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A Private Finance Masterclass With Mike Clay

November 27, 2024 • Andy Graham • Episode 284

In today’s episode, I’m thrilled to welcome back Mike Clay of Clay Properties. For those of you who follow my work, you’ll know that Mike is not only a great friend, but also one of my business partners. In fact, Mike has become a bit of a regular on the show!

Today, I’ve brought Mike back to talk about something very specific—raising private finance. This is a key strategy that has played a huge role in how Mike has rapidly and successfully built his HMO property business. It's also something that, alongside one of our other business partners, we’ve done on a regular basis, raising millions of pounds to fund property investments. So, when it comes to raising private finance, there’s no question—Mike knows his stuff. And today, we’re excited to share some of that expertise with you.

Topics covered in this episode:

02:09 The Importance of Raising Private Finance
06:51 Understanding HMOs and Their Financial Benefits
10:15 Types of Private Finance
19:26 Preparing for Investor Conversations
25:32 How to Build Trust
30:18 Diversifying Funding Sources for Property Investment
33:39 Mitigating Risks in Property Deals
40:43 Due Diligence in Investor Relationships
44:08 Preparing for the Future Trends in Private Finance

Listen to other episodes featuring Mike Clay:

Episode 81: 0-13 HMOs In 3 Years With Mike Clay (THIS Is How To Do It)!
Episode 163: 'HMO Investor Of The Year' Mike Clay Returns To Reveal His Strategy For Success & Much More!

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[00:00:00] Andy Graham: Hey, I'm Andy and you're listening to the HMO podcas. 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.

[00:00:20] Andy Graham: 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 now.

[00:00:40] Andy Graham: In today's episode, I am incredibly excited to welcome back to the show, Mike Clay. Now for those of you that follow me, for those of you that keep an eye on what I get up to, you'll know that Mike is both a good friend of mine, but also one of my business partners. Now Mike is a bit of a regular on the show as it turns out.

[00:00:55] Andy Graham: Mike first featured on the show back in January 2021 in episode 81, and we did an episode titled 0-13 HMOs in three years. That episode still holds the top spot for the single most downloaded episode today. Now, if you haven't listened to that episode, make sure it's the first thing you do after today's episode.

[00:01:15] Andy Graham: I promise you won't regret it. It's incredibly inspiring. Mike came back onto the show in 2022 after unsurprisingly, he went on to win HMO Investor of the Year at the HMO Awards, an incredible accolade, and Mike and I. further into exactly how Mike has achieved so much in such a short space of time. And that is episode 163.

[00:01:35] Andy Graham: So if you haven't listened to that one, you'll want to check that one out too. Today, I'm getting Mike back to talk about something very particular today. I want to talk to Mike about raising private finance. I know that this is a key part of how Mike has been able to build a HMO property business so quickly and so successfully.

[00:01:51] Andy Graham: It's also something that with one of our other business partners, we do on a regular basis. And we have raised. Millions and millions of pounds to buy property and to invest in property. So there's no doubt about it. Mike knows what he's talking about when it comes to raising private finance. And today we are going to share some of that wisdom with you.

[00:02:09] Andy Graham: Please sit back, relax, and enjoy today's episode. Of the HMO podcast.

[00:02:16] Andy Graham: 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.

[00:02:32] Andy Graham: Inside the roadmap, you'll find a full 60 lesson course delivered by me, teaching you how to find more deals, how 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.

[00:02:47] Andy Graham: 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.

[00:03:03] Andy Graham: 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.

[00:03:27] Andy Graham: Mike, thanks for coming back onto the show.

[00:03:29] Mike Clay: Thanks Andy, nice to be here

[00:03:30] Andy Graham: We speak every day, obviously doing a lot of business together now, but it's been a while since we've had you on the show and you do still hold the record, I think for the most downloaded episode to date. So most of our listeners should, and I suspect will know who you are, but we're gathering new listeners all the time, every week.

[00:03:49] Andy Graham: So perhaps Mike, for some of our listeners who Don't know who you are and perhaps don't know what we do together in business. Could you give us a bit of a high level about your background, what brought you into property, what you've done in property since then, and what you're currently doing in property?

[00:04:04] Mike Clay: Yeah, sure. Thanks, Andy. So my background absolutely isn't in property. I was working for a consulting firm, Accenture for several years, helping large businesses transform and then latterly moved to be an IT director for several businesses. So reasonably big teams, reasonably big budgets. And I really got into property because when I was in consulting, I was working internationally a lot.

[00:04:27] Mike Clay: When I was an IT director, I was working UK wide a lot, which is all lovely, except when you have a young family, it just means you don't see the kids. So, I found myself on holiday with Carrie, my wife, in Ibiza, which was lovely, on the beach, saying, what a nice time we're having, but recognizing that, uh, at the end of the two weeks, I'll be going home and pretty much not seeing the kids.

[00:04:45] Mike Clay: Until two weeks, the next year, and that just wasn't working for me, not seeing the family, not seeing the kids grow up. And so I needed another, needed something to do about it. And, uh, at that time, someone recommended the book that's, uh, famous in the property circle, which had rich dad, poor dad. And from that point, I said, right, that that's it.

[00:05:02] Mike Clay: That's the route for me. It's a way to balance seeing the family, getting some fitness in and also bring some cash in as well. So from that point, I decided property was, uh, was definitely the route for me.

[00:05:12] Andy Graham: And it's fair to say that you took the idea and the concept of acquiring assets pretty seriously, because you've built a pretty, pretty fantastic business.

[00:05:22] Andy Graham: We obviously met maybe four or five years ago, something like that. I think you were looking for a bit of advice from me about, about how to perhaps do it in the HMO space. I shared my thoughts and you went on to build a fantastic student portfolio and we continued to work together. You're part of the mastermind.

[00:05:40] Andy Graham: We obviously had a great relationship and actually now, obviously we're in business together, developing some pretty big assets, lots of commercial to residential stuff, aren't we? We've got schemes in Norwich and in Kent and North and, and some of those are quite big schemes. And one of the things I was really keen to get you on the show to do today was to talk about what I think.

