Today I'm going to be talking about just one little aspect of our property business. Our first experience with private finance, how that worked out for us, and how I made an incredibly stupid mistake, but that mistake turned out to be one of the best things that ever happened for our business.
So if you're thinking about introducing private finance as a way to scale your portfolio, you're interested in the mechanics of how it can work or some of the reasons why it might be beneficial to you, then I really hope you enjoy today's episode. So sit back, relax, enjoy and I'll speak to you soon.
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Have you ever been in the position as a property investor where you’re running out of your own money and thinking you might need to find another career?
This idea of building a portfolio sounded like a great idea for your first couple of deals, but as your cash got left in deals, your plans were at risk of grinding to a halt?
That was the exact situation I found myself in a few years ago… well, back in 2015 to be precise.
We had a few projects under our belt already, but I couldn’t see a way forward beyond our next deal, as it was going to give us a good income, but tie up most of the cash we had left.
I honestly thought we’d have to call it a day, until a stupid decision on my part actually saved the day and paved the way for virtually all of our future portfolio growth from that day on.
Want to know what that stupid decision was? I offered to pay an investor 20% interest on a loan, which, for the record, is at least double what you’d expect to pay a private investor in the property world.
This is the story of how that dumb decision actually led to growth we otherwise couldn’t have dreamed of.
In case this is your first time here, I bought my first investment property when I was 18, and kept investing ever since, albeit at a pretty slow pace in the early days. I did a couple of flips, and owned a couple of smaller rentals alongside my day job, until about 2014 when I quit full time employment to focus on property full time. We bought 3 projects in quick succession, but then we got stuck!
Money was tied up in projects but we wanted to keep growing the portfolio to build our income as quickly as possible, and looking down the line, I could see we wouldn’t get all of our cash back when we refinanced, so there was all of a sudden a cap on how much we could actually grow the portfolio with the limited cash we did have.
And, by the way, the punchline to the whole episode is that since that dumb decision to borrow money at 20%, we’ve gone on to raise well over 5 million in finance from private investors to keep building our portfolio at the pace we wanted to!
Section 2: Backstory
Whatever you want to call it - finance, investment, capital, loans - confidence is the biggest hurdle I see other developers face when thinking about using other people’s money to keep growing their own portfolio.
And I was no different! I had a bit of experience, but I had no track record of successfully using private investment, and I definitely didn’t know a long list of people with tons of cash in the bank.
I spoke to a mentor we were working with at the time about the problem we were about to face, i.e. running out of money, and they were where the idea of working with investors initially came from.
But I was SO confident that nobody would invest in us… that there was no money out there, that I took their advice but instead of making an offer at a reasonable interest rate of 8-10%, I offered 20% to prove to them that even at an absurdly good interest rate, nobody would be interested.
Now it would be a pretty short story if I was right and nobody was interested, but I made this offer to about 10 people and 3 of them came back almost immediately to say they were interested.
I was so excited that anyone had actually said yes that I just mentally blocked out the fact I’d promised to pay them 20%, I worked through the details, and within a couple of weeks actually had my first investor on board. I was staring in disbelief as £40,000 dropped into my bank account.
But aside from the personal doubts about ‘why would anyone invest in me’, I also couldn’t understand why anyone would have that sort of money sitting around that wasn’t already being used for something.
It turns out that this particular investor had just sold their business, but over the years we’ve had investment, and I’ve had my eyes opened to tons of different sources of finance, or reasons why people might have some money…
Pensions are a big one
Personal savings that are earning next to no interest
Redundancy payments
Inheritances
Other investments
Business sales
Home equity…
It turns out there are a lot of people out there with enough money to make a meaningful contribution to your next deal, who aren’t satisfied with whatever return it’s currently earning and are looking for better options. Some of those folks might have £10 or 20k, others will have hundreds of thousands and even millions.
How much do you really need to buy another deal? Probably a lot less than even a handful of investors would be able to contribute!
And that really opened my eyes as well. Once that first investor was on board and I had the confidence to look for additional investment, it meant our business could grow at the pace I wanted, without needing to worry about our own cash.
Now you might be thinking, well confidence is great, but not if the initial interest rate cripples you and your business. And even at the absurdly high interest rates, it actually still makes a lot of sense to me.
We borrowed £40,000 at 20% interest, which cost us £8,000 over the duration of the 12 month loan.
The loan allowed us to finish the renovations on a 6 bedroom HMO, which nets us a monthly pre-tax profit of £1,000.
So even at that high interest rate of 20%, it enabled us to do another project that we couldn’t have done otherwise. The cost to us was £8,000, and the profit over the 8 years we owned that house was around £96,000. That’s a 1200% ROI
The opportunity cost of NOT borrowing money at 20% would have been lost income of £88,000
I don’t know about you, but if I could pay £8,000 once and get an ongoing annual return of £12,000 I’d never not do that deal.
The other major benefit of doing this deal, that I didn’t even consider at the time was the ongoing relationship that we’d develop with the investor.
We did that first deal, everyone was happy, and then the question from the investor was, “what do we do next?”
He had more money to invest, and we hadn’t annoyed him too much during the first 12 months - of course we became an obvious choice for him to consider reinvesting with.
That first investment went onto several more loans in our projects over the years, as well as the creation of a new business with him - we formed a joint venture, and have bought 3 HMOs together over the years that we split the profits on.
That’s income from 3 more houses that we couldn’t have afforded on our own, and he didn’t have the time or expertise to source and renovate on his own.
So despite that first loan being an absurdly high interest rate, it was in fact one of the best mistakes I’ve ever made in my career as a property investor.
It showed me that there was in fact an abundance of money out there looking for a solution to low returns
It showed me that even at high interest rates, the opportunity cost of not doing a deal is often far greater than any short term costs of doing the deal
And it showed me that once you’ve found investors, they’ll often want to keep working with you, and become long term partners in your business growth.
We’ve raised over £5 million in investor finance when I last added it up, we’ve added dozens of units to our portfolio and thousands in monthly income that we couldn’t have done without these investors, and we’ve given them a great return along the way.
So my parting advice to you isn’t that you should offer investors 20% interest, but that private finance isn’t just a great route to grow your portfolio, but is often the only way to keep growing at the pace you want, and it doesn’t need to be something you’re scared of getting started with.
I hope that’s been useful for you. While you’re here, remember to subscribe wherever you’re watching or listening to this, like it, share it, leave a comment or a review to let me know you’re enjoying it and what you’d like to see more of, and I’ll see you next time on the inside property investing podcast!ri