One of the toughest challenges I’ve faced over the last 12 months is trying to work out how I can scale my property business.
Purchases move slowly, renovations take time and the market is buoyant which makes finding deals very difficult.
This post is going to be a collection of my findings which I hope will help anyone who wants to scale their property business come up with ideas and appreciate the roadblocks that they’ll need to overcome.
First though I want to talk about the problems of scale within a property business.
Property: Problems of Scale
Property businesses fall into two general categories – buy, hold and rent out or buy and sell for profit (flip).
Fundamentally though both rely on getting deals at the correct purchase price in order to create value.
Most properties need to be bought at below market value (BMV) for profit to be made or money recycled out of the deal.
To scale you need to do more deals so you need more stock on the market.
Most investors will consider a buy to let a success if they get most of their money out of the deal and can clear £200-£250 a month in rental income once the mortgage has been paid.
If you want to scale to a six figure property business at £250 profit per month per property you’d need 34 properties in your portfolio. To scale to seven figures a year you’d need 334.
Most flippers will want a £10k-£20k margin on the other end to even consider doing a deal. To make six figures you’ll need to do 5 properties a year and to make seven figures you’d need to do 50.
Even if you could find the amount of properties required the logistics of putting a team in place which could renovate those numbers per year would be a nightmare.
NB: before you jump the gun criticising these numbers I know people are out there doing high end flips and using other strategies to scale but give me a chance… that’s the whole point of this post.
I’d be impressed if any buy and hold investor could get to 334 properties inside 10 years. I’d be even more impressed if anyone doing flips could do 50 a year (stock would make this close to impossible).
Bottom line… there isn’t enough stock or reliable trades to just scale using a regular strategy.
Scaling Up A Property Business: What Are The Options?
The following are five realistic ways you can scale your property business quickly – not all are appealing but nonetheless they should help you start thinking about building your business quickly:
#1 Sacrifice Yield / ROI
If you want to build a big portfolio quickly then you could do so buying more expensive properties and sacrificing the return on your cash invested.
Paying more per property will increase the stock available to you but on the back end of the deal you’ll make less money and ironically you’ll need to do more deals overall to get your target returns.
Regardless of whether I’m buying stocks and shares or property – or pretty much anything for that matter – I want what I’m buying to offer value. By that I mean I want to be paying a price which is lower than the true value of the asset.
Scaling by paying more per property starts to eliminate value and gives you less margin for error.
If you’re flipping and you hit unexpected costs profit an evaporate from a deal and if you’re buying and holding you have to leave more money in and not only need more money to keep buying but also have less margin in your deals meaning less tolerance for rising interest rates.
Neither appeal.
#2 Buy Higher End Properties
In general buying higher end properties means you’ll sacrifice yield BUT that’s not always the case or sacrifices can be very minimal.
When I wrote about good rental yields I showed some numbers on a serviced accommodation unit we’re into for £211,000 that yields at 8.25% unencumbered. Financing this deal on a 25% LTV mortgage would mean we’d increase our yield to somewhere around 20.91% on £52,750 cash left in. That would cash flow a profit of about £920 per month.
You might need 3 vanilla buy to lets to get £920 coming in so by buying a higher end property using a different rental strategy we got a 3 in 1 type scenario.
Less effort actually went into the renovation process on this place as it was bought off plan so it was a real scaling up win.
You do need to look beyond a standard buy to let strategy with higher purchase prices. Renting out at nightly not monthly rates is nothing new but in the right locations it can really help you scale up.
#3 High End Flips
The majority of property investors doing flips are working within a a price range of £75,000-£200,000. The name of the game here is to get hold of the property as cheaply as possible, do a budget refurb and get the property back on the market so that the sale price covers your costs and leaves you with a decent chunk of profit – often in the £10,000-£30,000 range.
High end flips are different only in that the initial purchase price of the property is higher and the standard of finish you’re aiming for is much higher as well. The aim here is to capitalise on the top quality finish and materials used during the refurb to really make the house stand out and push the margin on your deal.
It works best in locations where money flows (think London and the South of England). You’ll often be looking to break the ceiling price in a particular street or area so the product you need to bring to market has to represent that.
The theory here is that whilst your costs on materials go up the cost of your trades remains the same and by creating appeal beyond the norm with your finished property you can really push the achievable sale price.
Check out an example of what I’m talking about in this YouTube video from Tej Singh:
#4 Title Splitting & Blocks Of Flats
Title splitting is the process in which you buy a building which contains several units (sometimes both residential and commercial) on a single freehold and you split them up into leasehold properties and refinance them separately.
Often by doing this the cumulative final valuations on the properties as separate entities will equal more than the purchase price on the original freehold deal. If the deal works out really well you can potentially remortgage and leave very little money in the deal thanks to the separate revaluations.
This is a complex process but it’s a powerful one as it can allow you to add multiple properties to your portfolio in one go. It’s too complex to get into the nitty gritty of in this post but if it sounds interesting to you I suggest you buy Grow Your Property Wealth Title Splitting by Azid Gungah – it’ll give you a good starting point on exactly how the process works.
NB: I’m working on a deal like this right now – if it comes off I’ll do a full breakdown post on the exact process and numbers involved.
#5 Increase Your Leverage
Anyone that follows Smart Investor and has looked into my portfolio will know that all the property I own inside my property investment company is unencumbered (debt free).
That’s unusual – you’ll find most property investors have a loan to value (LTV) ratio across their entire portfolio which is heavily weighted towards more loan than value.
A 75% loan and 25% value ratio isn’t uncommon with some investors more heavily leveraged than that.
The reason to leverage is it allows you to buy more properties, benefit from more capital appreciation and make more money each month.
For example…
- Investor A owns an unencumbered £100k apartment that rents out for £600 per month.
- Investor B owns four apartments with a LTV of 75/25 (£300k in loans / £100 in value). They rent out for £600 each per month (£2,400 total) but each have a mortgage payment of £200 per month (£800 total) for a total monthly profit of £1,600.
If the property market rises 10% investor A’s property is now worth £110k (£10k uplift). Investor B has four properties now worth £110k (£40k uplift).
As the example points out the more leverage you have the more properties you can buy and hence the more scale you can achieve.
Obviously risk is associated with increased debt but there’s no denying leverage is a solid strategy to produce or increase scale in any property business.
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