[00:05:59] Andy Graham: You're exceptionally good at amongst many things, which is using finance, raising finance, utilizing finance and using private finance and debts to build a business because there's no doubt about it. And there's certainly no secret, especially in our conversations about how important finance is to the ability to actually acquire assets.

[00:06:21] Andy Graham: And I think this is one of the things that. A lot of our listeners, a lot of our community members understand, but continue to struggle with. And it's very difficult to know exactly how to do it, know exactly how to use it in the best way and how to do it all safely. And I think you're a bit of a master and I think to be fair as a business partnership and with Mark, who's not on the podcast today as well, but I think the three of us are really quite good at that.

[00:06:43] Andy Graham: And actually the proof's in the pudding because I mean, some of the conversations we have and some of the amounts of money that we do use now are quite substantial. So it'd be great to get some of your opinions. On that and see kind of how you've been able to master that through your student portfolio and then into kind of the stuff that we do now.

[00:07:01] Andy Graham: So perhaps Mike, you could kick us off with why you think. Raising private finance is so important because obviously the different types of finances high street finance But why do you think raising and being able to raise private finance is so important?

[00:07:15] Mike Clay: I mean it comes down because I haven't met anyone yet who's got an infinite supply of money So no matter what your starting pot is at some point you will run out And the bank will lend you a proportion of the money you need to buy, refurbish a property, whether that's a small property, whether it's something for a flip or whether it's for an HMO or for some of the larger developments that we're doing, is there's always a gap between what the bank will lend you and what you need to completely buy and refurbish.

[00:07:42] Mike Clay: Pay all the fees, do refurbishment, upper property. So you need cash and it's a very capital intensive business. So no matter where you start from at some point, you'll run out of cash. Unless you're the one person who I've never met, who was able to get 100 percent of their cash out of every single deal.

[00:07:58] Mike Clay: And they just are well talked about on property investment courses, but I haven't met anyone yet who's been able to replicate cash out on every single deal. I just don't think it exists in today's market. So you will run out of cash. So you do need to embrace finance.

[00:08:13] Andy Graham: It's something that I've spoken about a number of times on the podcast and been quite vocal about it. Are there some deals out there that allow you to add loads of value and recycle your money out and get everything back out? Yes, there are, but they are the exceptions. And actually, most people that I think that I sit down and talk to and want to build businesses like the portfolios that you and I have built.

[00:08:35] Andy Graham: They want to find a solution to scale. They want something repeatable and something scalable. And actually waiting around for the unicorn deal is one thing if you can afford to wait, but actually if the goal is to do a certain number and hit some financial targets over a period of time, then actually waiting for those unicorn deals just isn't conducive, is it?

[00:08:54] Andy Graham: Because there are. To be honest, so few, and they are so far between. So I think those exceptional deals really are the exception. And I think that that is absolutely what we're talking about. And raising private finance has allowed you and me and lots of people that we work with the ability to get into more deals without having to worry too much about how much comes out at the other side of the deal.

[00:09:16] Andy Graham: And we're going to talk about that today and exactly how you've structured some of your deals and we structure our deals. Because even though we're not able to get all of the initial capital out, there are solutions to how we manage that at the back end. But simply raising the finance in the first instance to actually acquire the deals is great.

[00:09:33] Andy Graham: Just to add to some of your points as well, Mike, I agree with them. I also think raising private finance is incredibly favorable in terms of speed. Flexibility and simplicity using the banks is very difficult, and it does slow you down. Banks often want to send surveyors out to monitor works. Banks often have more restrictive covenants on the loan to values and things like that.

[00:09:57] Andy Graham: Banks often want your inside leg measurement, as we all know. And then, of course, we're paying for our solicitors and their solicitors. And Apparently everybody else is solicitors it seems these days and it's all very frustrating and that sort of stuff does frustrate the deal. It all costs money and it all costs time.

[00:10:14] Andy Graham: Let's talk for a moment specifically about HMOs because this is obviously somewhere that you can really focus your attention and I think actually that's why your podcast episodes have been so popular because we really focused on how you were able to do that. And then I think if I remember rightly, you actually described it as having a laser focus, one single product. So just talk to me very briefly about why you think HMOs work so well in combination with private finance.

[00:10:42] Mike Clay: I think we really were able to take advantage of this is good for all investors. When you're looking to raise finance, we were able to identify from an HMO perspective, what we wanted, which is a high cash flowing asset.

[00:10:54] Mike Clay: And so when you're talking to investors, you can describe the long term capital growth, which is understandable, but you can also describe the high cash flowing assets and the cash that you're going to get back. So I think as a model, as a business model, I think it's great because it does give you the opportunity of long term capital growth, but it also gives you the ability to generate cash.

[00:11:13] Mike Clay: And when you're talking to an investor, all of the investors that we talked to. Are either successful business people, they run their own businesses or they're successful in corporate life. And so having a model that generate cash and generate capital growth, it's very easy for an investor to understand as a business concept.

[00:11:31] Mike Clay: So I think HMOs really tick the boxes as something too easy to articulate to investors, something to invest in.

[00:11:37] Andy Graham: Yeah, couldn't agree more. And I also think that when you're trying to get into a HMO deal, again, going back to the kind of those unicorn deals, if you're looking for the deal that does everything, it generates all the cashflow.

[00:11:46] Andy Graham: It's in the very best location and it's got the highest degree of rental confidence, and it's got loads of scope to add value and recycle all of your money out. That is again, incredibly difficult to find. That really is the needle in the haystack. The priority, I think when it comes to HMOs should always be cashflow, cashflow, rental confidence for me.

[00:12:04] Andy Graham: And one of the big compromises that I make in my own portfolio is capital out. I ended up leaving a lot of capital in my deals now because the very prime student properties now that doesn't work for everybody. And that balance can be different depending on what's more important to you or somebody else.

[00:12:22] Andy Graham: But I think it is really important to remember that as you say, HMOs are fantastic because of the cashflow that they provide. They're actually not fantastic to add loads and loads of value, especially when you're looking in core and really prime locations, because of course every man and his dog wants to get a really good quality, well located HMOs these days.

