The Apprentice Property Master
Getting Started in Property Investment
The state of manufacturing in this country has been in steady decline really since the Seventies. The trade unions gave employees the right to have power over their bosses. If something was not going quite to their liking, strike! Factories are really the only working environments where people congregate en masse to do their job. Consequently strike action means that large groups of people stop working. It was, therefore, inevitable that large factories were very inefficient as they had to constantly make up for lost time.
Smaller factories without powerful unions were not affected in the same way; they could be productive and competitive, as they were only really competing against other British companies. Our factory fell into this camp. The Seventies and Eighties were a time of boom for most small- to medium-sized companies (SMEs), but much depended on the people in charge and how they ran things. The Nineties were the time when things started to change. Large clothing retailers started to exploit the possibility of manufacturing goods offshore. Lead times had to be increased as the product came from farther away, but the cost saving mitigated the additional transportation costs.
For a certain period in the mid-Nineties, as a direct consequence of foreign imports, 1,000 companies per week were going to the wall. For a great many of these companies and their staff, this was all a sudden blow, but my father, it has to be said, saw the writing on the wall ten years earlier. Although he made noises to me even in the Eighties, it wasn’t until 1990 (when I joined the family firm as a man rather than a schoolboy needing pocket money to buy a Gibson Firebird) that he suggested I look for another way of making a living, as this type of industry would not be able to sustain a newcomer for too much longer.
I have to say, hearing that was a bit like spending your young life becoming skilled in petrochemicals only to be told on the day you qualify that the world’s oil will run out tomorrow. To start with I didn’t do anything. I just started work, becoming certified as a work and method study engineer and trying to get on with the task in hand. But of course in the back of my mind I knew full well that this was not forever. I also had to bear in mind that any financial investment into the factory would have to be minimal: what would be the point in refitting a ship you know will sink? But whatever I decided to do, it had to be something that I was capable of doing. I didn’t want to bite off more than I could chew.
Looking for an alternative career
I began to search for something else to go into. Sales was the obvious choice as I knew I was good at it, but with the whole world, as it appeared, in recession, companies were not really hiring. Consequently, it occurred to me that I would have to use my own endeavours to get ahead and not be reliant on picking up a salary offered by a northern firm. I began to look for openings: something I could do without having to retrain. I was at the disadvantage of not having gone to university, but when it came to starting your own business this didn’t matter. I kept reminding myself of all those stories about Henry Ford and Nelson Rockefeller who had both been expelled from school and left with no qualifications. I wasn’t looking to become the Henry Ford of Scunthorpe, maybe just the Nelson Rockefeller.
One thing I did notice was the price difference in property from London to the North.
Scunthorpe, in North Lincolnshire, had one-bedroom flats for sale for £8,500. I made some enquiries and found that they would let for between £50 and £60 per week.
‘Wow,’ I thought, ‘that’s your money back in three and a half years.’ I also thought that it would be something I could do while I still had a day job.
How hard could it be? Letting out properties then going round each place every Friday night after work to collect your rent. The only real problem was that I didn’t have any money to get started. I had a nice collection of electric guitars but no cash. So I did what any sensible son would have done, I went to my dad for help.
Now my dad is no fool, and the fact that I am his son cuts no ice with him either. If I had gone to him asking for financial help for an idiotic idea he would have told me to take a running jump. As it happens, I think he took the idea seriously as any money that I borrowed from him would be borrowed for the acquisition of real bricks and mortar, so if it all went wrong, there would at least be something tangible that could be used against any debt I incurred. So a deal was struck. I borrowed £30,000 in order to help finance the acquisition of four properties.
How and why?
Whilst researching, I had made some discoveries about the world of property rental in the north of England, and Scunthorpe in particular. As I have mentioned, a good rent for a one-bedroom flat was £50 per week. A two-bed does not command any more money as there is virtually no demand for it. Three-bedroom houses yield about £75 per week but cost almost three times as much to purchase. I went on the hunt for terraced houses that had been converted into two one-bedroom flats, upstairs and downstairs.
Buying a freehold property
Buying a house converted in this manner means that you have bought the freehold to the property, and thus can do anything you like within the boundary walls without seeking first the consent of the freeholder as the lease usually demands. Also you do not need to pay a service charge to anyone, or ground rent. (The service charge is having to pay £50 for the privilege of someone to cut your grass – then again they may not but you still have to pay. Ground rent is a nominal amount paid to the actual person or company that owns the land that the building sits on). As well as these advantages, there is the obvious geographical advantage that one trip in your car means that you will see two tenants, and it would be bloody bad luck if both of them were late with their rent. Finally, because these properties have already been converted into two flats, any new legislation that came into force meant that these houses would be exempt. It’s a bit like owning an old classic car that doesn’t have seat belts in the back – you don’t need to fit them retrospectively.
