Risky Business: Managing Risk in UK Property (Part 2)

You're listening to expat proper story, a podcast in which I share my story to smooth the way for you to have your own. Hello there. Welcome to episode 102, the 2nd and final installment of our 2 parts special on risk, featuring the finest mines in UK Property. And for this episode to make sense, you really should go back to episode 101 to hit part 1, which featured Rob Dicks, Stewart Lawden, Michelle Cairns, Peter Meek, Dale Smith, Jerry Alexander, Helen Godbolded, John McDermott, Mike Stenhouse, Jim Demetrio, Bronwyn Vancom, Roman Akhtar, Ivankar, and Vanessa Warwick. I also talked about the 7 riskiest things my wife and I have done in our property story. And at the end of this show, we'll revisit these 7 deadly risks in the light of all the thoughts offered by my amazing guest from season 1. As a quick refresher from part 1, we established that risk often represents opportunity, a problem to be solved and intrinsically linked to reward. We learned that risk means different things to different people, and then we started to explore the idea that risk needs to be managed. Several contributors to the podcast talked about de risking. This is John Howard from episode 19. I use the word derisk more than risk, and every every development I look at, I look into derisk it before I buy it. And when I say derisk it, I'm looking to know what it's gonna cost me to put right, what are the challenges, what are the problems, derisking each problem if I can, and then look at the very worst scenario. What is it if I can't sell them? Can I rent them? What can I rent them for? So by the time I bought it, I'm pretty relaxed. risk is relevant relative, sorry, to everyone. So for me, I don't wanna be taking big risks because I don't wanna lose what I've got. So I'm cautious. I'm always being relatively cautious, surprisingly. People might be surprised in that. But when I was 2021, 22, 23, and the same with some of these first time developers, they don't understand risk. So they don't think they're taking risks. but in my my opinion, quite often, they are because they haven't got the knowledge to know any different. And that's where your consultants and everyone comes in. I did a seminar 2 of years ago in Manchester, and, this guy, he said to me, oh, I couldn't do what you do. the risks you take, John, I couldn't do what you do. And I said, what do you do? He said, well, I build one off houses. Alright. Okay. So what sort of level? Well, between sort of 3a half and 5,000,000 each. Now to me, a far bigger risk but he's in Manchester deals with footballers, you know, and he doesn't see that as a risk at all. He thinks what I do is a risk. So risk is all relative. So what's the riskiest thing you have done then, John? It all depends if you've got a personal guarantee on it or not, doesn't it? You take the wine rack. So the wine rack and Ipswich, £26,000,000 to to develop it, risky from the point of view, 150 flats, risky from the point of view, as my wife said, you don't wanna get this one wrong darling. I can see it from Marks and Spencer because it's so high. 18 store is high. So you got personal risk and personal humiliation if it goes wrong. and then you've got financial risk. From a financial risk point of view, we borrowed the money of homes England, which is the government bank basic. So I didn't sign any personal guarantees on that. Although we're we're in for a lot of money, we borrowed the 20 minute grid. I wasn't in for any personal guarantees, and and it's worked out fine. So some people would look at that as a personal risk if it all went wrong. It would be embarrassing for me if I'm in position as well as I'm relatively well known in Ipswich because of my local town. but for a financial risk, there wasn't much risk written. You can get another project, which doesn't appear to be risky, but you've got a personal guarantee on it. and I'd be more concerned sometimes about those than I would about others. But at the level I'm at, I never do a development where I couldn't write a check out for the personal guarantee if there was a problem. and I think that's probably a good policy. I mean, god forbid, I've ever had to sign a personal guarantee, but You know, he never say never, and he must never be complacent. For Rod Turner, host of the broadcast podcast, having a skill set in a particular area is another way to derisk. Developing is massively risk. And I think far too many people go into it thinking it's, it's a quick way to add value and and and that the reality is, the the majority of people in property that go past the developers is hugely, hugely risky. There's just so many things that are out of your control in development. And so what you're always trying to do is mitigate everything to make sure that you can control it as much as as as it can be. For example, you're seeing kind of like labor costs and and material costs rocketing up. How can you mitigate that? Okay. Can you get kind of fixed prices in? But again, that's that's only gonna mitigate it to a point you've got all other other sorts of issues. So I do absolutely think that