Is Your ROI Target Killing Your HMO Business?

In this episode, we're discussing something I believe is incredibly important: return on investment (ROI) or, as I prefer, return on capital employed (ROCE).

This is undoubtedly one of the most critical metrics we should consider when appraising and analysing deals in our business. However, in my opinion, and I need to get on my soapbox here, too many people are excessively focused on this target, setting standards that are simply too high. This, in fact, hinders the future potential and performance of their business.

Now, that might sound counterintuitive because surely the better the ROI, the better the ROCE, the better the business, and the more you can grow your business. So in this episode, we’re going to discuss that, including:

- Understanding ROCE and its limitations
- The pitfalls of overly high expectations for ROCE
- How to balance ROCE with other metrics
- Alternative strategies for ROCE
- The benefits of long-term investing

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Transcript

Andy Graham (00:02.67)
Hey, I'm Andy and you're listening to the HMO Podcast. Over 10 years ago, I set myself the challenge of building my own property portfolio. And what began as a short -term investment plan soon became a long -term commitment to change the way young people live together. I've now built several successful businesses. I've raised millions of pounds of investment and I've managed thousands of tenants. Join me and some very special guests to discover the tips, tricks and hacks, the ups and the downs, the best practice and everything else you need to know to start, scale and systemise your very own HMO portfolio.

Andy Graham (00:40.684)
In today's episode, we're discussing something that I think is incredibly important. ROI, return on investment, or actually as I prefer, return on capital employed, ROCE. This is unquestionably one of the most important metrics that we should all be looking at when we're appraising and analysing deals in our business. But in my opinion, and today I need to get my soapbox out, too many people are overly focusing on this target and setting standards that are simply too high. And that is actually hindering the future potential and performance of their business.

Now that might sound counterintuitive because surely the better the ROI, the better the ROCE, the better the business, the more you can grow your business. Well, as you're about to find out, that is not necessarily the case. If you want to find out exactly what I mean and exactly what I think you should be doing about this, then make sure you stick around. Please sit back, relax and enjoy today's episode of the HMO Podcast.

Hey guys, it's Andy here. We're going to be getting back to the podcast in just a moment, but before we do, I want to tell you very quickly about the HMO roadmap. Now, if you're serious about replacing your income, or perhaps you've already got a HMO portfolio that you want to scale up, then the HMO roadmap really is your one-stop shop. Inside the roadmap, you'll find a full 60 lesson course delivered by me, teaching you how to find more deals, to fund more deals and raise private finance, how to refurbish great properties, how to fill them with great tenants that stay for longer, and how to manage your properties and tenants for the future.

We've also got guest workshops added every single month. We've got new videos added every single week about all sorts of topics. We've got downloadable resources, cheat sheets and swipe files to help you. We've got case studies from guests and community members who are doing incredible projects that you can learn from. And we've also built an application just for you, that allows you to appraise and evaluate your deals, stack them side by side and track the key metrics that are most important to you. To find out more, head to theHMOroadmap.co.uk now and come and join our incredible community of HMO property investors.

Andy Graham (02:49.806)
So today we are going to be talking about return on capital employed. We're getting technical in today's episode. It's been a little while since we've done something like this on the show. And why are we talking about this today? Well, I need to get my soapbox out because I think too many people are setting expectations that are quite simply too high when it comes to return on capital employed, ROI. And in my opinion, this is having a very damaging effect on their ability to build their business. In today's episode, I'm going to explain exactly I mean, but more importantly, I'm going to help you understand perhaps a better way to approach this very important metric in your business.

Now, of course, it is one of the most fundamental metrics of our investment criteria. We should all be thinking about this. We should be looking at this in every single deal. We should be trying to achieve the very best that we possibly can. But as investors, also have to take a good balance. We have to take a position on every single investment and we have to try and find a good balance.

And at the end of the day, assuming that you want to build a portfolio that lets you perhaps leave your job or retire in the future or pass something to the kids or generate lots of income so you can go traveling and do what you want. We have to make sure that we can continue to invest. We can actually grow and build and scale our business out. And this is where I think part of the problem lies. So today, I want to talk to you about investment criteria. I want to talk to you about scalability challenges. I want to talk to you about quality versus longevity.

