It’s Summer 2022 and we’re in very uncertain, changing and challenging times (or so we are led to believe!)
Economically, if you know how to play the game, you understand economics, you understand markets and you understand strategic positions, these otherwise challenging times can be highly lucrative and you will have the opportunity to BOOM!
However, if you continue to do what you’ve always done or stand on the sidelines and bury your head in the sand, you’re going to have a tough ride and regrettably it’s quite likely we will see many casualties and some will unfortunately go BUST.
This report takes a look at how you can make the most of this current position as this will be the difference between the making and breaking of your business in the 12 to 18 months ahead.
Well, thankfully I’ve dedicated my entire adult like to business, entrepreneurship and economics (bit sad I know!) and have read pretty much every data report page by page, highlighted it, annotated it, analysed and scrutinized it and come up with the five highest value actions that you can take to capitalize in an uncertain market.
The contents of this report are based on the information available and current market conditions in June 2022.
1. Cash Down Assets Up
Cast Down, Assets Up is the art of capitalizing on inflation and making the most in a volatile market.
While everybody else’s money in their pocket is going down, their cost of living is going up and their standard of living reduces, how do we capitalize?
I HAVE REDUCED MY WORKING CAPITAL FROM 12 MONTHS TO 3 MONTHS
Assets are the number one way to offset inflation if you own assets, the price of things goes up but if you own cash, the price of things goes down so the first action is to reduce your cash holdings.
Look at Warren Buffet, arguably the best investor of all time, he has recently bought more stock in the last four weeks than he has done in the last two years! Granted he is also staying liquid looking for his next new elephant acquisition.
Like Bill Gates, I hold a minimum of 12 months working capital in the bank at any time so if all of my businesses were to be shut down for a year I can still pay all the salaries i.e. when lockdown was announced, I was able to reassure the team that for as long as possible I would not make anyone redundant and I would not reduce anyone’s hours, and instead used it as an opportunity to grow, not slow. This enabled us to expand and buy three other companies but now because we’re going into a period where holding cash is not ideal I’ve reduced the working capital in the bank. Consequently, my volume of liquid capital that is susceptible to devaluation from inflation is minimized.
It’s simple: reduce your working capital, and I’ve gone from 12 months to three months, and then every month you draw that money up to the financial fortress and reallocate that into assets.
So less cash, more assets.
High Net Worth Investor Funds
There are lots of people out there with lots of cash in the bank at the minute, but it’s going down in value, so there is an opportunity for you to start a high net worth investor fund where high net worth investors deposit their capital with you in one of two ways:
1.) Fixed rate return:
Put a 2-page brochure together with the fixed rate return details of their investment and assurances of a full repayment on time. Visualize how their money will grow with you instead of losing value if it was to stay in the bank and that it is less risky than investing in the S&P 500 or buying property.
2.) Joint Ventures:
Give your capital to fund someone else’s deal be it in a short term or long term development – equity play vs cash flow play. Everyone’s a winner!
Long Term hold Asset Acuisitions
This is about levelling up your thinking and taking your strategies to the next level. Here, you’re not looking for Hotels, HMO’s or service accommodation assets as these are cash flow strategies.
To play the game in the inflation market you can buy assets you’re happy to hold for the long term, can be top of the pyramid single asset properties or commercial properties, anything you can hold for the long term that will give you a modest return but a modest risk.
These asset based strategies are part of the medium to long term equity game you need to play in the inflation market.
THIRD-PARTY INFLATION-LINKED LEASES
Leases your assets out to someone else i.e. a house to a charity, a hostel, or a block of flats; a commercial building to a business or a third party operator who is happy to run it.
Instead of having 20 or 30 tenants in a building that you need to ensure gas bills, electricity bills etc are paid for you get one tenant and one lease payment. The third-party has the cash flow value but, by having that long term asset play, you have the asset value without the ongoing and increasing liabilities or operating overheads including energy costs.
INCREASE DEBT BACK ASSET HOLDINGS
During a period of inflation, you can use third party finance to acquire assets and increase your debt backed asset holdings. The cash flow may be strong or modest however the asset value will go up in a time of rising inflation and becomes the best repayment mortgage you can ever have.
For example if you buy a $1m property And you borrow 1 million to buy it if there is double digit inflation every year you have the property it could create 100,000 dollar worth of equity of funds you didn’t have as the assets are going up against capital you didn’t put in.