developing is always risky. Now is it more risky than not now? In the short term, probably, yes, because you've got a lot of costs that are going up. and you can never guarantee your revenues are gonna kind of go up proportionally to that. However, in the long term, if you're developing depends on what you're developing under. If you are a build to rent firm that actually is looking at things from start to finish being a 7 year term to kind of find a site get the planning on it, get it out of the ground and get it built, and then they're gonna hang on to it for another, I don't know, 40 year term. then, actually, it's only gonna be risky if they're leveraging it up and and trying to do that because really what they're focused on is that fixed income element and the total returns over that, I mean, 47 years or however long they expect to hold it for. But if you're looking at more of a trading model, then, yeah, it probably is a bit risky, but, like we say, with the risk comes opportunity and because there might be less people willing to do it, you might get better deals and you might get fines to things cheaper. And actually, there could be a bit more margin of it. So certainly not for the faint hearted. But if you can get it right, you can get big rewards. I think it goes back to what you're good at, what your capabilities are. rightly or wrongly, I like to think I'm I'm fairly capable in that, in that area. And and if you can spot something where actually you can control those risk factors to a point, then that derisks it. And if you if you've got a skill set that's good at it, then, actually, that's helping to derisk it. if you get some random bloke down the pub to, to do a development, it might not go very well. But if you get someone who's got the experience and has proven they've done it, then it might go better. This advice rings especially true for auction specialist Jay Howard, who is smart enough to recognize that development This advice rings especially true for auction specialist Jay Howard, who is smart enough to recognize that development is not for him. I'm anti developing because I'm not a developer. The risk involved in attempting to do a development without having the necessary skills, or even if you bought in a main contractor and you bought in a project manager and you bought in all this stuff, I would be so woefully unprepared and lacking in knowledge as to how to run that whole thing that I stay away from it. That and the risk of development. Wow. I mean, talk about you buy an asset that has a value. Then you're looking at what, 18 to 24 months, you know, depending on size of development, if you're lucky, you then you bought here at this price and you're trying to exit here at this price unless you're gonna refinance more, do a build to rent scheme. Right? But the moment you start working on that building, the value of that building plummets, and you're still plowing money into it, does this make sense to people? This is like a reasonable thing to do. You're nuts. I know I found a big hole in the ground. Let me take all of my money and pour it in there, not knowing what's gonna come the other end. Yeah. And also you're the last to get paid, aren't you? Well, yeah. Exactly. You know, maybe you're doing a 10 unit development. That last 1 or 2 units, that's your profit if you're lucky. Right? And even then you're taxed to high heaven and you've got 106s and you've got seals and you've got, Merrill levies or, you know, depending on where you've got all of this garbage. There are people that understand it. They know how to navigate it. They know how to make it profit. Hands up. Fantastic, grateful. I'm saying with people who can do HMOs. I have so much respect for people that can do that because I'm crippling kind of I just couldn't I can't bring myself to it. This very much sounds like an argument against the buy refurbished refinance strategy that has been a popular way to add value to a property while at the same time recycling your cash. But friend of the podcast, Richard Brown, had words of reassurance. If you're trying to project end values, it becomes less certain the longer you're projecting out for. So the good news with a BRR strategy is that the timeline isn't that far out usually. You know, you've usually finished your projects around pains what you're doing, obviously. Yeah. Some people say it can be done in 2 weeks, but that's not usually true. You know, it's 3 6 9 months. then you're getting the value around to have a look at what you've done sometime shortly after that. So shortly after the 3, 6, 9 months, if it's more development, it could be up to 2 years out, possibly longer depending on what the kind of development you're doing. So a 3, 6, 9 month projection of end value, if you're using sensible assumptions, you know, you should be okay. Run relatively speaking, and the market's not gonna fall off a cliff in that time. you might start to see a downturn if it goes if it starts going, but usually won't fall off a cliff in 3, 6. 