I want to talk to you about the risk of underutilising other long-term benefits and predictors that you can get from investing in properties. So before we dive in, let's first of all remind ourselves what return on capital employed actually is. Well, this is a financial ratio. It's an equation that essentially measures the performance of the capital that you are leaving in a deal in respect, in relation to the income that you're generating off the back of it. So let me give you a really simple example.

Let's say you're buying a property, you're going to put some money into that property, then it needs a refurbishment, which is going to require some more money. And then at the end of that, hopefully we're going to refinance that property. Now, when we refinance that property, hopefully we've actually added some value and that additional value can be used in part as your residual deposit, as perhaps your 25% deposit that you're always going to need when you refinance your deal. Now, when that refinance happens, it's going to release a certain amount of capital.

Andy Graham (05:15.606)
If you've done an incredible deal, it might release all of the capital that you originally started with. And that would be a hundred percent return on capital employed because you've got no money actually left in the deal. But in most cases, and we're going to talk about this further today, a certain amount of the capital that you started with will perhaps be left in the deal. So let's, as an example, assume for a minute that of all the money you put into the deal to buy it and to refurbish the deal, you've left at the end of it when all is said and done, £20,000 of your starting capital has been left. It's kind of locked in that deal. Okay. You just couldn't quite add enough value to get that extra ¬£20,000 out. So you've got ¬£20,000 of your initial starting capital left in the deal. Well, if we then get that property up and running, we've got our tenants paying the rent and we're paying our overheads. We've got our mortgage to pay and our overheads to pay and the gas and the electricity and the utilities and management costs. If, for simple maths, that property is generating 10,000 pounds net before tax every single year, we can then calculate the return on capital employed by taking that net income figure of 10,000 pounds and dividing it down by the amount of capital that we've got left employed in that deal. So in this example, it was 20,000 pounds. So if we take 10,000 pounds and we divide it by 20,000, it gives us 0.5.

Which if we times by a hundred gives us a 50% return on capital employed. So what this means is that for every pound that you have left in this deal, it is returning 50% or 50 pence every single year. So what that means is in two years, it'll have completely repaid the capital employed from the income that you are generating. So that would be a really great deal.

So hopefully you're keeping up. Hopefully that all makes sense. And the unicorn deal is where we come out of our refinance and we leave no money in it whatsoever. In fact, maybe it even pays us back some money because we've added so much value. And in that instance, our return on capital employed is simply a hundred percent. Or some people might say that there is an infinite return on capital employed. But essentially if all your starting capital has come out of the deal, then you are a hundred percent sort of getting

Andy Graham (07:36.238)
100 % return on your capital employed year after year. So that's kind of the unicorn deal scenario. So that's what return on capital employed is. It is a very important metric, but it's not the only one. I also like to look at gross yields. I like to look at net yields. I'm not going to go into the detail today, but they are extremely important and give a better indication of the ongoing performance and health of a deal. Whereas return on capital employed or ROI, that gives you an indication

Right now at the point of refinance, all this does is tells you how hard the capital that you have left in the deal, if any, is working. So it's important, but it's not the full picture. And it doesn't really tell you much about the long-term performance of the deal. Now, if you want to find out more about return on capital employed, gross yields, net yields, how to analyse and appraise deals, what to stress test, how much to stress test all of these figures, how all of these figures should be interpreted against one another.

There's plenty of videos inside the HMO roadmap, including a masterclass that'll take you through a more detailed and high level number of examples. So if you want to advance your learning, all of that stuff is inside the HMO roadmap. So we're not going to do that now, but we're going to simply focus on return on capital employed. So now that we know what return on capital employed is, or we've reminded ourselves at least what it is, why do I have such a problem with it at the minute? Well, the short answer is because

A lot of people set very, very, very high expectations on what that figure should be in the deals that they're analysing and appraising. Now, a lot of people understandably want to get a hundred percent return on capital employed every single time. Because in that scenario, you could essentially borrow all of the capital to buy and refurbish a deal, then refinance it and ending up with a hundred percent return on capital employed.