Leverage finance biases and let the market pay off the debt
Warning do however keep an eye on the LTV on your portfolio and ensure you have multiple lenders should there be any issues in the finance markets in the short to medium-term.
Success and failure are very predictable.
2. NICHES AND WAVES
How do you find six, seven, and eight-figure deals in a hot market?
You need to observe the masses do the opposite and look for the deals that everyone else is missing.
FROM THE TOP OF THE MARKET TO THE BOTTOM
In this current period of rising inflation you need to find opportunities that other people just don’t know about instead of competing with the masses
The top of the market is still very sexy and cool to be doing i.e. pension or studio apartments with high-end interior design but it could be a tough time at the top and may not be the best place to be when you find a position in the mass or the bottom of the market that is booming.
There are various niches that I invest in be it LHA charities social housing housing associations emergency accommodation or asylum seeker and it may be challenging as you do not need to develop relationships and know what you’re doing but in this climate it is far more lucrative than operating at the top of the market.
BUILD TO LEASE DEVELOPMENTS
Build to least developments are a game changer.
If you have a block of apartments or manage a number of HMO’s or private tenants one thing I’ve done is least these out to private companies serviced accommodation companies charities or housing associations to offset a number of the risks and rising costs.
In this period of uncertainty and volatility if you can ensure a five-year FRI index linked lease you can set and forget the assets with one tenant one lease payment with next to no operating over heads or cost.
PRIVATE SCHOOL SALE AND LEASEBACK
This is a new area I have begun to invest in but a very interesting and lucrative one.
In this position the operator may want to release capital due to the uncertainty of the market or it’s an ageing owner and they want to retire so they are selling the school building and operating company.
We tend to but the property in PropCo and then split OpCo off to a separate company and give them a 10 year lease on PropCo delivering both a lucrative trading business and a solid yield on our invested capital.
In many cases these are really nice buildings in nice areas where you can comfortably park your own capital, or an investor’s capital, on the back of a 10 year lease which could generate between 8% – 13% on the capital invested.
You do need to be experienced in the private education space for this one or partner with somebody who is.
E CLASS MA PD
New planning came in last year, E Class MA PD where you can buy an E Class site, in case office blocks, and using permitted development convert it into apartments.
I have a property where one half of the development is B1 – C3 which is now E Class MA PD so the existing building up to 1500 sq.m can be developed under Permitted Development into apartments. Across a variety of applications we hope to achieve 88 apartments on the site.
Another niche here is that if you buy a trading business centre, rather than an empty office block where you’ll pay over the odds for it as a development site, it will be valued on the commercial valuation which is against the lease income, particularly if it is owned by a pension fund or marketed by an unsophisticated agent.
Another new one is AB PD PN Airspace which allows you to develop a property upwards.
On top of an office block I’ve just bought, two stories will go on the first block and one story on the second. It will cost between 6m – 7m to build and finance but should be worth 10 – 10.5m when it’s finished.
This site was on the open market but nobody appeared to value the airspace or understood how to do it.
Observe the masses and do the opposite, success and failure are both ridiculously predictable.
3. MODELS AND MARGINS
Models & Margins
The cost of everything is going up so much so that the ONS is looking at restructuring the RPI Index to try and make it more targeted and transparent on where the inflation is because it’s not everywhere, i.e. service inflation (at the time of writing) is less than 4% while the price of fuel is 50-100%!
So how do you secure your margins when costs are increasing?
What you don’t do is spend the next year doing what you did last year because in most cases it is unlikely to work.
What you do is study the market listen to the blueprint we share and build a business that is highly strategic, highly lucrative and go out and catch the wave and get ahead of the masses to make your margins whilst the others run for the hills.
One way to protect your existing margins is through rent increases.
Make sure your commercial leases have rent reviews, ideally on the annual anniversary within the lease. You can’t just increase it regardless, you will need to get a surveyor out but it protects you from inflation.
If you have HMO’s and have private tenants, you’ll be paying for gas and electricity but now is the time to be serving Section 13 notices because the cost of operating that building has now increased which in the current strong market does appear to be well received.
If you serve these Section 13 notices now, in the spring, the tenant will either agree, which is great as there is no need for new tenants or for new lead and fees and no need for new voids, or the tenant disagrees and has a 60-day notice to move out, which brings you into the boom market of the summer which is the hottest time to rent in a working HMO market with increased rents and high occupancy.