[00:12:40] Andy Graham: So it makes it a very, very competitive market. Talk to us, Mike, about the different types of private finance, because there are different ways that you and I and our listeners today can think about using private finance, aren't there?

[00:12:54] Mike Clay: Yeah, there are. There's probably three that are at the top of my mind. Our favorite one is just purely debt finance. And by that, I mean, somebody lends you some money. For a period of time and they get a fixed interest. So someone might lend you 150,000 pounds to go and buy and refurbish property. You might buy that property with bridging. You might buy it with your own cash.

[00:13:14] Mike Clay: You might do it with a mortgage and they just simply lend you the money for a period of time. You give them a return and at the end of the project, they get their money back plus return. That's a really nice, clean, easy way of doing it. And you can immediately start talking to your friends and your family and tell anyone about that, because it's such an easy, clean concept.

[00:13:33] Mike Clay: The ones that I would approach with more caution or at least more due diligence are things like joint ventures. So this is you're really are getting into bed with someone for a period of time. And so that means you are working together with an individual. You might provide your expertise, you might provide your time and they might provide the money.

[00:13:52] Mike Clay: So you'll go and buy a property jointly. I set up a business, a limited company. So you're setting up a limited company together and then you're buying property in that, in that limited company. And ideally they provide all the cash. You provide your expertise and your product and your time. And at the end of it, you have a property and assets in that limited company.

[00:14:11] Mike Clay: So that doesn't take having any of your capital, but you just got to be really clear about what your objectives are and what your joint venture partners objectives are and ensure that they're aligned because you're probably going to be with this person for a long time and be financially linked to this person for a long time.

[00:14:27] Mike Clay: So you need to be very clear that this is someone you want to be effectively in bed with for a very long time. There's a bit of a hybrid model, which is, is kind of a one for me, a one for you, which is you might say, okay, well, I want to. Have the cash, but my investor wants a long term capital growth as well.

[00:14:44] Mike Clay: So you might come to an arrangement where they lend you money and, uh, you get a return and you buy a property, you're in a limited company, and then they don't take a return. And then you buy a property effectively with their money, but you do it in their limited company. And, uh, you provide your time and expertise for free.

[00:15:01] Mike Clay: So effectively you're replicating a JV model, but you're doing it in separate entities. It does take some trust on both sides because you're doing it in, you can't very often do that at the same time, unless the investor has, uh, oodles and oodles of cash. And so it's a nice model if you find someone who you're, you're happy to work with, but you keep your capital growth in your limited company and you're not financially tied together quite so much. So one for me, one for you, it's quite a nice medium model.

[00:15:27] Andy Graham: It's interesting, isn't it? There are different ways to utilise private finance. And actually, I think when our listeners are thinking about this after today's episode, I'm perhaps trying to look for actions that they can take. I think one of the things that is important to remember is that investors will often have a preference as to how they might want something to work.

[00:15:45] Andy Graham: And you might, have a preference as to how you might want it to work. Now somewhere, and sometimes there is a solution that works for everybody, but sometimes it just isn't compatible. And sometimes actually the best solution is actually just to find another investor. And I think also just to really highlight and perhaps circle around one of the words that you mentioned, which is trust.

[00:16:05] Andy Graham: I think it's so incredibly important, no matter what you borrow, and no matter what terms you borrow it on, whether it's in a joint venture or on a debt basis, whether you're giving a personal guarantee. But I think that getting it right is so incredibly important. And actually, this is something that you and I and Mark and our business partnership, we take so seriously.

[00:16:26] Andy Graham: It is an absolute highest priority at all times, isn't it? Investors ultimately get paid back no matter what but there's a huge commitment to being able to do that because deals often get delayed things that people don't see happen and we're going to come on and we're going to talk about contingencies and this isn't to say that there isn't a time and place when you might need to use a contingency, but just making sure from those values are all completely understood by all parties.

[00:16:55] Andy Graham: It's not just a loan. It's not just borrowing. A bit of money that, and agreeing to pay it back. It's actually having the trust, having the faith, having the confidence in one another, it's about upholding whatever that agreement is under all in any circumstances, and it shouldn't be taken lightly.

[00:17:11] Andy Graham: And I think that that is one of the troubles that we've seen. A lot of people talking about raising finance, maybe teaching, raising private finance, making it perhaps sound a little bit easier than it is, but certainly perhaps not placing enough emphasis on just how. Substantial and significant. The commitments to raising private finance are, and it really wouldn't be unusual at all for an investor in any arrangement to ask you to personally guarantee something if that goes wrong and you can't pay or the deal can't pay that loan back.

[00:17:41] Andy Graham: Ultimately, you're going to be on the hook to do it. And I think that those sorts of commitments have to be really well thought through. And sometimes it means having a chat with your wife or another business partner to make sure that everybody really does understand just how serious these sorts of financial commitments are.

[00:17:56] Andy Graham: I don't know if there's anything you want to add on that, Mike, but I do think it's really important, is it? Because it's not as simple as just kind of knocking up a bit of an agreement on the back of a napkin. It's pretty serious stuff.

[00:18:07] Mike Clay: Yeah, there's a few things that we always make sure we do, and we need to make sure at the front end that we're absolutely aligned in our objectives and our goals with any investor.

[00:18:14] Mike Clay: So there aren't surprises coming down the line of people wanting something completely different. But at the back end, you need to really understand how you're going to get out of this deal. That means you really understand your high, medium and low financial projections. You're not just looking at the most rosy case, but also really understand what contingencies you have in place if things do go wrong or if things are late.

[00:18:35] Mike Clay: You really take that seriously as well so that you can pay your investor back the quickest thing to make sure you don't get any more investive investment from investors not paying back in full on time. And similarly, some of our investors who've been with us for years started off investing a small amount of money.

[00:18:49] Mike Clay: Now they're in investing a considerable amount of money with us, and that's only because we go and pay them back in full on time every single time. And if we don't do that, then the trust is starts to erode.

