Jon Calls An Expert: Valuable Advice And Support From Those ‘In The Know’
“Real estate is technically not an investment … it is a business. And those who treat it like an active ‘hands on’ business generally prosper, while those who treat it like a passive ‘armchair’ investment are the ones who moan and groan loudest about how lousy real estate is as an investment. It is lousy as an investment, but it is simply marvellous as a business.”
So says Robert Allen, the American self-made property millionaire and ‘Nothing Down’ guru in his book Nothing Down for the 90’s . You may know that I have a great respect for Robert Allen, and reading this particular passage was like a eureka experience. For some time it had been apparent that whilst I was quite happy running my property business, I was getting a lot of requests for help from investors who were obviously disappointed that property didn’t meet their expectations.
I realised that investors often have totally unrealistic expectations of the rent and the costs, and as a result are often dissatisfied with the actual returns received from their investment. I also realised when I read Robert Allen’s comments that the reason why I was not in this position wasn’t just because I had made a more realistic assessment of what the income and expenditure would be, but it was because I run my properties as a business and have retained control, which ‘investors’ often delegate away.
However, as I thought about it, it occurred to me that running property as a business requires a completely different mindset from keeping property as an investment. And the major difference I could see as a result of this mindset was that I was not as emotionally involved as the ‘investors’.
This had not always been the case, and there had been plenty of times in the past when acting as an investor, I had felt that I had lost control over my properties, and even the smallest setback had created in me a disproportionately negative emotional response.
I had realised quite early on that things could not continue this way; if they had, I would soon have become emotionally burnt out, and possibly broke. Without consciously naming the process, I endeavoured to stop being a passive investor, at the mercy of my tenants and managing agents, into a pro-active business owner, with a high degree of control over all the processes of property investing and managing.
For example, an area where I previously felt ‘out of control’ was when managing agents arranged for repairs and improvements. I often felt that if I only had my own builders and other contacts I could make considerable savings.
The necessity of having control over costs, and not just writing blank cheques was highlighted when one of my Managing Agents wrote in early January telling me that a property had been vacated but needed some work doing to it. It also led to an interesting insight into how some of my tenants live; an inside, incidentally, which would have been very painful emotionally if I hadn’t by then learnt how to distance myself from the properties, and to think about this as a business.
“We’ll get you a quote” promised my managing agents. A month later, and still no quote. “The contractors are busy at the moment, but I’ll chase them” I was assured. ”I’ll call you back”. A week later, still no telephone call, but there was a letter with a quote. “For giving a small 2-bedroom flat a lick of cheap paint: £2,300” – I’ve paraphrased, but that ’s really what it meant. I choked on my cornflakes. “They’re taking the ****, they’re taking advantage of me,” I thought. Still, no matter. I now knew a good local builder who I would ask to give a second opinion. I arranged to collect the keys and take him around.
Visiting the flat turned out to be one of those consciousness- stretching experiences. The flat itself was not in too bad a condition, and I have to say that the rent, courtesy of the benefits office, had always arrived on time whilst the tenants had been there. There was some rubbish on the floors, and a kitchen unit door was lying on the floor, but that could all be sorted out quite easily and quickly. But what struck me as strange was that there were three packed suitcases in the bedroom. Why were they still there? Someone had gone, but in such a hurry they’d left all their belongings behind. How can that happen?
Then I started to put two and two together. The back door had been kicked in. Then there was the mountaineer’s ice-pick that was lying on the kitchen floor. With a chill, I realised that this had probably been used as a weapon, or at least to intimidate. Was it evidence of an aggressive visitor, or a frightened occupant looking to defend himself?
But why? Perhaps it was related to the number of small, scrunched- up pieces of kitchen foil lying all over the lounge floor. It seems my tenant was in the middle of a drugs war, and presumably had lost. I have to say that a while ago the idea that my property had possibly been tenanted by a drugs dealer would have been quite shocking, and might have made me question whether property was something I should invest in.
That is the wrong mindset to adopt. I love property. I love doing deals. Russ Whitney, another American property guru, says that questioning property as a worthwhile business when things ‘go wrong’ is not valid. He compares property to retail and asks whether the fact that on average one of their stores is always being shoplifted, or a member of staff somewhere steals from the till every day, makes the directors of Walmart want to give up and go home. Of course not, they accept that this is a cost of being in business and they plan and budget for it.
The same with property. It is a business and some times will be better or worse than others. Some tenants will be better or worse than others. I deal with higher yielding properties and my tenants tend to be on benefits. This means that by the law of averages I am going to have problems. However, I know and accept this from the start, and from a position of knowing that, despite these problems, I am still in a highly profitable business.
Ultimately, my only concern was whether the repairs and redecoration could be finished cheaper than my managing agents quote. As it was my builder’s alternative quote came back at exactly the same figure, and without any collusion; I know that my builder and my managing agents don’t know each other.
And that ’s ok as well. At least I know I am being charged a reasonable amount. I have control over my costs, and ultimately that will be reflected in my business’ bottom line. Unlike with speculation, nothing is being left to chance.