The little black book

Euphemistically known as the 'little black book', your list of people who can help you in your property business will become invaluable over time. I manage mine electronically - Google contacts is such an invaluable tool - particularly as it is synchronised to my phone on a regular basis! That way I always have to hand the number of an electrician, plumber or general D-I-Y person who can deal with a property problem as it arises. If I need to ask a question about mortgages, I have the numbers of a couple of mortgage consultants I trust. If I have a legal question, the details of my solicitor are ready and available (much to his dismay)!

In fact the other week, I was at our local Wacky Warehouse giving my youngest son a chance to let off steam with some of his friends, when a call came in from one of our tenants saying that water was leaking from the bathroom and dripping onto the hall below. There was a light fitting situated near the water leak and the tenant was understandably concerned about the risk. I couldn't escape the clutches of the ball pool, having found myself in there playing referee to about 5 boys and their superhero fantasies, so I pulled out my trusty Nokia, dialled the number of a certain guy I know, and hey presto! he was on the case!

An hour and a half later, he called me with a progress report and the solution he'd implemented, while I was happily observing Bat boy flying through the rafters of the padded tunnelling above me. The leak was fixed, the light was safe, and all was well at house number 5. I sipped my latte contentedly, calm in the knowledge that this particular workman is thorough, trustworthy and reliable.

You may have problems bigger than this when managing property

Being organised with your contacts is vital if you too want to have a life and run a business. You might not choose to spend your time at the Wacky Warehouse, but the skill of getting out of that ball pool was a great reminder to me of the necessity of people power when you are stuck in a tight spot.

Dressed to impress

Yesterday the boys (all three of my current home-based brood, aged 18, 14 and 4) came and helped 'seal' a new plasterboard wall we've had erected to create another bedroom in the latest property. Diluting the paint 50/50 with water they keenly applied said mixture to the walls and approached the whole activity with gusto and enthusiasm. It was rather like watching the three bears decorate, with daddy bear's industrial size roller brush, mummy's value roller, and baby bear's mini roller. All three happily splashing and painting and rolling together, trying not to get in each other's way, but not too worried about coming out looking like dalmatian pups without the black spots. One stood on the step ladder to reach the highest edges, one rolling more-or-less at face level, and one kneeling to get down into the corners.

It wasn't all sweetness and light though. The first spat was between the two older boys over who should have the step ladder - arguing about who was the tallest. Then they ganged up on the youngest, who was merrily painting any blank space he could find, whether or not it was near the paint tray, thus trailing paint across the floor before walking in it. The dust sheet was abandoned half-way through the job as 'another annoyance that mum's brought with her'.

I was trying to guide/direct/train them but really I was a totally unnecessary accessory to the whole event. No matter what I said the boys were quite happy to do it their way, and experiment with what worked (and work out their conflicts without external mediation)!

She's looking a bit too clean for me

We finished after a couple of hours and exited from the house looking decidedly white and spotty. Hair, hands, arms, faces and clothes - spattered and spotted with paint! I had warned the boys of the necessity of old clothes and I was glad we had worn our oldest and scruffiest clothes. Except when we approached the counter at McDonald's 10 minutes later - spotty, bedraggled, unwashed and greasy - looking like something the cat had brought in.

But you know, there's something terribly freeing about wearing your oldest, dirtiest clothes. Then getting them covered in paint and dust and dirt. Having unwashed hair, no make-up on and one's nails a bit chipped and broken. Yes you do feel a bit like a tramp. But it is totally liberating. I think if I get into this more I may have to develop a 'property developer's wardrobe' (now there's a thought). A selection of items designed to give the impression that hard labour has been partaken of during the day, whether that be drilling, sawing, painting or building. In fact, I'll probably have been sitting at my desk all day, updating the finances, reviewing the marketing plan, or analysing the market. And when I collect the youngest from school - they'll never know quite what I've been up to!

Gearing up!

In four words

The word leverage always brings to my mind a mental picture of a frail old lady gardener, who, on finding a large rock in her carefully tended flower bed decides to get rid of it. She tries to grip it and lift it but to no avail. She tries to force it out of the ground with her bare hands but it won't budge. So finally she goes to the shed and chooses the strongest long-handled spade she owns, and tucking the blade under the rock, she presses down on the end, to find that with some pressure, she can slowly lift it into the air. Note the contrast between the lady and the stone. One is spindly, the other is heavy, but the force of the spade (and the length of the handle - not too long) enables her to lift a gargantuan weight into the air: something she definitely couldn't achieve by lifting it on her own.

Leveraging (or gearing as you might hear it called in the UK) is what in finance is equivalent to the action that the old lady takes by using a tool to raise something much more than she could alone. In property, you might not have much to begin with, but leveraging allows you to punch above your weight in terms of the finance you can access. Using other people's money (OPM) combined with your own, you have much greater purchasing power, and much greater possibilities of future income. In property investment terms it might look a bit like this:

Hilary Hopeful has been saving money for a rainy day but has decided that her savings are not really going anywhere. She has a total of £100,000 saved up. She decides after much consideration to buy a property to let so that she can have some income from her money, and as a bonus she might make some money long-term if the property rises in value over time. She finds a property for £100,000 and uses all her money to pay for it. She rents out the property for £500 per month. Therefore she has an income of £500 x 12 months = £6000 *. This counts as income, so she will have to declare it to the Inland Revenue, and if she has other earnings she will probably have to pay tax on the £6000.

Pauline Purposeful has also been working hard, saving for a rainy day and has saved £25,000 so far. She also has decided that money in the bank is next to useless and wants to get into property. She too sees a property for £100,000 which she makes an offer for and buys for £100,000. In Pauline's case though, she is using a mortgage to fund the other £75,000 which she hasn't got. So £25,000 of her money and £75,000 of someone else's money are together making the £100,000 she needs to buy the property.

She too rents out her property for £500 per month. However, she also has a mortgage to pay of £400 per month. Of which £200 is interest. She has an income therefore of  £500 x 12 months = £6000. She is able to claim the interest cost of the mortgage (£200 x12 = 2400) against her income. Therefore her income is reduced by £2400 to £3600.

You might think 'well I'd rather have more monthly income so I think I'll follow the example of Hilary Hopeful' . And yes, you could do this if the amount of income is your major priority. But lets look at the return on investment (another three letter acronym - remember I mentioned these much earlier in my blog?!) or ROI.

Hilary has invested £100,000 and is making £6,000 - in other words 6% return on investment.
Pauline has invested £25,000 and is making £3600 - in other words 14.4% return on investment.

Who is getting the highest return on their investment (ROI)?

(Wish that you had paid attention in 'O' level maths now?! -  I just wish they had taught this stuff in 'O' level maths!).

So you can see how actually Pauline is a more savvy investor. If she invested £100,000 in this way, by putting £25,000 in four properties, she would actually be getting £3600 x 4= £14,400. Much more income than Sylvia - simply by leveraging what she puts in more effectively.

THAT is the power of the lever!

* this is only a simple example - you could get more, you could get less income than this, depending on the property!