API - Passive Portfolio

THE SECRETS OF BUILDING A

PASSIVE PORTFOLIO BY

ROD THOMAS

FCA

CEO OF AXIS PROPERTY INVESTMENT

PROPERTY INVESTMENT

T

he goal for many investors is to develop a passive property portfolio. A portfolio that requires little time to develop or run and delivers regular income month after month.

Is it a dream? Is it possible? What are the secrets to developing a passive portfolio?

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In this article Rod Thomas discusses different options and reveals how best a passive portfolio can be built.

Rod then reveals a simple “Passive Portfolio Checker” that will give you an accurate score of how ‘passive’ any deal is based on who you work with, what they do, and what the deal delivers. It’s a great way of evaluating future risk and time commitment BEFORE you get started!

Let’s get started and take a look at what exactly IS a ‘passive portfolio’?

Four major elements of a passive portfolio…

In my experience most clients who wish to build a passive portfolio are tremendously short of time, usually have good cash resources and don’t want to make the effort to learn everything that is needed to effectively investigate, analyse and negotiate good investment purchases.

Building a passive investment portfolio is all about busy and successful people making a positive choice to benefit from property investment but to do it with minimum time and hassle. Very commendable.

But what exactly are the key elements of a passive portfolio: 1. Deal certainty – as many as 40% of property deals do not proceed to completion. So only taking on deals that can be delivered saves time and hassle.

2. Acquire and own property with minimum time input 3. Acquire and own property with minimum risk 4. Have clarity and security over the eventual exit Here’s why minimum risk is important to most passive investors. When you have little to do with an investment and you want it to run in a ‘hands-off’ way, you need to be confident that the revenue stream will keep coming.

The starting point for making all this happen is to use the ‘OP’ formula! If you are not going to use your time and your expertise to acquire, own and then exit your property investments you will need to use Other People. Specifically OPT – Other People’s Time, OPC – Other People’s Contacts, and OPE – Other People’s Expertise.

Another key point to accept is that other people don’t work for nothing (do you?), so there will be a cost attached to using OPT, OPC and OPE. Done right, the cost to you will be dwarfed by the time saved, risks reduced and value in your investment!

OK. We’ve discussed what you want to achieve. But how exactly can this be done?

Who can you turn to that has the time, contacts and expertise to provide what you need?

And finally, how is the specific type of investment going to impact the level of ‘passivity’ you achieve in your portfolio?

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What’s involved in property acquisition?

And how to use the ‘passive’ approach THE SECRETS OF BUILDING A

Let’s say you are a ‘hands-on’ property investor looking to source and acquire property yourself. Before you even start you are going to need to learn and know a great deal – about property investment, about deal structures, about locations, pricing, refurbishment and more besides.

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Then you have to find the deals. That’s not easy – my Property Investment System training lists 17 different ways, but all of them take time and expertise.

Work with the right acquisition company and you tap into their network of contacts accumulated over many years. Put simply, you generally have no access to deals offered by the acquisition company!

At this point the list of how to arrive at a stage of agreement and then completion of the purchase includes:

Research – local market, rental and sale values, demographics, and more Due Diligence - legal, contractual, construction, local factors, ownership Negotiation – getting the price you want. You have little negotiating power if you are investing in a single property. You usually can’t offer volume as a trade-off for price Evaluation – does the deal stack up? Will it meet your short or long term goals? Risk analysis Professional contacts – having the right ‘power team’ including solicitors, mortgage brokers, valuers, surveyors and more available that you trust and can deliver high quality results

Frankly this list is scarily long, which is why many people shy away from property investment. However a solution lies in working with a specialist acquisition company like Axis Property Investment.

If you choose the right company, ALL these things will be included as part of their service. But the value to investors wanting a passive portfolio goes way beyond this list. There are three additional, and significant, benefits to you: 1. Deal Certainty – any acquisition company worth their salt will have strong relationships, clear legal structures and careful due diligence. The result is deals rarely (no one is perfect!) go wrong and ‘what you see is what you get’.

2. Deal Benefits – an acquisition company negotiates on behalf of their clients and can deliver volume sales to a property vendor. This is in addition to offering certainty and speed. As a result deals are negotiated that are simply not available to individual investors.

Examples of recent Axis deals that fall into this category are a negotiated FIVE year guaranteed return when others in the market only had three years. PLUS guaranteed buy-back when it wasn’t available elsewhere.

3. Deal Support – a good sourcing company will provide end-to-end administrative support right through the acquisition process to completion.

This minimizes time and angst for the investor.

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The property acquisition phase of developing a passive portfolio is 1/3 of the core segments, but probably represents 50% of the time and expertise needed. So it is the area where working with a specialist acquisition company can save the most time, reduce risks considerably and provide investment opportunities that should be deliverable. Not to mention bring you deals that are way better than you could negotiate on your own!