None of that money is left in the deal, which means if you borrowed it from private investors or a bank, you can pay it all back. And of course there'll be a residual deposit. You've had to refinance that property. You've refinanced it essentially on the equity that you've created. The equity that you've created just remains as your residual deposit. Okay. It's all value that you've made. And in that example, you're basically able to invest infinitely because if you could just keep borrowing a hundred percent of the capital to buy and to refurbish.

Andy Graham (09:55.116)
And then get it all back out at the end to pay everybody off. You could just keep doing one after the next, after the next, after the next, and essentially never need to put your hand in your own pocket. You're never going to have to leave any capital on the table. And that's great because that idea means that you could infinitely scale your business. So we all understand the attraction of it, but a lot of people do have very high expectations of this figure. And a lot of people do expect and want to achieve a hundred percent ROI, a hundred percent return on capital employed.

And here's the problem. That rigidity in that criteria means that for a lot of people, a couple of things could well be happening. For many people, finding that deal and finding a way to justify that buying and then refurbishing and getting it all set up will actually produce that metric is exceptionally difficult. It's the needle in the haystack. Yes, people have done deals.

Yes, they do exist, but there are very few of them because all the stars have to align. So what I see is a lot of people setting this very high expectation, remaining incredibly rigid around it and ultimately finding that they go through deal after deal after deal after deal, doing viewing after viewing after viewing after viewing, appraising after appraising after appraising, ultimately getting absolutely nowhere and spending months and in some cases years just appraising deals and wondering why.

They can't seem to find anything. These are often the people that say there are no deals out there at the minute. The market isn't good. And that is a big, big problem. Now, during that time they're sitting out to the market, during that time that they're not actually buying anything, because they've set that criteria so incredibly high, they probably are missing out on some really good deals. Those deals that may not have got that absolute top whack return on capital employed could have still generated a really great amount of cash flow.

They could have actually appreciated in value over the 12 month period that they didn't ultimately buy and actually could have gone up in value and that could have actually over the next few years got them to where they wanted. While they're sitting out the market, the prices of other HMOs and other properties could well go up. So that price drift could be happening in the background, continuing to price them out of the market. For a lot of people, this is very, very frustrating and ultimately why a lot of people actually never get their business

Andy Graham (12:21.45)
off the ground. the first reason I have a bit of an issue with this very high expectation on ROI and return on capital employed is because it is simply so hard to find those deals that people just spend too long and eventually give up trying to find them thinking that they simply don't exist and HMOs are not worth investing in. And actually it's not the full picture. HMO investing should not all be about return on capital employed or ROI whatsoever.

The second issue I've got this and setting extremely high standards when it comes to ROI and return on capital employed is that it makes scaling very, very difficult. Even if you could find that first deal that got you a hundred percent return on capital employed or even the second deal, the chances that you're going to get a third and a fourth and a fifth and a sixth and a seventh and ultimately get to where you want with a portfolio generating enough income to give you all the things that you want in life is very, very low. It's so low in fact.

You can almost guarantee that is not going to happen. It would be a statistical anomaly that it did happen. Okay. You would have to be that one in a million. You haven't just found unicorn deals. You are the unicorn. Okay. And that's a huge problem because once you've done one, you've got that taste and you're chasing the dragon. It's very difficult to find it. And that again becomes very, very frustrating and people end up sitting out to the market for a long time. Prices around them go up and it becomes increasingly difficult to invest, they lose that momentum, they get frustrated, start to look at other things, they chase other shiny pennies.

I'm sure there's a lot of people listening to today who can understand this and to some extent relate to this. So as well as frustrating yourself and making it very difficult to find your first deal, even if you do find a good first deal with a very high ROI, return on capital employed, the chances of you finding a scalable solution that was based on those sorts of deals with those sorts of metrics is incredibly low.