9 months is starting to get close. If you just think about the global financial crisis and what happened in 2008, 2009, prices didn't fall off a cliff. They they did go down gradually at, like, on a on a staircase over about an 18 month 2 year period. and, yes, there was a a drop of about 15% in 1 year. So guess what? Bacon that sort of contingency into your numbers and stress test it on a 10, 15% basis. What happens if if your value was 10 or 15% lower than today's values, that would be one of the safeguards, I'd recommend you do on a PRM. The further out you're trying to project, the riskier it gets. Now it could go with you. And, again, I'll tell you stories where I turn a 100 k to 150 k in 15 months or something. But, you know, often the tide has been with me. the wind has been behind me. And, you know, the market in general has lifted. It wasn't necessarily a magic formula that I did. Possibly not. But the opposite could also be true. So if you're projecting out 15, 18, 24 months or longer, it's less precise, and you'll need more of a contingency. to cover that potential risk. And that's why development's such a risk. You know, you can literally get caught in the middle of your development or towards the end of your development, And as a recession or a property price correction, just at the time you're bringing your units to the market to sell, whether it's a flip or whether it's a development project, Whether it's on you're gonna refinance and keep, you gotta get a value around and the valuers, particularly if they're acting for a lender, they don't wanna get sued. so last thing they want, they don't wanna get sued by a lender, so they're cautious. And so even if you think the price should be 20 k more, because that's what the street price is telling you. A value is likely to be cautious. And, that's where you get this sort of disappointing valuation or down valuation as it's called. the market might actually be real, you know, that might be the real situation at the time. Another way to derisk property investment is not to be too quick to give up the day job. Stephen Pardo from episode 11 still had a business importing stone to the UK when he started his property story. We still had the stone business running at that point in England. So that derisked it a little bit because we could we could do some stuff in property without losing our income, if that made sense. There was already income from outside of property. While nearly all guests answered my question from an investor's point of view, 2 contributors looked at it from different perspectives. Here is my favorite expat mortgage broker, Simon Allen, from episodes 15 16. There's risk from my perspective, and there's risk from the lender's perspective. from my perspective, it's making sure that my clients meet the lender's criteria. From a lender's point of view, it's that as well, but also ensuring that the type of business that we're dealing with, the the potential of that client also fits in with their criteria. and and their future strategy. To to to me, risk is you want if you're putting your hard earned money into an investment, because that's what a buy to let is it's an investment that you could put money in stocks and shares, and there could be a stock market crash tomorrow, and you or your money. You could put all your money into property. You could still have a 4 in those values. and the property is cyclical. So I would say a risk from a buy to let perspective. So from an investor's perspective, is making sure that you'll get your capital back and making sure that you'll get a good return on it for the amount of time and effort that you're putting in because a lot of time and effort is incostable. what I mean by that is, you know, you're dealing with a managing agent. You can delegate what you can't abdicate, especially with HMOs, you still need to be aware of all the legislation. What you don't want is somebody falling down the stairs. Somebody put in a deep fat fryer on room, that kind of thing. So to risk, it covers the finance, it covers the property, but I would say making sure that you get your capital back and you get a return on your money. And Stuart Ball from episode 2 also looked at it from a different angle. It's losing losing your money on something, but I don't think it's as simple as that. I think it could be much broader. You can have you mentioned tenants a minute ago, you know, if you've you're not giving a good product, there's risk in that. Yes. There's an element that's the monetary side of things, but you're also providing somebody's home. We started this compilation with the first guest to be asked this signature question, so I guess we should end with the last person I asked. who was Adam Lawrence in episode 89. It's the single most important thing to understand in any investment, right, because ultimately you have to look at upside versus downside. In order to do well, you want to be taking you have small downside risks and have large upside risks. So if you go and buy a brand new car or a brand new off plan flat, right, from a developer in any sort of jurisdiction, not gonna pick on anywhere in particular, but I've got a few places in mind at the moment. And you've gotta pay 10% a year for 10 years to see the thing