[00:19:00] Andy Graham: Absolutely. I want to move on and I want to talk about some of the things that we perhaps need to get in place if we're going to borrow private money under any of these terms or types of arrangements, what sort of stuff that we do.

[00:19:10] Andy Graham: And I suppose in the business that we run together, that's something that we're regularly doing. And we probably, there's a big overlap between what we do, but there are some differences in the bits and pieces that perhaps we handle or maybe where our own strengths and weaknesses lie. But it'd be great to hear from you, Mike, about

[00:19:26] Andy Graham: Some of the things that you're thinking about and perhaps need to be in place from an investor's perspective, if you are thinking about raising money, and I'm suppose I'm thinking about things that almost give you the credentials to be able to lend money from someone in the first place.

[00:19:41] Mike Clay: And there's quite a lot Andy so it starts a long, long way away from meeting someone and asking for cash. So we kind of, when I talked to my mentees, I talked to them about a year in advance, preparing to have a conversation with an investor. And if I was an investor, I would be looking to make sure the very primary thing I get is my money back and then interest on top of it.

[00:20:01] Mike Clay: So what, what do I want to have in place to get my money back or the things that we ensure that we have in place is about a year's worth of digital proof is what we say. So. Can the investor come and find you in multiple different places doing what you said? You are doing so it's no good just saying i'm just about to start a deal can i have some cash you need to be able to demonstrate to the investor multiple things so the things that we always say is what's your product do you have a product do you have an understanding of what that product is and how that product relates to the market so do you have a good understanding of your market do you understand what your competitors are doing in the market do you understand the price point do you understand the quality.

[00:20:39] Mike Clay: Do you understand what your tenant demographic is and what your tenant want? We're talking about things that are a long way from raising private finance, but all the things I think we need to have in place, which is okay. What's your market? What's the competition in the market? What's your tenant demographic in that market?

[00:20:53] Mike Clay: And how is your product meeting that market? So have you got good product market fit for your product? And once you have that, have you demonstrated that? So have you done it once? Have you done it twice? Have you done it three times? By the time you've done that and you've documented it and you've put that on social media, you've maybe done a couple of magazines and maybe you've put that on your website, you know, have you got multiple touchpoints where that investors can go investigate all of these things about you and see it?

[00:21:21] Mike Clay: I actually had one investor come and see me. His builder put me in contact with him and he literally sat down in a coffee shop and said, Hey, Mike. Yeah. Stevie's, uh, said you're a good guy. I've seen you in a magazine. I've heard you on a podcast. I've seen you on social media. Probably you didn't know about me.

[00:21:37] Mike Clay: He talked to him about himself for 10 minutes and said, right, should I, what a hundred is 125 grand. Okay. So, you know, having all that wealth proof in the background, I think is almost a checklist of what you need to have in place. Before I think you're ready for someone to, to invest in you. And that's without even saying, well, how do you get people to invest in you?

[00:21:55] Mike Clay: I think you've just got to put yourself out there and be visible for people to find you rather than going out and hunting for money at a time where you were desperate for cash. I think everyone can smell someone who's coming desperate for cash. I know I've certainly been in certain property meetings where people are asking for cash and they just kind of look desperate because they've got this deal that's going to fall out of bed and please, please can I have some cash?

[00:22:19] Mike Clay: I think you need to have the other approach, which is put yourself out there and say, this is what I am. This is who I am and here's my product. And here's my offering. If you're looking to invest in that, then this is me. I know it's a much more effective way of raising finance and making yourself available to investors.

[00:22:36] Andy Graham: I think there's a good piece of research by Google and it's about these touch points and it's not specifically about raising finance. It's about selling to customers and what customers need to feel comfortable and ready to buy. And the consensus is generally that it's 10 touch points. I think the school of thought used to be more like seven, but I think now it's more like 10 touch points and those 10 touch points could be, like you say, in the form of reading an article, it could be sitting down and having a meeting.

[00:23:02] Andy Graham: It could be an email exchange. It could be a phone call. And I think when you talk about the planning ahead and being a year ahead of when you need finance, I think it really kind of highlights just how important it is to make sure that you have got time to get those touch points in. It's unusual if you're trying to hunt an investor down and sit them down 10 days in a row or you're in contact every single day from start to finish with the expectation to raise finance.

[00:23:25] Andy Graham: Of course, those 10 touch points. They're not going to happen immediately over a 10 day period. They are going to need time to go away, to think, to look at their other affairs and what's going on with their finances, to look at their own plan. And they also probably want to spend a bit of time just observing you, just lurking, just watching what you're up to, just making sure that actually everything that you're talking about, actually they can see you doing.

[00:23:47] Andy Graham: And I think that that's important as well. Actually continuing to do what you say that you're going to do and making sure that people can see it. I've seen people go and do lots of work and get in the right rooms with people. And then the magic hasn't happened there. And then, and they haven't continued with that consistency and that persistence.

[00:24:06] Andy Graham: They've done a little bit less on social media. They've let other activity drop off and inevitably. That attention from that investor has gone elsewhere because somebody else is doing it and keeping busy. And I think that that's important. And I was going to highlight one thing here, Mike, and actually I think I can do it with you because you were here.

[00:24:23] Andy Graham: So you were there. So I might be blowing my own trumpet, but this is a true story for our listeners. We've done quite a lot of lending as a business in the last few years. And. Some of that has been from the high street. We don't exclude the high street, but a lot of it has been privately. And I think earlier this year, maybe last year, we all agreed, didn't we?

[00:24:41] Andy Graham: In our business that it was probably time for us to try and move away as much as possible from the banks with the large facilities, which for a period of time, we'd probably found that getting individual investors with capacity at over a million pounds. To invest in our project simultaneously was tricky because understandably people and investors want security.

[00:25:00] Andy Graham: So the banks that had capacity to lend substantially more was obviously the sensible thing to do. But we have been frustrated, haven't we, by the timelines and the delays and all the usual things that you experience with lenders. But we went out and we looked for a private investor. And that's a relationship that we've been nurturing for a while.