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How to minimize time and risk during property ownership Whether you use an acquisition company or not for the investment purchase, you are faced with a new set of challenges when it comes to property ownership. Done wrong, this can sap your strength, require considerable time, involve considerable risk and totally undermine the concept of a passive investment.

In this section we look not only at different ways to own and manage property but different types of deals.

What you choose to invest in, and how the management is organized, will massively impact the level to which you achieve a passive investment. Let’s build the ‘staircase’, reducing time and risk as we go.

LEVEL 1: The worst – hands-on management of a typical buy-to-let So that we get a starting point of what NOT to do, buying a traditional buy-to-let and managing it yourself is positively the worst thing to do IF you want a passive portfolio. Of course for investors who want to take a hands-on approach and spend time running their portfolio this is the perfect solution! This shows the importance of a) clarity with what you want to achieve and b) knowledge of what different approaches will deliver in terms of passive portfolio building.

LEVEL 2: What’s the next alternative? Professional management of buy-to-let property Now you give up day-to-day management and your time involvement drops substantially. But you will still get calls when the tenant doesn’t pay, calls when the washing machine needs fixing or the carpet need cleaning. Not to mention calls when the gas certificate needs renewing, or you need an EPC (Energy Performance Certificate) or to discuss rent increases, or indeed decreases.

So whilst ‘management’ does remove a lot of paperwork and reduces contact with the tenant, it is NOT a hands-off solution. It goes part-way towards what you want.

The second aspect of professional management does not remove the risk of voids, the tenant trashing your apartment, lack of payments and more. So there remain risks with your income that professional management will not remove.

LEVEL 3: Change the investment- change the management approach Suppose you don’t invest in traditional buy-to-lets. Suppose you invest in hotel rooms, which have always had professional management which is removed from property ownership. They will NOT call you to fix the washing machine or redecorate the room. And voids are replaced with occupancy rates which generally are pretty stable.

So you reduce the time needed and reduce risk. Good move I’d say.

You have much the same result with student accommodation which is managed by a professional company. Low time required and reduced risk.

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LEVEL 4: Add in a well-known company.

How could you improve even more? Reduce risk further by picking hotel rooms which are managed by large brands – Accor, Hilton, Holiday Inn to name a few.

LEVEL 5: Add in a fixed or guaranteed rental return Now you are motoring. You can predict with more certainty your income in coming years. And if you check the numbers the offer of fixed or guaranteed income will usually reflect a realistic approach to net income, which means that even after the guaranteed period is over you can expect something similar - or maybe more if rents have increased!

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Disconnect your investment from property ownership by investing in bonds or loan notes, rather than the underlying property!

LEVEL 6: Finally, invest in an ‘investment vehicle’, not the property directly!

Perhaps the ultimate is to not take direct ownership of the property, but to invest in a ‘savings’ type vehicle that provides a loan to the underlying property company.

This can offer fixed and/or guaranteed but increasing returns, with no liability or involvement with the underlying property.

For example: You could invest in German listed buildings and receive a fixed income of 12% pa for one year, up to 13% for three years and up to 15% pa for a five year investment. All with absolutely no time involvement and (due to the history of the company and security of your money) very low risk!

This is a very important section. I’ve shown you step-by-step how to reduce further and further both the time needed and risk incurred in owning property. This is property that you could hold for five – ten – even twenty or more years. It’s a key piece to building a truly passive portfolio!

However, you will need to consider if you are willing to invest outside the ‘traditional’ buy-to-let marketplace. The rewards are definitely there for ‘passive portfolio builders’.

Time to Exit? What happens now?

Many investors make the mistake of worrying intensely about whether they are getting into the right investment, without considering how they will exit. For some investors this could be a perfectly acceptable approach.

For example, suppose you are in your late 50s and you have already prepared for retirement and have spare capital (lucky you!). Perhaps your investment view is to buy property that can provide income for you in retirement but will be left in your will to your inheritors.

In this case there is no need for an exit.

However, many investors will have a different view – maybe a definite plan to exit in five or ten years (say), or a more vague feeling they want the option to liquidate all or part of their portfolio if the need arises.

For a passive portfolio investor this is therefore the third and final piece of the puzzle to consider. You really don’t want a passive portfolio held over a number of years to turn into an all-consuming nightmare because you are intensely involved in the disposal process. Even worse is the situation where selling at a realistic price is difficult and therefore you suddenly hit a disposal risk – the risk of not achieving what you expect.

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In general it is true to say the more avenues to market that you have the better.

Here’s a list of what might be possible: THE SECRETS OF BUILDING A

• • • • •

Sell on the open market to retail buyer Sell on the open market to investor Sell to existing tenant

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Sell back to vendor Sell an option to purchase in the future (more risky and no cash now)

Clearly if all five choices listed above are really possible then you are more likely to achieve your exit more quickly and with less agro!