built or whatever. there's a gigantic amount of risk involved in all of that. So much stuff outside of your control. If you buy a bit of a beaten up house at what looks like a reasonable auction style price in an area where value can be added where things are gonna grow, and you pay a 100 k for it, let's say, Worst case scenario, you might have to liquidate it and sell it for 90. So, you know, you've risked£10,000. Best case scenario, You do a 30 grand refurb. It's worth a 140. It rents for£800 a month. You keep it for 25 years. And by the end of that obvious it's worth 350 k, and you've you've made such a good return on your money throughout that period. So it's really our focus on the downside of what you're really putting at risk rather than the actual number of the investment it would be riskier to buy £20,000 worth of cryptocurrency, especially if it was not one of the established coins than it would to buy that 100 k house. The fundamental starting point for investing is understanding your appetite for risk. And I think it's fair to say that the most successful people in property have a larger appetite for it. That doesn't mean you have to throw caution to the wind, but you need to be comfortable with the worst thing that can happen. And as Peter Meek said, If you don't risk anything, you risk everything. There's a direct relationship between risk and reward. The higher the risk, the higher the reward. Or maybe it would be better to say the higher the perceived risk, the higher the reward, which brings us on to risk management. The more you can manage risk, mitigate for it, and control it, the lower that risk becomes. There are lots of different resources to manage risk. education, skill set, knowledge, experience, network, or leveraging the education, skill sets, knowledge, etcetera, of those around you. And your risk appetite can and will change over time. For most people, this means that the older you get, the more you should have to lose. and the lower your appetite for risk. But for some people, their risk appetite may increase over time as their capacity for risk increases. They may have more money, knowledge, experience, and contacts, etcetera, as they get older, which therefore increases their appetite for risk. And your appetite for risk will need to adjust to the appetites of those you're working with. And risk diversity is also a factor. If the majority of your investments are low risk, then it's okay to take a punt on a small percentage of your portfolio. And risk is not the only factor. People often forget the importance of time and effort. In a recent episode, Sam Lownie explained how he's happy to set a slightly more competitive rent than the competition. while still providing best in class in terms of quality of accommodation in the knowledge that the avoidance of voids will give him more time to look for future income producing opportunities. And if you don't have the time, knowledge, or appetite to manage that risk, then maybe you're better investing in those that you know, like, and trust to do it for you. And risk can take many different forms. It could be with financing or tenants or planning permission, structural issues, location, future employment prospects, transport plans, regeneration or legislation, etcetera, etcetera, etcetera. I could go on, but you get the idea. The key thing is you still need to manage the risk you take on and get good at knowing which risks can be managed and which risks can't. And you have to do your research whether that be on the people you're working with or the areas you're investing in. And by doing so, you can make calculated risks. which is a theme that emerged from many of our guests. In the first part of these special episodes on risk, I promised to explain the thinking behind the 7 deadly risks I identified from our own expat property story. So here it goes. 1 when we'd almost finished paying off our mortgage for our first time in London, we refinanced taking out 55 percent of the equity that had built up in order to finance our portfolio. More than one guest alluded to the fact that by doing nothing and risking nothing, you're risking everything. By leaving your equity tied up in your family home, you're not putting your money to work. And while it definitely felt a little scary when we first made the decision to release equity from the family home, it feels like a no brainer now. Although I'm glad we kept the loan to value at 55% and not higher. 