[00:25:18] Andy Graham: And we've got a fantastic new lender, which we're working with now, essentially a private investor. But did we, or did we not walk into a meeting quite recently where it's just a touch point meeting where we were having a conversation and some other people in that team had been brought to the meeting.

[00:25:32] Andy Graham: And it turns out that somebody there had been listening to the HMO podcast, and we were having a conversation before they realised that it was me and it was that the podcast and I just a little bit, but actually how great was that for us that these people so comfortable that some of them were already listening to the podcast and all of that kind of digital footprint.

[00:25:55] Andy Graham: And yes, it may have been without even realising it was on me that was sat in front of them, but so great to have. Conversations and talk about building trust and giving people comfort and experience. I mean, it's such a powerful tool. And one thing that I say to everybody is you just never know who's watching or listening.

[00:26:13] Andy Graham: It's so the reach, whether it's in a magazine or a podcast or on social media, it is absolutely incredible. It just, it never ceases to amaze me. But sometimes you've just got to have a bit of faith that actually that magic is happening out there, but you have got to put the work in and you've got to be consistent with it.

[00:26:30] Mike Clay: Yeah, I mean, that was a superb meeting. It was sitting there with the directors of businesses and they literally all got the phones out and went, Oh my God, actually, Andy, this is you. I listen to this all the time, but it can be thankless, can't it? Just putting stuff out on social media again and again and again and again, because you don't always get.

[00:26:46] Mike Clay: Very quick return. So I would say, just do it for a year. Just keep on doing it. Just don't expect something back quickly. Just, just keep on posting stuff about what you're doing. Don't worry so much about how polished it is or how amazing you look, or it's right the first time document what you're doing and it doesn't even have to be a refurb quite a lot of mentees are actually, I'm not, I haven't bought my first property yet.

[00:27:09] Mike Clay: Yeah, but you're doing area analysis. You're working out what the competition is doing. You're working out what. How shapes are around in your area, what you're working out, what routes you want to the particular work or train station or university. So what areas is best for you? All of those things are interesting things for people to understand and things that investors would understand as well, because you're making sure that what you're designing meet the tenant demand.

[00:27:34] Andy Graham: And I think it also helps you curate a story, which everybody loves, people love seeing what you're doing and being brought into that world. And it might not be something that they necessarily want to do themselves, but it's interesting and it's honest and it's really transparent and they are touch points.

[00:27:50] Andy Graham: That is all of that digital footprint. And one thing that I say to my mentees regularly is look. This has to be a first priority. There's things that you just need to get up and do in your business before you do anything else, before you start going through the emails, before you perhaps even start worrying about where the next deal is coming from or scrolling through Right Move.

[00:28:07] Andy Graham: Actually, are you spending time building a digital footprint, your credibility, your authority, or you're actually getting out there and in front of people, because it is a thankless task and it is going to take time, but you need to continue doing it. If you don't, when you do find that perfect deal, unfortunately there's going to be no one there at the gates waiting for you.

[00:28:24] Andy Graham: Right. What you really want. And I think this is that chicken egg thing. And I get asked this question a lot. Do you find the deal first? Do you find the investor first? Often the consensus that I hear is that actually money will follow a good deal and yes, it will, if you know where to get the money, if you don't know where to get the money and that money isn't available or you haven't had conversations to prime that money, doesn't matter how good the deal is, if you haven't got someone to put it in front of and talk to, it's just not going to work and you're certainly not going to be able to raise private finance for it because like you said, going cap in hand or asking for money in a rush, it's without a relationship in place is going to be extremely difficult.

[00:29:01] Andy Graham: So for me, getting up and prioritising all of these efforts and activities to raise private finance is incredibly important. And we're good examples. We've taken it very, very seriously. I've gone to the lengths of recording. I think we might be on 280, coming up for 300 podcasts, which is a really extreme example of exactly what you're talking about.

[00:29:22] Andy Graham: But honestly, that's why it all started. It was all about building relationships, building authority and building credibility. And these things really, really do work. I think that there is inevitably, Mike, a point where everybody who has a bit of money runs out. You mentioned this earlier in today's podcast.

[00:29:40] Andy Graham: And I don't care how much money you've got. It eventually runs out because buying assets in the UK is really, really expensive. And this is a challenge for people. And even if you can raise private finance to buy the next deal, if you can't get all of the money out, what happens? Let's talk about. As someone's building and growing a business, how important is it perhaps to diversify sources of funding?

[00:30:05] Andy Graham: And maybe that's also taking us onto some of the creativity in deal building that we might need to find to enable it.

[00:30:14] Mike Clay: I've seen a really interesting pattern just across a lot of people I've been working with and mentees is that. Even if they raise debt finance, once you get to about four properties, depending on how much cash you can recycle, if you're only recycling, say, for example, 50 percent of the cash out and you're borrowing money to buy deals, you still need to put 50 percent of the remaining cash into that deal and you still need to pay the investor interest.

[00:30:39] Mike Clay: So even if you've got a whole chunk of money yourself, at some point, you're going to run out of the ability to pay the investor back unless you are consistently finding those unicorn deals, which is just not something I've been able to achieve or anyone I know. So I've noticed an interesting pattern of when you get to about four HMOs.

[00:30:57] Mike Clay: Or when you get to about eight HMOs, the people do start running out of the ability to take debt finance because they just haven't physically got enough cash because of the amount of cash they're having to leave into deals. So then you've got to find another way of progressing and keeping that momentum going.

[00:31:12] Mike Clay: Now that could be, you have a trading business, it could be you're sourcing for people. It could be that you're offering a kind of portfolio service for other people where you're just. Finding properties, uh, refurbishing them for other people. And, uh, so it's kind of like a portfolio builder and you're charging fees, which is another trading business.

[00:31:31] Mike Clay: So that's just another few examples of just getting more cash. I mean, you could just have a good job and you just keep squirreling money away, but that's kind of generating cash for your own self. The other way is to go into the one for me, one for you, or the JV side, which is actually recognising that you've come to the end of the ability to generate cash.