And actually I think that is very, very damaging. Chasing that and being in pursuit of that goal is very, very damaging and is almost definitely going to stop you ultimately getting anywhere near that goal of however many properties it might be. The third thing that I want to talk to you about is quality over longevity. To understand this in a bit more detail, you really do need to go and watch some of the videos inside the HMO roadmap so that I can explain to you in a much greater depth.

Andy Graham (14:46.318)
The relationship between return on capital employed and other metrics like net yield. But in short, it's feasible that we could do a deal with 100% return on capital employed based on refinancing the property on a 75% loan to value mortgage. Now let's say actually that same bank would give us

80% mortgage or an 85% loan to value mortgage, we could get even more capital out of the deal and our return on capital employed would get even higher. But so would our mortgage costs. So actually whilst your return on capital employed could go up, your actual net cashflow can come down or will come down and your actual net yield will also come down quite dramatically because your mortgage payments, because you're essentially taking a bigger mortgage, will go up. So generally speaking,

You have to balance out your return on capital employed with your net yields. And it's very, very important. And a lot of people are overly fixated on that return on capital employed figure and are not paying enough attention to the net yield. Now that is important. There's a couple of things that people will often do as well that essentially creates a similar problem. They will prioritise this return on capital employed at all costs at the expense of the longevity and the health of their deal.
 

So quite simply, they might spend less on the refurbishment, even if that means that the longevity, the types of materials that they're using are not going to stand the test of time. They might get that valuation today, but actually that property might wear out, expire very, very quickly. And then they're to have to come and spend a lot of money on it much sooner than perhaps I might do on one of my HMOs where I invest in better quality materials. And actually that's going to be detrimental in the long-term to the growth of their business.

Similarly, if they are compromising, if someone is compromising too much on that net yield, what it means is that the margin in the deal is very, very slim. So if something happens, like you have a void in the property or the government changes the legislation and we have to end up paying more expenses for whatever reason that might be, or your management costs go up or you get a lot of maintenance or the rental prices come down, which is unlikely, but just to give you an example.

Andy Graham (17:05.39)
If of that happens, your net yield will shrink even further. So if at the point of refinance, you're getting, for example, 100 % return on capital employed, but your net yield is 3%, which is feasible. Actually, if something happens over the longer term of your deal, then actually that could get squeezed 2%, 1%. Actually, there are scenarios where you might not even be making money. Now that scenario is unlikely, but it's absolutely possible. And I'm doing it to explain.

try and help you understand why that is a bad decision. The best deals are the deals that have a good balance. You get a good return on capital employed, but you got a good, strong, healthy yield with a good net margin. And remember, and I've talked about it many times on the show, the absolute minimum you should be trying to achieve on every single one of your rooms at the minute, net is £200 per room per month. 12 months ago I would have said £250 net cash flow per month per room with inflation and cost going up and interest rates that has got squeezed a little bit. even I brought that expectation down to help you guys because a lot of people were sticking too much to that, but you got to think long -term things could happen and things could change. So don't compromise too much on the longevity just quite simply to get that high ROI figure right now. The other thing that I want to talk about is that a lot of people when they are trying to get the very best ROI, return on capital employed, they can. They're almost chasing that at all costs. Then they are disregarding other really great potential benefits that buying other properties in possibly other locations could provide. And the really obvious one there is capital appreciation. Now there's a good reason why you might buy in an area that has good, strong values. And it's probably because there's a lot of stuff going on in that area. Maybe there's infrastructure programs, maybe there's great schools, great universities.

Maybe there's investment programs, whatever it might be, but those types of things in certain locations carry values and help appreciate capital values. And actually, if you're not taking this stuff into consideration because you're blinkered, because you're simply chasing the highest return on capital employed you can, you could be missing out on one of the most important things to your longer term wealth. Now I'm not sitting here today telling you that

Andy Graham (19:28.8)
It's right or wrong. I'm simply trying to encourage you to take a better and more balanced view of all of your deals. If you are one of these people who has set yourself quite high expectations on return on capital employed and you find it difficult to find those deals or enough of those deals to build your business. So just to recap the issue that I've got of setting high return on capital employed metrics is

That being incredibly rigid means that you're likely to find it difficult to find that first deal, which means you can be sitting out the market for a while. And while that's happening, prices around you may well just be increasing. Prices are just drifting up alongside you. The second reason is because from a scalability point of view, even if you do get your first deal, relying on that method to get your second, third, fourth, and so on is probably in all honesty, naive. It's going to be very difficult.

