This was a question I was asked at a recent workshop I ran. Today I shall share some headline methods of how I go about de-risking my property portfolio and winder investment portfolio to some extent. As you will detect, the approach may evolve as your property portfolio also evolves, so it is something of a flexible approach I have found at least.
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Look at the 16 different methods that I use to de-risk my property portfolio and consider which ones you are applying in your own. Make a plan to adopt one or two missing ones, particularly the top three mentioned at the end of this episode as essentials.
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Transcription of the show
Hello and welcome to another episode of The Property Voice podcast. My name is Richard Brown and, as always, it’s a pleasure to have you join me on the show again today.
‘How would you de-risk your property portfolio?’
This was a question I was asked by Anthony at a recent workshop I ran. Today I shall share some headline methods of how I go about de-risking my property portfolio and winder investment portfolio to some extent. As you will detect, the approach may evolve as your property portfolio also evolves, so it is something of a flexible approach I have found at least.
Let’s dive right in and deal with that question right now.
- Know what you are looking for – have a clear plan, strategy and deal criteria. These should all be written down. If you don’t have my simple business plan template yet then drop me a line and I also have a couple of standard deal criteria checklist examples that you can adapt for your own purposes too.
- Plug your gaps – know what your gaps are: typically, one or more of time, knowhow or money and then go and plug these. I know what you might be thinking…if I have no time or money, then how can I plug these gaps and then how will it reduce the risk in my portfolio? Well, let me illustrate with a couple of examples. With a lack of money, we may be tempted to work in a property field providing investor services, such as becoming a deal sourcer or by handling property that we do not own, such as a rent-to-rent strategy. But, what if new legislation made it illegal to be a deal sourcer or enter into rent-to-rent contracts? The best way to protect yourself in this situation is to transfer your income into assets as you go to help plug the gap of being reliant on a single income stream remaining open to you. This is part of the reason why I have added one or two additional strategies to my portfolio as I have progressed. With time, I am protecting myself by developing passive income and recurring income streams rather than repeating effort-related income streams. With a knowledge gap, such as not being an expert on the structural aspects of a building, I adopt an extra set of eyes approach and having someone else look at the property that does have this skillset. Their professional or expert views therefore helps to protect me from being exposed by my own lack of knowledge. Of course, I could get myself educated in this area but I would rather upskill in other areas and leverage the experts that become a master of this particular area.
- Asset allocation – asset allocation is the sensible spread of investment across different asset classes. However, if you have £10,000 and a desire to grow your wealth in the short-to-medium term, then does it really make sense to spread this across property, stocks and shares, bonds, precious metals and other alternative investments? If you did that you would have £2,000 in each asset class and certainly in property, £2,000 won’t take you very far. That said, I do have money spread across different asset classes and not just property. I was heavily concentrated in property to begin with, but as I have grown, I have also added to other asset classes as well, such that my current property assets represent around 60% of my total assets. Many would see this as still overly weighted in a single asset class, but as you will see shortly, I have hedged this to some extent also. In addition to asset allocation, I also allocate my investments by time scale and type of return. For example, I have investments that are better suited for the long-term and other more suited for the short-term. I also have some properties that are mainly capital growth plays, although not that many that exclusively rely on this and even the ones that do I am looking at debt pay down more so than riding house price growth. However, I always seek out property investments that generate an income, can service holding the property and some extra profit on top. I can then choose whether to spend the extra profit, reinvest it or paydown debt instead as I prefer and how it suits me at that moment. I am also not averse to selling property, although I will generally reinvest the proceeds into my property business.
- Diversification - geographically e.g. town / city / country and strategically BTL, Short-Term Rental, Trading, Development, Vendor Finance, etc.
- Avoid lender concentration – it’s tempting to go all in for a seemingly great deal, but it could also hold you to ransom on a day when you need some flexibility
- Interest rate protection – fix as long as is economic for a long-term buy and hold, or as short as is economic and safe to do so where you want to exit sooner
- Adequate due diligence & regular check backs – ask questions, be curious, do your own research and check back periodically to make sure all is OK. Remember, everyone has an agenda and their own motives for what they do
- Portfolio reviews – major portfolio review annually, sniff-test minor review on individual properties on major events such as tenant changeover or mortgage renewal date for individual properties
- Careful supplier & partner selection – make sure they are members of one of their recognised trade or industry bodies, check reviews & feedback, get sight of PI insurance where applicable
- Avoid over-leveraging – leveraging is a good thing, but too much can also prove fatal. I tend to use 75% mortgages initially and may even refinance to this level after adding value to a property. After that, I don’t typically refinance again and instead aim to pay down my debt. When growing quickly, average portfolio Loan to Value (LTV) will be quite high at say 65%+, but as we consolidate it will fall to around 50%+ to be comfortable. My current average LTV is 55% and so this gives me a buffer in case of a property crash.