[00:31:51] Mike Clay: At a sufficient speed for yourself, therefore you need a period of time until those 4 HMOs start generating or the money for the rent of those starts building up and then you can go again. So you need to do a JV, so using other people's money to buy the properties and you still keep that momentum and we've definitely done that with people that we know, like and trust.

[00:32:11] Mike Clay: We've done JV about property number four, and that enabled us to continue. It also enabled us to keep those relationships with the estate agents going. So we were continuing to buy. So they continue to contact us before other people. They enabled our build teams to be busy. So we kept a consistent building going on.

[00:32:28] Mike Clay: And so, yeah, switching to a JV model or a one for me, one for you model. That was the way we were able to proceed and then back about, we, that took us another couple of HMOs forwards and then HMO number six and seven, we used, we had our own capital again, saved up from the rent and we used debt finance for those two.

[00:32:47] Mike Clay: And then again, around eight, we bought some more with our JV partners. So we definitely do fluctuate as we grow the portfolio to in between debt finance and JV finance.

[00:32:58] Andy Graham: Lots of different solutions really to achieve the same objective. And I think it really depends on what's going on, where you're investing, the types of projects that you're investing in, the market, the timing.

[00:33:08] Andy Graham: I mean, anyone who was coming out of a deal when Liz Trust was in number 10, understands just how tricky it can be all of a sudden when stress testing or rates or even lending products are pulled from the market. And that can really change the way that things look at the back end. And I guess in the same breath as sort of having.

[00:33:27] Andy Graham: These conversations and exploring creative strategies at the front end. There's also, I think the backend that we should consider in the contingencies in case things don't pan out. Let's talk about that, Mike, and some of the solutions that we use when we're looking at how we can mitigate everybody's risk, our own risk, our investors' risks, and all the various things that might happen.

[00:33:52] Andy Graham: So perhaps we'll start with the different things at the back end of a deal that could happen, that could influence whether or not you can pay an investor back on time or in full.

[00:34:01] Mike Clay: There's the things that you can control, and there's the things that you absolutely can't control. So the things you can control, I think, are things like the build cost, making sure you're on top of the numbers of the build.

[00:34:11] Mike Clay: Are you understanding what the builder is doing? Are you approving all variations before they're done? And then there's the time. So, you know, if you're borrowing money for a period of time, then every month there's delays costing you interest. And so, you know, are you, have you got a clear plan worked out?

[00:34:25] Mike Clay: The builder, is that builder delivering on time? So there's a couple of things that are quite common. Uh, not easy always to get right, but they're common with each build and something everyone needs to be on top of. And then you've got the, uh, the dreaded valuer that comes at the end of the deal and just makes stuff up.

[00:34:40] Mike Clay: Maybe I'm being a bit unfair to valuers, but I have had a valuer come round to two of my properties, and these properties are one street apart. They are identical to one centimetre. They're the same layout, the same spec of a refurb. Everything is exactly the same, and they valued them at 30,000 different.

[00:34:57] Mike Clay: Between the two properties and the only thing that was different was the weather. So your value might come out at the end and down value the property. And everyone I know who's been in property for a while has had a down valuation at one point or another. So there are things that definitely could go wrong or at least really impact your ability to pay the investor back.

[00:35:16] Mike Clay: And so you need to have a clear understanding of what you're going to do in that instance. Are you going to pull money from elsewhere? The first thing we always do is have a conversation with the investor early clearly and honestly and say that this is the problem that we have and here are the solutions we've thought about resolving that that is paying back part of the money that is putting the money back out from other deals that is putting money from savings.

[00:35:37] Mike Clay: That is raising other investment from other investors and we have these contingencies mapped out before we even get to that situation and we talk those contingencies through the investor if we find ourselves in that situation and we always do pay the investors back but sometimes the investor comes back and says, I actually know it's no problem for me, I don't, I'm not actually interested in having the money back on time, I quite prefer having three months more interest, thanks Mike, so thanks for the chat but can we just, just keep the cash for three months, which

[00:36:01] Mike Clay: Lead me on to the thing that when some of our investors have quite a lot of cash and constantly deploying that cash in that capital becomes quite a job for them and so having a stable income stream from them where they don't have to think about where they're deploying that cash. Is actually beneficial to them.

[00:36:21] Mike Clay: So rather than putting investors on a pedestal, sometimes I think of investors, the people who have a problem, which is they have a, an amount of money and they need to find a safe, secure place to get a good return on that investment, which is a problem for them.

[00:36:33] Andy Graham: I think a lot of people trying to raise money do often see it as something one sided initially raising money to help them build their business.

[00:36:40] Andy Graham: But actually, like you say, It's a really great opportunity for lots of people who have a genuine interest in business and property who have a genuine interest perhaps in you and what you're doing and actually would really appreciate a much better return that they might get from you than they might get either in the bank or in the footsie or something like that.

[00:36:59] Andy Graham: You've sort of shared some really interesting ideas on the creative approach and things to be mindful at the back end. And perhaps I should add some methods that we actually put in place to help make sure that we can mitigate the impacts of any of these unforeseens. Because you are right, there's things that you can control and there's things that you can't control.

[00:37:18] Andy Graham: But I suppose some of the really simple things that we do with our agreements with all of our investors is, the first thing is, Before we have a problem. And of course, we would raise an issue as soon as possible. But actually, before we even do the deal or come to an agreement, actually highlight all the things that could reasonably go wrong and what the impact of that could be.

[00:37:36] Andy Graham: That sort of transparency, I think is absolutely critical to any investor relationship. I think investors get it. They really appreciate it. And it makes the conversations much easier if something does go astray. Um, I think one of the things that we always do as well is we make sure that we've got enough meat around the bone to help if there was a time delay or if there was a cost delay or even in a scenario where neither of those was the case.

[00:38:00] Andy Graham: But for example, the bank's opinion has changed and actually the covenant, the loan to value that they want on the refinance. So let's say we had hoped or anticipated have been told that at the end of our project, we'd be able to get a 75 percent loan to value mortgage. We can then assume a certain value that will release a certain amount of capital back out that we could pay our investor with.