If not impossible to actually build a business simply based on that strategy. And the third reason is because the higher the ROI or the more inclined you are to chase that high ROI, the more inclined you might be to compromise to some extent on the quality of the refurbishments and the program that you're going to do on the property, but also other things that could benefit your property over the longer term. And the fourth and final reason is because you could be disregarding some of the other

really good, very important long -term predictors that when you're investing in property can actually be the best methods to generate wealth. And the obvious one there is capital appreciation. You know, the other one there could be simply missing other great opportunities that materialise into something else over the future. So four really, really, really important reasons why you shouldn't be overly focused on return on capital employed. And just to clarify what I think a high figure is,

And just to benchmark this, if you were to take a pound and put it in the stock market, you'd probably be really, really, really pleased if you got a 10% return year on year. Okay. Well, why, when it comes to property, are we so fixated on trying to get a hundred percent return on capital employed or 70 or even 50? Okay. They're exceptionally high returns and by any standards, incredibly good, something to be incredibly proud of. So just to benchmark it.

Andy Graham (21:46.07)
That's kind what the stock market does and that's sort of what you can expect if you were to put the money in just in the stock market or you get less in a pension fund or whatever it might be. So that just gives you an idea, something to benchmark off. Personally, I like to buy prime located student stock. That sort of stock tends to come at a premium because it's very robust. It stood the test of time. It's very predictable and there's a lot of comfort from lenders in lending in this sort of stuff and investors.

So it's a model that I like for other reasons as well that I've talked about many, many, many times on the show. But what that means is that it's very difficult to get return on investment. That's actually much higher than 20 to 25%. If I insisted on 50%, I would never be able to buy any deals because they simply do not exist in the type of stock in the locations that I actually want to buy.

And I very much have designed my portfolio around my personal and long -term financial objectives. I don't want to be at the beck and call of a portfolio that's scattered around a major city. I want all my properties to be really consolidated. I want to be able to do all of my work at once. I don't want to be doing viewings in the evenings and weekends, which typically you need to do throughout the year if you've got a big portfolio of professional HMOs. Now again, I'm not saying there's a right or wrong here. That's just why I've chosen to do that sort of stuff. And that's why I struggle to get yields of upwards of 25%.

And I would honestly consider anything above 20% really, really, really incredible. But you don't need to say it. I can hear all the cries from a lot of our listeners right now. In many cases, we simply cannot afford to accept a return on capital employed of 25% because we don't have the ability to leave that much capital in the deal.

Or if we were to leave that much capital in the deal, it would mean that we couldn't do the next one, the second one or the third one. And I totally get it. So what I want to do today is present a couple of alternatives, a couple of other ways to look at this. Because what I don't want you to do is think that the only way to build a portfolio with a limited amount of capital is by simply chasing a hundred percent return on capital employed deals around the country, because it simply isn't the case. And for a lot of people, they're just not getting their businesses off the ground because they're setting that expectation so, so high.

Andy Graham (24:05.24)
so there are a few alternatives to this short term ROI focus that I want to talk to you about. The first one is you could quite simply reduce the quantity of properties that you want to buy and you could buy with slightly lower yields. You could quite literally just recalibrate your goals and expectations. Now, what this means is that you don't necessarily need to compromise on the quality of your investment in terms of the cash flow, the actual cash generated.

This doesn't need to affect that at all. You don't need to compromise on the standard of the accommodation. You don't need to compromise on the location of your investment. You just potentially need to compromise on the number of deals that you might buy and what that actual return on capital employed figure looks like. Now, for me, if you gave me the opportunity of 10 professional HMOs that all had done 100% return on capital employed or five HMOs that maybe didn't actually generate me gross,as much cash as that 10 property portfolio, but we're all in the same area, all gave me the performance that I actually like to get from student properties, really consolidated.