- Contingency planning & buffer protection – plan on more time & money in all your projects, have at least 2 if not 3 alternative exits to your deal (e.g. sell, refinance, extend finance), have a contingency line in every project, allow for voids and maintenance in your rental evaluations, have a cash contingency fund set aside…’the boiler replacement rule’ & ‘the 10% rule’.
- Cashflow & equity safety margin – in virtually all of my property deals they wash their face and leave at least £200 a month for a single let or £500 a month for an HMO positive cashflow after allowing for ALL costs and provisions. Buy at a discount and add value to property as my certain ways to build in equity rather than speculate on capital growth…leaving equity in your property acts as a natural buffer in case of shocks.
- Knowledge - understand what you are getting into, remain current & keep one eye on the future. For example, I predict even greater regulation for smaller HMOs and serviced accommodation in major cities…make sure your properties are bought and developed with sustainability in mind.
- Insurance Protection – shit happens! So, sadly we have to prepare for that as well. I take out a premium landlord’s insurance policy that has these provisions included as a minimum on top of basic building insurance that covers fire, explosion & lightning, earthquake, theft, storm or flood, escape of water or oil and subsidence: public liability, landlord contents, accidental damage, riot and malicious damage and terrorism cover. You can also insure for loss of rent and legal protection. Personally, I self-insure for loss of rent by providing for and setting aside voids across my entire portfolio but some people prefer actual insurance instead.
- Keep a lid on transaction costs – we pay fees when we buy, sell and finance property…to many different people for many different reasons! By keeping our transaction volumes down, we also help to keep our fees leakage down and so improve the health and profitability of our portfolio. A profitable portfolio allows us to weather the odd storm that will inevitably come around every once in a while.
- Plan for tax – we have to pay tax and indeed if we are paying tax, then we should be doing something right! Aside from the new Section 24 mortgage relief restrictions, which could mean paying tax on a loss-making property or portfolio, paying tax usually means we have made a profit. So, plan to pay tax and set aside a sum of money to do this. An awful lot of people that go bankrupt do so because they can’t pay their taxes when they fall due. Tax is usually deferred into the future, long after the income has been received, so it is prudent to set the tax bill to one side to make sure you can pay it when it becomes due. This is the most basic form of tax protection possible. After that, by all means speak to a professional and reputable tax adviser and set up the tax structures that best suit your personal situation and plans. Personally, I now have a mixture of ownership structures that has evolved over the years and which mitigates my tax position in a legal and efficient way. I would suggest keeping things simple to begin with and then adapt as you grow and scale your property business. If you want a free training module on ownership & tax structures, Tony Gimple, a former guest on the show, has kindly put together such a thing exclusively for my audience. Drop me an email and I will share that with you if you would like to see it.
Right, so when I was initially asked the question, how do you de-risk your portfolio and supplied around 5-6 off the cuff comments, it seems that I have around 16 different ways in which I de-risk my portfolio!
If I could prioritise some of these, I would probably suggest that if we focus on these three, it will go a long way to protecting your downside risk:
- Due diligence, research & knowledge acquisition – ask questions, be curious, do your background checks and understand what you are getting into.
- Get some slack and buffer included in your numbers and don’t over-leverage, so that you can withstand a set-back or two that will inevitably crop up.
- Diversify across properties, geographies and arguably strategies as you grow and develop
I hope that rather long list is helpful to you. Keep in mind that I now have a diverse and complex portfolio now and so many of these risk protection strategies that I have arose as a direct result of that. If all you want is a simple BTL investment, then just focus on my top three tips at the end…perhaps adding in insurance protection and you should be good! However, as you grow and develop, you might find you may want to become more sophisticated in your approach.
As usual, email me firstname.lastname@example.org if you want to talk about anything from today’s show or more generally in property investing. As usual, the show notes will be over at the website www.thepropertyvoice.net
But for now, all I want to say is thank you very much for listening once again this week and until next time on The Property Voice Podcast…it’s ciao ciao.