[00:38:21] Andy Graham: But actually, what if that product isn't available and actually it's only 70 percent or 65 percent and that's certainly the case when you move into bigger deals, as soon as you're sort of developing blocks of flats over 10, there's no way anyone's going to give you 75 percent loan to value. And actually that really squeezes the deal because that means that, for example, if the bank requires 30 percent of equity in the deal at the end to refinance, unless you have created 30 percent capital uplift in that project, you're going to struggle to get out of that deal and pay everybody back.

[00:38:51] Andy Graham: So what do you do in that scenario? Well, a little different if it's just a HMO and it's just one unit. But for example, we have various models that we plan where on the blocks of flats, we could sell one or two units. We could crystallize some capital to plug back into the deal to then be able to refinance the rest of the project.

[00:39:12] Andy Graham: There's also examples with private investors coming back, perhaps to HMO specific deal where you could have a longer term arrangement in place after that. There could be an open conversation at the front end of the deal to talk about this possibility at the back end. And a lot of my mentees, they will actually come to some sort of arrangement where they pay a certain amount over a certain period of time.

[00:39:34] Andy Graham: They just reset the loan. Some of those have linked that almost to the mortgage rate. So they get a similar rate. Some of them have paid it back from the cashflow, all sorts of different things. But I think the other thing that we try and do is also just make sure that there's enough fat in the timeline as well.

[00:39:48] Andy Graham: One of the real issues that a lot of people who are new to raising and using private finance, I think, come up against, certainly that I've experienced, is that they underestimate how long it takes to go through the refinance process with a bank. A HMO project might take, let's say, six or nine months start to finish.

[00:40:04] Andy Graham: But how long does it take to refinance? Well, actually that can easily be four months and that's probably a good case. It can certainly be a lot longer. Is there enough scope? Is there enough length on the rope in the agreement to enable you to go through the process of a fairly slow refinance with the bank?

[00:40:21] Andy Graham: So all the sorts of things that I think need to be well thought out. When you're constructing these sorts of agreements with private investors, I mean, Mike, this has been what feels like a real masterclass on raising private finance, but I think the truth is we're still only really skimming the surface that there is an awful lot.

[00:40:37] Andy Graham: And we do spend an awful lot of time. Don't we procrastinating on the timelines and the amounts and the types of deals that we do with our investors. But it's an incredibly important part of our deal. I think before we wrap up, I think just one last question that I want to ask, and I'm looking back at my notes here because I think that this is an important one.

[00:40:58] Andy Graham: In terms of due diligence, I think this is one that could be easily overlooked, but in terms of due diligence on potential investors and to ensure alignment and trust, what would your advice be?

[00:41:08] Mike Clay: So I think it's being really open and clear about what you're trying to achieve. Over what timeline is the first thing and just talk through with a potential investor, what they're looking to achieve as well.

[00:41:19] Mike Clay: So it starts off for us. Are we aligned in goals, are we aligned in timelines of what we're looking to achieve? So, you know, I'm in property, I want to be still doing it in 30 years. All of our deals are predicating on buying and holding for the long term. Does that objective align with the investor's objective if you're doing a JV together?

[00:41:40] Mike Clay: If you're just looking to raise debt finance, what's that person's position? I never take investment from someone who doesn't have very much money. So not because I want to borrow the money, but if it's unbelievably important to that person, that they get that all of that money back on that date, then is it the right thing for them to be doing to lending this money out to what is a higher class, what is a higher risk investment?

[00:42:06] Mike Clay: So, But the kind of due diligence that we do is we always meet people multiple times. We talk through alignment in goals, what they're trying to achieve. We talk through what else that's going on in their life and where they are, what they're doing. We kind of want to know whether or not we know and like them.

[00:42:19] Mike Clay: And also we go through quite a process of going through almost heads of terms for an agreement. So, okay, what do you like doing? What do we like doing? And we walk through a typical project quite in detail to say, okay, What will you do, what will we do, and just so there's no ambiguity, uh, all throughout the sourcing process.

[00:42:37] Mike Clay: Okay, so we're doing a JV, we go into even more details, so sourcing property means we will go and do all the marketing, we'll do the direct to vendor campaign, we'll speak to all the estate agents, and you will do none of that or some of that. And so we want to make sure we step through every single part of the project and get absolute clarity about who's doing what.

[00:42:57] Mike Clay: So that's the kind of face to face stuff. There's also a bunch of background due diligence as well, just searching our company's house for them, do simple Google searches on Facebook, on Instagram, all those as well, just to make sure that there aren't any hidden nasties that we can't find on the web. So we want to make sure that due diligence isn't just one way from the investor to us, we want to do a similar big due diligence back to the investor, so we really know who we're working with and dealing with.

[00:43:24] Mike Clay: And we've got some great investors who are lovely people and are really aligned with what we're trying to achieve.

[00:43:28] Andy Graham: And as far as we're aware, don't have any skeletons in the closet. I said it was the last question, right? But actually I've got one more. And I want to ask you about your thoughts on the future trends for private finance.

[00:43:41] Andy Graham: Do you see the landscape for raising finance evolving over the next few years, particularly in the HMO space? And what advice would you give for any of our listeners today who've been inspired by today's episode, who can actually see a route to being able to build their portfolio and access more finance to do that but are wondering what they could do to perhaps prepare for it.

[00:44:01] Mike Clay: There definitely seems to be an overall trend for more legislation and more regulation around property. If you're a landlord or a property investor, that seems to be the general trend. Having said that, that doesn't seem to have really reached the financial services side of it.

[00:44:19] Mike Clay: So the extreme example would be if the FCA suddenly become very interested in private finance and making sure that people are regulated. I mean, that is a long way off, but I think that people should recognise that they are in an environment where property investment is not any of the party's government's um, flavor of the month.

[00:44:38] Mike Clay: And they're definitely doing an awful lot to provide more obstacles than help to landlords. So I think that's the environment they're in. And in terms of people preparing for this, I actually think that people should just knuckle down on their own business, being absolutely clear about what their business offers, making sure they got a fantastic product, offering a great service to tenants, and then everything stems from that.