I would still take my student portfolio because that is what I want and trust in long term. Okay. So you can reset your expectations around this. And I think because of channels like Instagram and Facebook, and we hear people bragging and shouting about the a hundred percent return on capital employed deals. We think that that is the standard.

That's the benchmark that we should be working to. And when I say with all of my mentees, I help them understand that actually they are exceptionally good results that are often very, very, very difficult to replicate, certainly on a continuous basis. And other types of deals that offer slightly reduced performance on a return on capital employed basis can in many cases be far, far favorable. And like I said, go and watch some of the videos inside the HMO roadmap that are more so about analysing deals and interpreting the information from deal analysis.

And you'll get a much better understanding of what makes a really, really good deal because trust me, it is not simply return on capital employed. So the first thing that we can do is we could actually just reset our expectation. We could recalibrate our expectation. We could buy fewer properties with a slightly lower return on capital employed yield. The second thing that we could do is actually, if we've got an objective of perhaps buying a certain number of properties within a certain number of time, well

Andy Graham (26:28.546)
If we're prepared to extend that timeline, maybe double the timeline and try and achieve the same number of properties in twice the amount of time. I appreciate that that might be frustrating, but surely better than the alternative if the alternative is actually not finding any deals and not, you know, not getting off the ground whatsoever, which for many people is actually the case. That is what is happening. Their finding it so incredibly difficult.

We often and I can't remember who the quote is by, it might be Bill Gates quote, but we often overestimate what we can do in a short space of time, certainly a year or two, and vastly underestimate what we can do over 10 year period. And actually, once you get a number of properties up and running and under your belt and that cash income is generating, and then things do start to gradually appreciate in value and longer term refinances come up and you can draw more capital, you will be really, really surprised, pleasantly, by the fact that

You find it easier to grow the longer you're in the market, the more cash is coming in, the more refinances you've got coming through in the future, the easier you will find it to grow. It's not all about forcing that growth on day one at the very beginning, which is very, very difficult. So that's the second thing that we could do. We could simply just extend our timeline. We could give ourselves more breathing room, more space, more time to actually allow the results to be generated. And that way we can accept a slightly lower return on capital employed because we'll be leaving a bit more capital in each deal.

We could then wait a little bit longer till we accumulate what we need for the next deal and then so on and so forth. The third option is we could be more creative. And this is my favorite, by the way, about our finance solutions. Now let's go back to the example that we used earlier. We left 20,000 pounds in a deal that was generating 10,000 pound net income per annum. That's a really fantastic return in my opinion. It's 50% return on capital employed. It's incredible.

But if that meant that you owed an investor £20 ,000 back. I can understand why that would be a big problem. So let's ask ourselves, what could we do about it? What solutions could we employ if that was the scenario that presented itself? Well, I think there are a couple and I've used them myself and many of my mentees to very, very good effect, have used these as well. The first one is you can quite simply have an arrangement with your investor whereby when you come up to refinance it, there is an amount of capital left in the deal.

Andy Graham (28:50.614)
You could repay that over a period of time after the refinance from the cash generated from the deal. Now I appreciate that might not be the absolute preference for you because you want that money in your own pocket, but look, hey, beggars can't be choosers, right? And at the end of the day, we can't predict exactly what the value is going to be every single time. These are things that we should be taking into consideration anyway. So I would advise you could have a conversation with your investor before the refinance, maybe even before you take a loan from a private investor, you could explain the possibilities of coming a bit short on refinance or the unlikely that you'd have been able to get all of your capital out and explore whether or not they would be open to the idea of if you had to leave a bit of capital in on which they probably wouldn't have any security because the bank would have the security, would they be willing to have it paid back over a period of time after that?

Might be at the same interest rate, might be at a slightly lower rate, whatever you want to come to. That's certainly an option. Alternatively, and you need to be really financially astute and really on top of your numbers with this, but another good method that a number of my mentees have used is they will take a loan from a private investor and actually they will use that loan as a bit of a float in their business. And that float is there to fill the gaps at the end of these deals when that refinance doesn't quite enable them to get all of the starting capital out of the deal to pay an investor back.