Borrowing money to get started
Unexpectedly, there were quite a few of said properties around. And I was surprised that these landlords actually wanted to sell (please remember I was still of the opinion that this job called ‘landlording’ needed nothing more than a spare Friday afternoon to pick up money by the sack load). I found four properties all on the market at a similar price. I wanted to split my money and buy them. That would mean borrowing more money from the bank. This was not difficult as I was putting down such a large deposit on each property the bank was happy to lend. At the time banks were still suffering from the recession and they were not lending as they should. Although the loans that I was taking out were for the purpose of acquiring property, they were not mortgages. Buy-to-let mortgages had not yet emerged so I had to borrow using a commercial loan. At the time I think I was able to get 1.5 per cent above base rate. Base rate then was double what it is today so my repayments were high but still afforded a good return for me.
The fact that I was my father’s son did not hurt. My dad was, and still is, very well respected in the town and has always conducted himself impeccably in business. They assumed I was a chip off the old block; they were right. Paying debts, and being a stand up guy, to me means a long life in business. If people know they can trust you, you have their confidence and this will ensure you can ask for help, and at the very least get a foot in the door. Unlike today, bank managers stayed at a branch for many years. They had the power to OK a deal without having to refer it to the branch’s head office; these people really did wield the rod of power. It made sense to stay on the bank manager’s good side for the obvious reasons, but also to keep him abreast of what you were doing in business did not hurt, in case you needed him in the future.
Integrity and trust in business are vital
Whilst on ‘The Apprentice’, I found myself in the boardroom on several occasions. To this day I am the only person to have appeared on that show and refused to say who should be nominated to be fired in the boardroom. I just thought it was not the right thing to do. Finger pointing and passing blame onto someone else is a sign of weakness, especially if you are in the position of leader. Furthermore, I was not doing the firing, so if I had nominated someone to be fired, and Sir Alan thought otherwise, there would obviously have been tension between the nominator and nominee the next day. It is not enough to say, ‘Well that is part of the show’. Make a decision, stick to it, and then take any resulting heat that arises from it like a man. Pick yourself up, and don’t do it again. If you get into the habit of looking to blame someone or something else, you will never learn from your mistakes and you will continue to make those same mistakes until your luck finally runs out.
To this day I am offered jobs by companies that have no idea what I am good at, simply on the strength of how I conducted myself on the show and my integrity, and the knowledge that they can trust me. If I don’t buckle under pressure in front of 4,000,000 viewers I can probably cope with most things.
So, I was on the hunt for these four houses all split into two flats each. Each house would yield £110 per week, as I had decided on £55 per week per flat as an appropriate rent. I had also decided that I would try and find properties with sitting tenants. That way I would be assured of a month’s rent from each place without the expense of advertising and before I had made my first payment to the bank.
There were certain criteria that I wanted to stick to regarding these properties I was about to buy.
- They had to all be the same, so all the rents could be justified at £55 per week. That was not only easier for the sums, but also I would become known for this type of property and be able to get savvy with this area of the market.
- They all had to be in the same part of town so I could get to them easily, preferably walking distance between each one.
- They all had to have a front and back garden, not coming off the public footpath straight to the front door.
- They all had to be in the worst part of town. No, you didn’t read that wrong. These properties that I was buying were cheap. Therefore I was not going to be able to let them to company directors that drove Jags.
Know your market
My market was the unemployed and people being paid weekly, and these people could only afford this part of town. Had I considered a better area, it would not have made financial sense. Property was so cheap that there was no reason for a person not to buy their own rather than rent. The only people who did rent were ones that were not in a position to buy, such as the unemployed, people with court convictions, those on benefits, and the transient job market where people would come to the town on a contract of a few months and then go. Hence, I knew what I was taking on – or I thought I did.
Back to the house hunt.
I found four houses that fitted all my personally-set criteria. I went round each one with the owner under the pretext that I was the insurance assessor. These properties, although being sold via an agent, were advertised without a board. He didn’t want the tenants leaving, afraid of getting a Rigsby-type landlord second time around (even though I always thought he was quite a good landlord, but a poor ladies’ man). Incidentally, these four properties were owned by the same person. I asked him why he wanted to sell, and he told me he was moving to Cyprus. These properties, as is so often the case, had been left to him by his parents in their will.
You can appreciate that if you approach someone about buying several properties in one transaction, it is more advantageous to the vendor to sell as many as possible to you in that one instant. This will firstly and obviously allow them to feel more secure about the deal, it also means that legal bills will be less and the whole legal process more simplified. Furthermore, the vendor is able to get a better deal from the agent. So be sure that you remember this and use it to your advantage when negotiating price.
I don’t really think the vendor was the type to own and run property, and as a consequence did not even think about leaving the properties to a letting agent while he was abroad. He just wanted shot of them. Knowing his desperation, coupled with the fact that my funds were already in place, I made him a lowish offer. This was not so low that he would have to order his beer as halves instead of pints on the beach of Ayia Napa, neither did I want to get a reputation in a small town of using an advantage and to hell with whomever it affects. Either way he declined my offer and asked only for the asking price. I told him that at asking price I could only afford three houses – which three would he let me have? He didn’t like the sound of this, obviously he didn’t want to be stuck with a single house whilst thinking about moving abroad, but I could also see that he didn’t know what to suggest, so I spoke for him: I demanded £2,000 off the asking price of the fourth house, and wanted to be able to start collecting the rent as of now. I would give him a goodwill deposit to show good faith and this would also enable him to start preparing for a life in the sun. Quite readily he accepted. I asked if he would mind if he introduced me to the tenants and he was happy to do so. He took me round all the properties and I told all the tenants that I quit my job as an insurance assessor and I was now a property landlord, and did anyone watch Rising Damp?
