I would say AB, but I may be wrong this?

Expat Property-Guy  27:25

Well, I'm very pleased to say that you are wrong, which puts the score at one:one, AB are second at 43. C1 the junior m anagers are 58. Semi skilled 22 and semi skilled or state benefit unemployed. 24. Wow. So we got to a tiebreaker. There is a one bed ground floor garden flat for sale. How much is it for sale for I'll give you a few options.

Peter Meek  27:51

£295,000 

Expat Property-Guy  27:52

Now there is a man who has done his research in advance of the show. Ha ha... I didn't even need to give you multiple choice! Two- one you win. So thank you so much for your time. It's been great talking to you. And I look forward to catching up with your story as it progresses.

Peter Meek  28:09

Thanks for the time

Expat Property-Guy  28:10

you're welcome. Well, that was another inspiring Expat Property Story. And I just want to pick out three things to think about. The first is how Peter and Joanna overcome each and every obstacle in their way. Stuck in the UK? No problem. Let's get some property education. Can't get a mortgage? No problem. Let's JV with others. Can't find a property? No problem. Let's target tired landlords. What a great example of seeing problems as opportunities in disguise. The second thing that stood out was their approach to joint ventures. First, they took the view that none of us are smarter than all of us. Secondly, they made sure that their JV agreement mitigated for every potential scenario, and then took it to a solicitor to get it drawn up. And finally, Peter said that JVs are often more fun than working alone. And the third thing worth highlighting was the timely reminder to always keep some kind of a footprint in the UK, whether that be a property, a bank account, or even just your name on the electoral register. If in doubt, keep it. Join me next week when I have a guest who also subscribes to the view that none of us are smarter than all of us, and who also dipped her toes into the holiday let market. It's the second part of my interview with Vanessa Warwick of Property Tribes. Thank you for sticking around till the end. It takes a long time to produce these episodes. So please help me out by heading over to my website, www.expatpropertystory.com where you can rate review and subscribe to the show, or leave a voice message or a written message with ideas for future episodes. And of course, if you know someone who might be interested or inspired by Peter and Joanna's story, then share the show to spread the word you've been listening to extra Expat Property Story.