2 Before that, in 2015, we bought a 1 Bed Apartment in a new development off plan for £400,000 here in Hong Kong. 2 Before that, in 2015, we bought a 1 Bed Apartment in a new development off plan for £400,000 here in Hong Kong. 3. The first person we chose to source project manager, run our first HMO in Nottingham, was someone we never met in person until halfway through the refurb. I've talked before about the influence Annie Duke's book thinking in Betts had on me, and in particular, the idea that we often judge a decision based on its result in retrospect, Well, number 3 turned out really well for us, and this person is someone we've gone on to work with on many projects, but it could just have easily gone wrong. He came recommended by someone in the public domain. And although we checked out his references, at the end of the day, they were his references, and yes, we had Zoom calls with him and relied on our gut instinct and checked him out on company's house and on page 100 of Google, etcetera. So we did everything we could except physically meet him. And if you're investing from thousands of miles away and you've done as much as you can in the circumstances, Then at a certain point, you've just got to take that leap of faith, but there's no getting away from the fact that number 3 was probably our riskiest decision. But the one that's arguably been our best one based on results, not the decision itself, if you're still with me. 4 Of the 10 properties we've bought so far, the only one we physically saw and visited prior to purchase was our original principal residence before we moved to Hong Kong. Again, very risky on paper, but we've done our due diligence on both the people involved and the areas involved. And as expats on the other side of the world, you have to work with someone. And as I said earlier, if you're comfortable with the worst case scenario, then you do the deal. And if you're not, you don't. 5. We exchanged contracts on the last two properties we bought before even sending someone around to view them. on our behalf. For this one, we trusted the source of the deals who was someone within our network in terms of the information he was providing us with. We did our due diligence on the company selling the properties, and the nature of this company was such that we had confidence in the properties themselves because the company's policy was to do bank level due diligence on the areas the properties were situated in and to bring the properties up to an EPC level of C. 6, with those same two properties, which were bought under auction conditions, We exchanged contracts without having the legal pack reviewed by a solicitor. Although there was not enough time for a full and thorough review of the legal pack, We did ask our solicitor if there was anything in the title that should stop us heading for exchange. And long time listeners will know that at this time, I was a member of the auction buyers club, which offered a certain level of support and expertise that gave us the confidence to proceed. I also ran the properties past our mortgage broker who raised some issues around mining searches, which we undertook and took out indemnity insurance on the other potentially risky issues. But the main point here is that the risky nature of these two deals was factored into the price. In other words, because the vendor wanted speed and certainty, we were able to get the properties at such a discount that all the what ifs were accounted for and mitigated by the fact that we could probably put them into auction a month later and at least get our money back. We arranged private finance for those 2 deals within the standard 20 business days available between exchange and completion when buying under auction conditions. risking the loss of our 10 percent deposits had the finance not come through in time. This last one was also quite risky, but we had bridging lined up as our fallback position and the investors were people we'd known for a long time. If they had let us down, things would have been more complicated and challenging for sure, but we took a calculated risk. Going forwards, we will do things the other way around in that we will arrange private finance in advance and then go looking for the deals. For a fuller and more technical explanation of risk in investment terms, you might want to check out the final episode that's number 29 of the tax season featuring friend of the podcast, Sean the property tax accountant, which goes by the title of risk management. One final thought. I always find it surprising when you hear people say things like, you don't want to invest in property. It's way too risky, especially these days. These are the people who do nothing with their money and let it lose value in the bank. And as the tagline on our website says, it's no longer enough to work for your money. Your money must work for you. So that just about wraps up these special episodes on risk. I'd love to hear what you think of these episodes. So drop me a line by the podcast website www.expappropertystory.com and tell us what you think. For today's exotic listener location, because we're talking about risk, I thought it would be appropriate to look for a listener from a country that ranks highly in the 2023 most dangerous countries in the world, according to world population review dot com. And the one I chose is Russia. which apparently is more dangerous than Ukraine, believe it or not. So if you're our risk taker in Russia, get in touch and tell us about your expat property story at the podcast website, and perhaps leave us a review. It really does help us reach more people, which means we can attract more great guests And the other thing I would of course urge you to do is to share the show to spread the word. You've been listening to Expat Property Story