Getting off to a good start
That week I picked up £440 from tenants that were not mine living in houses that belonged to someone else. In addition, I didn‘t have to start paying any money back to the bank for still two months after that. All the money I was collecting was going into an account and building nicely. This was all money that I had not expected to have, of course, nor did I expect to get £2,000 off the asking price. A bit like my Christmas salesman, who saw me as a desperate soul, I also acknowledged it in my vendor and used it to my advantage. Coupled with that the fact that he was going to live a million miles away, I knew that any resentment he may have harboured toward me could not be made public all the way from sunny Cyprus.
When we finally exchanged and completed in the same week, I had almost forgotten that the properties had not been officially mine all that time. Things had gone really very well. One of the other provisos had been that the current owner would continue to maintain the properties until we exchanged, so I had no need to keep any money aside for repairs to the properties as this was not my responsibility. The only thing I had to worry about was that he may well have tried to defer doing repairs knowing that he would be out of pocket; fair enough – I would probably have done the same.
The next few weeks were fairly uneventful. The only thing I did was visit each property every Friday night and collect my rent. I would ask the tenants if everything was all right, and go.
I had no idea about the laws governing tenanted properties and got my basic tuition from the previous landlord. This was at a time when the laws governing tenanted properties did not carry the penalties that they do now if they are broken. I would not advocate that you enter into this field with the lack of knowledge that I had. I am by nature a blagger; you shouldn’t want to be.
Each tenant had a rent book, and that, in itself, was a contract, a six month tenancy that kept rolling on each month after the initial 6 month period. In each rent book was written details about what deposit was taken, and I would fill the book in when I picked up the rent for that week. The rent was always paid in cash and always paid on a Friday night. If the tenant was not going to be in, by prior agreement he would leave it in a drawer still in the rent book, I would let myself in, sign the book and leave. This is how the previous landlord did things and they suited me fine; I didn’t want to make life for the tenants difficult, so stuck with that system. The only possible flaw was that picking up the rent in cash and on a Friday night meant it could not be banked for three days, and the temptation was there to spend it over the weekend.
Keep on top of the maintenance
As a landlord, I actively encouraged tenants to report any problems with their properties as soon as they arose and tried to see to it that they were put right as soon as possible. This made sense to me, as a problem caught early enough meant that it stayed a small problem. If it wasn’t reported, it was likely to turn nasty. I am thinking here of a slight leak from the roof – reported early it may only involve slightly adjusting a roof tile. Left to its own devices, the leak could carry on, damp could develop, plaster ceilings could become waterlogged and instead of £30 and up a ladder for 20 minutes the job involves two sets of tradesmen, replastering walls, redecorating, new carpets and a bill for £1,500.
Here is a possible and not unrealistic scenario for you to be aware of. It illustrates how debilitating bills can be on the cash flow: a leaking roof goes undetected. Drops of water land on the first floor ceiling, which is made of plaster. That ceiling, as luck would have it, is the spare room so no one sees it. There is a damp smell in the house and the tenants give their notice. You finally trace the smell just as the ceiling falls in, water everywhere. That room’s carpet is ruined and there is a large hole in the ceiling. Furthermore, black soot and 30-year-old dust come falling in also. Before any redecorating can take place or indeed new carpet fitted, the roof needs fixing. Then the room needs to be dried out, about two weeks with heating on full blast. The ceiling re-boarded, then replastered, drying time about a week. Room then redecorated, then new underlay and new carpet after the floorboards have dried out. Then you can advertise that house for letting again. Total time spent on the project about two months, costs about £2,000 not including two months’ lost rent. Total time it could have taken: not long. Total amount it should have cost: not much.
Always understand that your properties are yours. You are not only responsible for ensuring that the tenants are happy enough to want to stay, but also for keeping on top of the maintenance. That way between tenants there is less to do, and thus less downtime; critical if you have a mortgage to consider. Repairs can be a killer financially. Very rarely would you be in a position to pay a plumber’s £100 call out charge then £30 per hour thereafter. It is precisely for this reason that landlords are in the habit of cutting corners. They do work themselves that should best be left to tradesmen.
Most landlords should easily be able to paint and decorate, unblock drains, fix leaking taps, change locks, garden, bleed radiators and that sort of thing. It is always best to stay away from electrics and gas, otherwise you could be causing more damage than you think. If you cock up the decorating it is nothing more than a little embarrassing, but if you cock up plumbing-in a gas fire that ends up having a blocked flue, you could end up in prison. That is why it is always important to make sure that any small jobs stay small and don’t escalate and that you acknowledge what you are capable of doing and what needs expert help.