So what it means is that they can do a number of deals and over those number of deals, there may be, for example, five deals with each with 20,000 pounds left in the deals. Now that portfolio could be worth 2 million pounds. Okay. Part of that, let's say 1.5 million pounds of that is owed back to the banks. A hundred thousand pounds might be owed to the private investor. We can use that capital to basically cover off the 20,000 pound we've got left in each deal.

We still have a certain amount of equity in the deal and more importantly, we still have a lot of cashflow coming into the deal to service all of this debt. Now we still need a plan to pay this back over time, but again, that could come from the cash income. It could come from refinancing deals into the future. And there is another option here as well. And this is really the fourth idea that I want to share with you. A number of people that I've worked with, mentees, business partners, and just pals out there in the property industry

Andy Graham (31:11.298)
Do this and do it to very good effect. And that is that they adopt a dual strategy. So there are a couple of different strategies that you could adopt. One of them, as an example, could be for every two HMOs that you buy, refurbish and refinance, you sell a third. Again, not ideal. You want to keep everything that you work really hard for. I understand that. But if the alternative is not doing any deals because you simply can't pay the debt back that you need to to private investors, whomever it may be, then surely this is a better option.

And remember, as you grow and as you build a portfolio with a certain amount of capital and generating a certain amount of income, it will become easier. The portfolio itself will start to compound. So over time, I promise it will get easier. It's trickiest at the very beginning. But a dual strategy of buying two and selling one or buying three and selling one, that's a really, really good method. And that's an idea that you could share with investors. It's an idea that you can very easily communicate. People would understand it. There's actually a very market for investors who want to buy ready-made HMOs.

You'd essentially be doing what you have already learned to do really well, which is buy good stuff, refurbish it really well, add value, get great tenants in, you know, all of that stuff. So that's definitely a really good option. Another dual strategy option would be to flip some properties on the side. Jake and Lucy, a couple of our mentees at the HMO roadmap and regulars on the podcast, been on the podcast a few times, have talked openly about their strategy that they've used.

They buy in quite a high capital, high value area and had the same issue with capital, inevitably getting stuck in the deals. And essentially that catches up with you. There's not an infinite amount of capital in the pot. So what do you do? Well, actually if we use some of that capital, some of the capital that we've got, or even some of the skills and experience and some of the investment that we can access and do something like a flip on the side, that flip, if it is successful, can release a big chunk of capital. Let's say we do a flip on the side of our five HMOs that we want to buy, so buying five HMOs, let's go back to the example.

We've left 20,000 pounds of our initial starting capital into each one of those deals. That's racked up as a hundred thousand pounds that we still need to pay back to somebody. But we've got the cash income coming through. How do we pay it back? Well, one option would be to do a flip on the side. And if we did a flip that made a hundred thousand pounds, then that hundred thousand pounds would quite comfortably pay off those 20,000 pound chunks. So that's a really good example of another dual strategy that you could use. So hopefully what I've been able to do today

Andy Graham (33:38.734)
Is help you understand why return on capital employed isn't the be all and end all. And if you're struggling to find deals and you're struggling to find that you're getting flight in your business, you're not getting off the ground, you're struggling to fledge, and this could be one of the reasons, then there are alternatives. There are great alternatives in fact. And I would say that if you do have high expectations, expectations over 30% on return on capital employed, you are almost definitely finding that it is difficult to find deals regularly that stack up that demonstrate you can get more than that amount of capital out.

It's very hard out there guys. It is tough to get those sorts of returns because every man and his dog wants it. And usually prices of properties are priced accordingly. So savvy investors, savvy homeowners have a good understanding of what the ongoing value of a property could be. Examples being, if I want to buy something in my prime student area, even if there's a loft that hasn't been converted into a property, the savvy landlord knows that I'm probably going to do that. And he builds some of the value of the sales price into the deal and I have to essentially pay for it.