Green Deals and Third Party Leasing
Make sure you’re making use of every green deal opportunity as they are released!
In the Spring Statement, the government released a new offset so VAT has gone down to 0% VAT on any energy-saving materials (ESMs) and if you’ve read the Travis Perkins finance report you’ll know that prices have gone up 8%-15% so if you can get 20% off on your VAT then you’re already saving the price increase and more on ESM’s
Alongside this, if you’ve had enough of paying utility bills and service accommodation all together, as referenced you can look at third party leasing i.e. lease your assets to charities, the council or other operators. Let someone else worry about that side of things and you focus on the asset margin of a lucrative single lease fee instead.
Alternative Construction Methods
If you’re planning to buy overpriced houses and then try and refurbish them in the way you always have done, you’re going to find that your margin is going to get compressed and compressed in the current market.
If you can buy some commercial sites, however, and find additional value e.g. air space on top and use alternative construction methods, you won’t just be clawing back the margin you’ve lost you’ll also find an additional margin that you never knew you even had.
Alternative construction methods include looking at modular housing timber frames and using cold rolled steel. You just need look at what everybody else is doing and how you can move out of that mass market and into a niche and find the additional margins.
It’s not easy, but it is possible.
Short Term Cash Flow Hold On Developments
Due to increased cost of construction there is nervousness is some niches about buying developments or operating sites, however, these costs are not going to remain high. It’s supply and demand – materials are expensive because there’s no supply and people pay the high price, in turn, to capitalize on the higher prices suppliers will increase their supply, thus over the next year or two prices will either become embedded and it all goes up or start to fall back to a place of equilibrium.
Find deals now that nobody else is buying – using E Class MA PD, AB PD PN Airspace and preferably tenanted – with the sole intention of developing them in the medium term but holding them for the short term. It may not be the best return but can pay for the finance, allow you to get planning, ride out this current price hike and then develop it on the back end when prices drop again. This is something we care doing on number of sites and seems to make sense to me.
Success and failure are very predictable.
4. THE WEALTH GAP
The Wealth Gap
It’s sad to say but it is the reality of the market that the rich are going to get richer and the poor are going to get poorer.
People who are already really struggling will go into the red and enter a period of poverty at the bottom end of the market.
The mass- market who have lived consistently for years are going to feel the pinch as fuel and mortgage payments go up, their standard of living is going to come down as they spend more on some things and less on others but
they will survive and the current rise in wages will assist with this to a degree as inflation is pushed through.
The wealthy, who know how to allocate capital and buy assets to gain the first-mover advantage will get wealthier as they understand how to play the game. They will ride inflation out and do deals that nobody else is doing.
If you don’t know how to become financially independent listen to my ‘Rich Bad, Wealthy Good’ podcast which explains, in 18 minutes, the blueprint and the three levels you need to go through to achieve wealth creation.
5. LEVEL UP
Government Level Up Manifesto
The government’s Phase Three strategy is called Level Up and whilst already commenced, will start to come into effect toward the end of 2022 and 2023 as the corner turns and we shift back into a growth market of investment and development.
The aim here is to get ready to level up when the economy turns and if all goes to plan, the UK market could be fundamentally rebuilt.
This will be a huge window of opportunity that we won’t see again in our lifetimes and there are four closing suggestions for you to take away.
First mover advantage is about being ahead of the game, listening to people like me and participating in one of our Property Entrepreneur Programmes, understanding what to do and then executing relentlessly.
Here you need to observe the masses and do the opposite. If you’re reading. Watching and hearing things in magazines, Youtube and training events then you’ve already missed the market.
How many other people are out there talking about buying and leasing back private schools? How many other people are talking about ESM’s being 20% off VAT? How many people are talking about AB PD PN Airspace? Not that many I think.
You want to be on the crest of the wave, getting this stuff first, mastering the market, playing the game and understand that now is absolutely the time to do this.
6. TAKE ACTION
Time To Take Action?
Hopefully this Boom or Bust Report has provided you with the vital information required to enable this year to be the making, not the breaking of you business as we head into a changing landscape.
If you have not already done so, I highly recommend listening to the ‘Recession is coming’ podcast where we cover all things property prices, interest rates, inflation and GDP and what is like to happen over the next 18 months and when.