Above and beyond all this, there are two other elements of an exit strategy which can provide HUGE peace of mind, very little time and massively reduced risk. Are you all ears? I hope so.

These elements revolve around what we will call a Secure Exit Strategy (SES). This involves the vendor or third party agreeing at the time of purchase to BUY BACK your property. Usually supported by a guarantee!

There are two elements to the buy-back: 1. When is it going to happen 2. How will the price be determined Usually the timing for the buy-back is specified precisely. Rarely is it at the discretion of the investor, so you must be careful to take up the option if you wish at the right time.

The price may be pre-determined and based on: 1. A fixed price 2. Market value 3. A percentage of a valuation The beauty of a buy-back is that it removes uncertainty from the deal, the only thing the investor needs to do is decide if they want to exit or not!

It is true to say we have never seen buy-backs with traditional buy-to-let investment property, so this could be one more reason to consider more commercial investments like student property (at the time of writing Axis has student property with a five-year rental guarantee and a five-year guaranteed buy-back!).

Balancing Risk and Reward There is one more topic we need to cover to ensure you have a realistic view of a passive portfolio. I’m sure you understand that the level of risk and reward are almost always related to each other. So, for example, there may be investment opportunities which may have the potential of very high returns, but they are not guaranteed and therefore must be inherently more risky for the investor.

For an investor building a passive portfolio the potential of high returns does not increase your Scorecard rating (see end of article), but if a lower income was guaranteed that would help improve the overall score. So the Scorecard is deliberately weighted towards a lower risk profile.

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For an investor willing to take a more hands-on approach and adopt a higher risk profile, then the potential of higher returns could outweigh a lower level of income even if it is guaranteed.

So you can see I have adopted a relatively low threshold of risk in discussing the approach to passive portfolio building.

The level of risk, and therefore potential returns, can be reviewed and the balance adjusted either by you or in consultation with the Acquisition company that - I hope - you will be working with!

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Summary The three areas an investor wanting to build a passive portfolio needs to consider carefully are: acquisition, ownership and exit. Each of these can be approached in a way that can minimize both time and risk.

The biggest impact on acquisition is to work with the right acquisition company.

They can effectively reduce your time obligation to almost zero, and reduce risk considerably. In addition offering you opportunities that you could never find and deals you could never negotiate!

In terms of ownership, the type of investment plays a huge part in developing a passive portfolio, with commercial investments often offering significant advantages.

When it comes to divestment, the more exit strategies that are realistic the better.

Going into an investment with a secure exit strategy in place – guaranteed buy back with pre-determined time and amount – offers the best possible solution.

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The Passive Investment Scorecard To bring all this together we have developed this scorecard. You can use it before investing to score your potential purchase. You will then see the strengths and weaknesses of your proposed passive portfolio investment.

ACQUISITION PHASE

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In the acquisition phase you score points only if someone else does that activity either instead of you or to support you. No score in that category if you do it yourself. Points are weighted if activities take longer /require more expertise or contacts POSSIBLE SCORE Discovery / Sourcing

5

Evaluation

1

Due Diligence

1

Negotiation

2

Volume buying benefits available

5

Legals organized

1

Mortgage broker organized

1

Support through to completion

2

Maximum score - Acquisition

18

YOUR SCORE

OWNERSHIP PHASE Ownership section is about the deal and how it is structured. You can score in EVERY category that is relevant.

Full management arranged

5

Commercial proposition (eg: student / hotel / care home / farmland)

5

Well-known / experienced brand

1-5 depending on brand

Fixed or guaranteed income

10

Investment vehicle, NOT direct property investment

2

Maximum score - Ownership

27

EXIT PHASE Score in each category for each exit option. Scores weighted to reflect reduced risk of specific strategies Open market sales to retail buyer

1

Open market sale to investor

1

Sale to existing tenant

1

Sale back to vendor (with agreement)

1

Sale of option to purchase

1

Other exit not specified here

1

Secure exit strategy – fixed term and guaranteed formula for value

9

Maximum Score - Exit

15

Total Scores

60 - maximum

Your score

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Interpreting your scores Score

RESULT

COMMENT You understood the message. This investment choice should offer the best chance of passive portfolio building!

50-60

Excellent

30-50

OK to Good

Some elements in place but you could do considerably better. You may choose to accept the lower score because other factors make up for the lack of positive attributes in the deal you are considering

20-30

Poor

Heading for major disappointment as a passive portfolio. Needs reassessment

Less than 20

Bad

Either you don’t really want a passive portfolio or you haven’t read this article!

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Next Steps If you are seriously interested in building a passive portfolio and you agree with the principles in this Special Report we should be talking.

Contact Axis Property Investment and request a strategy consultation, at no charge, with one of our Investment Consultants. They can help refine your strategy and offer investment opportunities that can help you meet your goals.

for further information

✆ +44 (0) 1273 447 300 8 sales@axiscontact.com www.axispropertyinvestment.com

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