That is often just how it works. So finding those really high return and capital employed deals are hard. And look, one other thing to say is that the longer that you've been in the market, the more opportunities that you will find because you will have a black book of good contacts, maybe landlords that you've bought before that could come direct to you, other investor pals that are passing on deals. The longer you are in the more

market, the more immersed you are in that market, the more likely you are to be able to get your hands on deals and the more likely those deals will be to get you the higher return on capital employed. A good example now that I can give you from personally is that as somebody with almost 20 years of experience, I now get offered many more opportunities

that have the potential to make a lot more money than I did when I was first starting. And that is quite simply because I know so many more people. Agents call me, business partners bring deals, landlords come back with stuff, all of these reasons and many, many more. So you do just have to have a bit of faith in the fact that it will get a bit easier over time. But the key is not convincing yourself that the deals simply don't exist.

Andy Graham (35:51.288)
and walking away from the idea now, because I've seen sadly so many people do that set those high expectations, struggle to achieve them, struggle to be able to justify them in the spreadsheets and put the HMO idea down, start looking at serviced accommodation, start looking at rent to rent, start looking at commercial to residential. And all the while, all they had to do was just tweak the methodology, just tweak the approach to what they're buying a little bit. I appreciate there's a lot to take in in today's episode

Hopefully for some of you listening that perhaps are finding it tough, hopefully it reassures you that you are first of all, not the only person. And secondly, there are strategies out there. There are other methods that you can employ to help you get where you want to be. It might just take a little bit longer. It might need you to reduce your expectations a little bit, but I promise you the best businesses are built on the best foundations and the best foundations you could possibly build for a property business are good properties in good locations that have good longevity, they're future-proofed.

Okay. So we don't want to be cutting those corners. We don't want to be simply sacrificing our yield and using poor quality fixtures and fittings to do cheaper refurbs, simply to try and force out the very most we can from our deals. And I do see it happening. That's about it for today's episode, guys. I hope you found this interesting. I hope you found it useful. I hope you found it valuable. If you've got any questions, come on over to the HMO community and ask them in there. That is the place to have a conversation about this and anything else.

It's a really good environment to have discussions about this sort of stuff. You can ask questions and you can ask questions not just to me, but to one of, or any number of our 10,000 community members. So you can actually get the experience from everybody else in our community. And there's so much experience to people doing these sorts of deals. People who've done a hundred percent return on capital employed deals, people who do deals that return far less in terms of return on capital employed. And you can get an understanding of why they do it and how they have found it.

And over time, the sort of balance they've been able to achieve in their portfolios. All of that advice and experience and guidance is waiting for you inside the community. So if you haven't already joined, come and check it out, but do come and ask any questions about this that you've got, because I appreciate that this is a slightly more complicated subject. And if you're new to investing, if you're new to HMOs, then I can appreciate that this might feel a little bit overwhelming to begin with. But that is it, guys. If you have enjoyed today's episode, could you do me a huge favor? If you haven't already.

Andy Graham (38:15.726)
Please leave a quick review of the podcast. It helps more than you could possibly know. It helps us continue to bring great guests onto the show. It helps us continue to able to spread the message about all the great work that you guys out there in our community are doing and why HMOs are so important for the private rental sector. And we are slowly but surely making a dent in the general public opinion, I would say, of HMOs. And I'm really proud of that because that is not something that we can do independently. That is something that we all need to club together do as a community. you're new to the show, thank you for joining us. Keep listening.

 But if you have enjoyed it, if you have found it useful, then please do leave a quick review. If you do want to level things up in your HMO business, if you want to go and find out more about how to stack deals, about how to appraise them, what metrics to be looking at, how to stress test your figures, how to interpret the results, it's all there, waiting for you inside the HMO roadmap, plus everything else you could possibly need, including dozens of my most important downloadable resources that I've spent hours

often thousands and thousands of pounds creating that you can access for less than the price of a cup of coffee every single day. I wish it existed when I was just getting started. And if you are just getting started, you're in the early stages, it's an absolute no brainer. Go and check it out. I promise you won't be disappointed. That's it guys. Thank you again for tuning in today. And don't forget that I'll be right back here in the very same place next week. So please join me then for another installment of the HMO Podcast.