[00:45:03] Mike Clay: So if you do really understand your market, really understand your product, really understand what your tenants want. I need to deliver a product to meet those tenant demands then you will have a great business and part of that is the underlying mechanics of the business have you got a grip of the cashflow have you got a grip of the finances you understand the marketing that you're doing but in terms of preparation for the future.

[00:45:26] Mike Clay: I think you should just be knuckling down on your own business and making sure that, uh, it is a great business. That'll take you an awful lot further than preparing for what the next government or government after might be doing.

[00:45:37] Andy Graham: Sounds a lot like focus to me, Mike, which I think takes us full circle. I mean, just to add to that, I think that your advice is really on the money there, pun intended, but I think that there are some, some really simple key, sort of key actions that people can take.

[00:45:52] Andy Graham: Be honest with yourself. And if you're listening to today's episode and are inspired by this, ask yourself whether or not you're doing the right things to raise finance. Are you sharing your story? Are you documenting the journey? Are you reaching out? Are you having conversations? Are you getting in the right rooms with the right people?

[00:46:08] Andy Graham: Are you doing it consistently? Are you getting up and prioritising? The actions, these actions to raise finance before perhaps doing the other stuff, the less valuable stuff before perhaps you're scrolling on Instagram. Are you connecting and building relationships with people? Are you building investor decks?

[00:46:24] Andy Graham: Are you actually learning about creative strategies? Are you doing all of this stuff that takes you closer to the money, to those arrangements that you can make with private investors? And I think just to give you guys listening today a bit of a leg up, if you. Want some inspiration and need a bit of help creating an investor deck?

[00:46:43] Andy Graham: We've got a template inside the HMO roadmap that you can download. You can literally use my template and add your information. An investor deck is a great tool to be able to put yourself and your story and your objectives and your brand and your mission and values in front of an investor neatly packaged up.

[00:47:02] Andy Graham: And I think putting it onto a deck forces you to get everything into place, but actually knowing where to start can be a bit tricky knowing about the information to include. I understand it can be a bit overwhelming, but that document is inside the HMO roadmap. We've also got loan agreements. Now it goes without saying that especially with new investors, you should be getting those executed by solicitors on both sides, but if you do need a loan agreement template, we've got that sort of thing inside the HMO roadmap as well, but build a plan.

[00:47:30] Andy Graham: Actually. put down on paper, some decisive action, set yourself some KPIs and set some targets to go and achieve and go and raise some private finance. And actually I think to top today's episode off, and we have spoken about a lot, haven't we Mike? But I think have faith. I think that that is the one thing that we probably just haven't mentioned.

[00:47:48] Andy Graham: And actually it isn't rocket science and there's In my opinion, somebody for everybody out there when it comes to raising the finance, there's a lot of people that I see raising money and I certainly wouldn't lend them money. And I imagine there's people out there lending money that probably aren't interested in lending us money.

[00:48:04] Andy Graham: But I think have the self belief there's no rocket science behind this. I think if you do these things, you keep it simple and you focus, actually you can achieve some really great things. And I think you and I, Mike, A really good examples of that, aren't we? I think we've just done the simple stuff and we've done it really well and really consistently, and we've achieved some really, really great things from it.

[00:48:23] Andy Graham: But Mike, it's been an absolute pleasure to have you back on the show today. I have no doubt whatsoever that this will be another very popular episode. Whether or not you can knock yourself off the top spot will wait to be seen, but it's really great getting your insights into how you've been able to build your portfolio.

[00:48:38] Andy Graham: And I know that we're talking about a fraction of the process behind building a portfolio. We're just talking about finance today. Thanks for coming on. Thank you for sharing all of your ideas. Mike, for anyone who's listening today, it goes without saying that you and I, as a business partnership with Mark and our fellow investor group, we're always happy to have a conversation.

[00:48:56] Andy Graham: So anyone listening today who's thinking about maybe lending some money or wants to have a conversation with us, just reach out to either Mike or I, but Mike, anyone who wants to reach out specifically to you about anything, where is the best place that they can contact you?

[00:49:08] Mike Clay: Either just hop onto Instagram and you'll find us under Clay Properties or just drop me an email mike@clayproperties.co.uk and happy to chat to anyone.

[00:49:17] Andy Graham: Wonderful. Mike, been an absolute pleasure. Thanks again for joining me and I'll look forward to speaking to you in no doubt about 10 minutes about something to do with one of our sites.

[00:49:27] Mike Clay: Thanks a lot Andy, been a pleasure.

[00:49:35] Andy Graham: That is it for today's episode guys. Thank you for tuning in. Hope you enjoyed and hope you found a huge amount of value in what I think was an absolute masterclass on raising private finance today. Now, don't forget that if you want to really level things up, if you want help putting everything we've discussed in today's episode into action, then make sure you head over to theHMOroadmap.co.uk.

[00:49:54] Andy Graham: get yourself signed up as a member and take advantage of everything we've got waiting for you inside the platform. If you want to get your hands on my templates, my downloadable resources, including my investor deck template, my loan agreement templates, please Video lessons, teaching you how to use social media to build that digital footprint.

[00:50:16] Andy Graham: We've got over 70 case studies from community members, including Mike. You can actually learn from Mike's deals. You can see exactly what he's done and how he's done it. We've got dozens and dozens of masterclasses from experts like Ellie, our mortgage expert. Andrew and Mary, our architects, planning consultants, interior designers, everything, and a whole lot more.

[00:50:35] Andy Graham: Trust me, for less than a price of a cup of coffee every single day, you could quite literally achieve 10 times the amount in a 10th of the time by joining the HMO Roadmap. If there's anything in today's episode that you want to discuss, come on over to the HMO community. That is, of course, our free group in Facebook.

[00:50:51] Andy Graham: It's a great place to ask questions, to find guidance, support, advice, just to speak to people who are out there doing what you want to do. Other investors, including myself and Mike, and about 10,000 more members, all doing great things that we can learn from. That's it guys. Thank you once again. 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.