Delivering High Yielding Quality Investments.
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Delivering High Yielding Quality Investments.
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Using Property to Achieve investment goals - Chapter 2Outcomes for Property – What Do You Want to Achieve?Let's stop talking about property for the moment and turn the attention to you. What do you want to achieve and why? When entering any business or venture, it is of course worthwhile to set out a plan for what you would like to achieve and when you would like to achieve it. Property investment is no different in this respect. Working backwards, setting out a clear objective (or set of objectives) that you would like to achieve from property investment will be useful for the following reasons:
There are a huge variety of reasons investors cite for starting with property investment. From the investors I have known and worked with, typical reasons have been: 1 To provide a passive income to supplement current income streams2 (i.e. wages). 2 To provide a passive income to replace current income streams. 3 To provide an income stream in retirement. 4 To provide capital to draw on in retirement. 5 To speculate on potential capital growth to provide a short term cash flow. 6 As a tax-efficient shelter for savings. 7 As a tax-efficient shelter against income. 8 To exploit low interest rates or favourable currency rates between locations. 9 As security to provide a home in times of uncertainty in resident country. 10 To provide an asset which can be passed-on to future generations. Understandably, all the motivations are for financial reward or security in some regard. It still surprises me that potential investors very rarely make mention of the core of the business that they are about to enter, namely the provision of housing for people or premises for business. Of course it would sound just a little unbelievable if an investor said: "Yeah, I am getting into property so I can give people a decent roof over their heads" But perhaps it is by doing exactly this, and doing it better than anyone else, that the real financial rewards come. More of this in Chapter 5. 2 The 'Rich Dad Poor Dad' series explain this concept well: www.richdad.com Taking the reasons for investment further, we can examine the effects this will have on your likely investment strategy. In graphical form: 
And making some attempt to position each of the motivations on the chart: 
1- To provide a passive income to supplement current income streams3 (i.e. wages). 2- To provide a passive income to replace current income streams. 3- To provide an income stream in retirement. 3 The 'Rich Dad Poor Dad' series explain this concept well: http://www.richdad.com/ 4- To provide capital to draw on in retirement. 5- To speculate on potential capital growth to provide a short term cash flow. 6- As a tax-efficient shelter for savings. 7- As a tax-efficient shelter against income. 8- To exploit low interest rates or favourable currency rates between locations. 9- As security to provide a home in times of uncertainty in resident country. 10- To provide an asset which can be passed-on to future generations. Where do you think you fit best on the chart? Which number or combinations of numbers best describes your investment motivation? Most investors should be able to identify with one if not more of the investment motivations listed. So far, so good. We have an understanding of our motivations to invest and some thoughts about the yields sought, the time taken to gain a return on our investment and the associated risk. Most of you would already have this worked out in some form or another, perhaps this just introduces you to a new way of expressing your intent. However, it is very surprising to me how few investors have got an overall plan for how they will meet this intent, in real terms. So, What does a Plan Look Like?Business Plan writing software is abundant and is extremely good at producing plans running to at least 100 pages, with graphs, that will bamboozle any Bank Manager. For some, producing a long and detailed plan may fit with how they approach the business and the individual investments. Everything is captured and, hopefully, uncertainty modelled sufficiently. Such a plan would include items such as:
And so the list goes on. Perhaps this is why people don't tend to set out a plan for what they want to achieve. Beyond the need to set out a plan for the purposes of finance, I would argue that if a business aim and strategy can be captured and distilled down as short as possible then a plan which satisfies this can be correspondingly short, and certainly less than than a whole page. Back in November 2002, it become clear to me that we had the opportunity to become full-time property investors and give up full-time employment (so I am a reason 2 from the list). We had built up a small portfolio of property and had it under successful management and seemed to have the skills and discipline to run the businesses efficiently. It was time to scale the operation. At the time, I had in the following overall concept in mind: Aim: To create a passive income stream through property sufficient to service our lifestyle. Strategy: Purchase property that achieves 12% rental yield, or more4.Based on the above, I arrived at the following plan (I still have it, on a small scrap of paper in my desk): Monthly Income Stream Required: £4,500 pcm Number of Properties Required: 30 Net Income Per Property: £150 pcm Typical Property: 1-bed for £30,000 (perhaps with some work to do in better areas) Finance: 80% Loan-to-Value Target Date: Nov 2006There were a few sketches on my plan, which I am embarrassed to share, but other than that the above captures what focused our activity for the next 3 years. It may seem over-simplistic but the plan captured exactly which properties we should search for, how we should finance them and gave feedback on when we had reached our objective. The plan also highlighted to me the need to generate around £180,000 (plus costs) in cash over the 3 year project to finance the purchases. This was a huge sum of money to us then, around 3 years wages! It really focused our efforts and highlighted the need to keep working for this period (and save, save, save!), buy, develop and sell some properties and flip some properties "off plan" to raise the finance required over the 3 year project. Some flexibility was required on our part towards then end of the project as purchasing 1-bed property for £30k become increasingly difficult but other than that we stuck to the plan and achieved it a few months earlier than the target. Keeping my aim and plan very short and pithy enabled me to take the plan everywhere in my head and even in my sleep for the 3 years on which it was executed. It was possible to judge every action undertaken in those 3 years very easily against the plan and how it contributed to it. Now, let's be honest, I kept the plan in 2002 short because I was lazy. I was very lucky 4 Why 12%? See Chapter 4 I did though as it provided a constant focus that a 100-page multimedia epic business plan would have failed to do. Of course, for some the more comprehensive plan on paper will be the way forward as by going through the process confidence and knowledge of the plan is built. Activity 2 Think about what sort of investor you are and what your investment aim and strategy should be. Make a plan (as long as you like!) to include:
If you want to get the most from this book, it is wise to do this activity even if only in a very draft form before proceeding. You can then develop the plan as you read the rest of this book and refer to it in the future. Next Chapter - The Location Hunter |
Chapters
Introduction Chapter 1 - Why Property? Chapter 2 - Outcomes for Property – What Do You Want to Achieve? Chapter 3 - The Location Hunter Chapter 4 – Purchasing Well – Evaluating and Securing an Investment Chapter 5 – What to Buy and From Whom Chapter 6 – People Not Bricks – The Secret to Success Chapter 7 – The Management of Risks Chapter 8 – You are a CEO Chapter 9 – Finance and Currency - Getting bang for your buck Chapter 10 – Location, Timing, Location – Bringing it all together Chapter 11 – Selling Your Investment Appendix 1 – The German Property Market Appendix 2 – The UK Property Market Appendix 3 - The US Property Market Appendix 4 – About ProVenture Property |
