Overcoming Start-Up Struggles With Alex & Sam From SO Properties

In this episode, we're doing things a bit differently. I'm joined by Sam and Alex from SO Properties—partners in business and in life. They’re wrapping up their very first HMO deal, and I’m excited to talk to them about that experience. We’ll be talking about the journey, the challenges they faced, and how they got started in the industry.

But that's not all—we’re switching things up a little. Sam and Alex have some questions for me, so we’re going to have a mini Q&A session. I’ll be drawing on my 15+ years of experience to offer as much advice as I can and help them navigate their journey.

If you're just starting out or scaling up, this is an episode you definitely don’t want to miss. 

Topics covered in this episode:

• 03:10 - Challenges of Starting in Property Investment
• 07:23 - Five-Year Plan and Financial Goals
• 19:41 - Funding Strategies for Growth
• 24:21 - Navigating Risk and Leverage in Property Investment
• 27:05 - Balancing Cash Flow and Capital Growth
• 29:04 - The Importance of Diversification in Property Portfolios
• 34:28 - The Pros and Cons of Joint Ventures
• 37:58 - Self-Management vs. Outsourcing Property Management

Please leave us a quick review on Apple Podcasts or Spotify to help us celebrate this milestone!

-

Got any questions? Ask us in The HMO Community Facebook Group or follow me on Instagram @andygraham.hmo for daily HMO tips and advice! 

If you want to join my 1-2-1 mentoring program, you can enquire here. 

New to HMOs? Join The HMO Roadmap on a premium plan and unlock our award-winning library of 400+ resources to help you start, scale and systemise your HMO business. Get started now!

Transcript

[00:00:00] Andy Graham: 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.

[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, we're doing something a little bit different. Today, I'm joined by community members, Sam and Alex from SO Properties. Sam and Alex are business partners, they're partners in life, and they're just finishing their very first HMO deal. I want to talk to them about that deal. I want to talk to them about the challenges of getting started.

[00:00:58] Andy Graham: Plus, we're going to do things a little bit different. Alex and Sam have got some questions that they want to ask me, and we're going to do a bit of a Q& A, a mini mentoring session. I'm going to give them as much advice as I can. I'm going to draw on my 15 plus years of experience and help them as much as I possibly can.

[00:01:12] Andy Graham: So if you're at the beginning of your journey, if you're just scaling things up, then this is definitely an episode you don't want to miss out on. Please sit back, relax, and enjoy today's episode of the HMO Podcast.

[00:01:26] Andy Graham: Hey guys, it's Andy here. We are gonna be getting back to the podcast in just a moment, but before we do, I wanna tell you very quickly about the HMO roadmap. Now, if you are 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.

[00:01:42] 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.

[00:01:57] 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.

[00:02:12] 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.

[00:02:36] Andy Graham: Hi guys, thank you for coming onto the podcast today. 

[00:02:39] Sam: Hey Andy.

[00:02:40] Andy Graham: I'm looking forward to this episode recording with you guys, because I think this is going to be a slightly different episode for us. You guys are at the beginning, I think, of your HMO journey. And a lot of our guests that come on the show, they're a bit further down the line on this journey.

[00:02:55] Andy Graham: But the challenges are different and the obstacles and the hurdles and everything about it is different. And I thought it'd be great to get you on and get your perspective on how the business looks at the minute and the challenges, how you actually managed to make that kind of leap from the nine to five into what you're doing now and find out a little bit more about yourselves.

[00:03:12] Andy Graham: And we're also going to do a bit of a Q and A today, a bit of a mini mentoring session, if you like. I know that you guys have got some questions that you want to ask me, so I'll do my best to answer them for you. But before we get there, it'd be great if we could find out a little bit more about you guys and your business.

[00:03:25] Andy Graham: So Alex, you're based and investing in the South coast of England. Can you tell us a little bit about kind of what the, your interest in property currently look like and what you're doing at the minute as a business?

[00:03:35] Alex: Yeah, sure. So, SO Properties was founded a little over a year ago, but we've really only just started getting really into HMOs this year and we are going for HMOs in Bournemouth specifically.

[00:03:49] Alex: It's an Article 4 area. We've been doing sui generis HMOs for professionals and we've gone to the very high end of the HMO market. And so far it's been really good. We've got one project that's about seven weeks away from being fully completed. And we've got another two that we've lined up, bought them, plans are in, and we're waiting to get started on those as well.

[00:04:09] Andy Graham: All right. So it's all go full steam ahead. And am I right in thinking that you started doing this about a year ago? So you sort of almost finishing the first project now, and you've got two more on the go about to start, and that's all within the first year. Interesting. And. Tell us a little bit more Sam about before property, you and Alex obviously worked together as you kind of share a lot of in your roles, but actually, I don't want to talk to you about this today.

[00:04:34] Andy Graham: Your roles within your property business are a little bit different. You've defined them, but tell us a little bit about how you guys met and how you came to the decision to actually invest in property. There's so much stuff going on out there. There's so many courses that you could go on. There's so many people doing things and doing it in different ways. How did you actually cut through that and make the decision to invest in property?

[00:04:53] Sam: So I guess to start us off, Alex and I met about seven years ago, which is in our corporate lives. We've worked together ever since kind of side by side in the same roles. We then kind of got together in personal lives about five years ago now.

[00:05:06] Sam: And for the last three years, I would say we've both been kind of exploring property. We were very guilty of being those people that went to lots of training and we'd done lots of research and education. And, and it just got to a point where we had to just bite the bullet. We had buy to let properties that were making us around 3 percent ROI per year.

[00:05:28] Sam: It just wasn't making sense. And then at the start of this year, we made that decision of, okay, BRR HMOs is a strategy for us. After learning about all different things, service accommodation, rent to rent, BRR HMOs, supported housing. And that was truly the one for us. And we've just really tripled down on it over the last 10 months.

[00:05:47] Andy Graham: And how did you make the decision to actually get started with HMOs and do that in Bournemouth? It's not a cheap part of the country, and there must have been a process that you guys went through to actually make that decision. I know, Alex, that part of your role in your business, based on our pre-chat chat, I understand there's You kind of handle the appraisals and the numbers bit. So perhaps this is a question best answered by you.

[00:06:09] Alex: Yeah, I think where we are, we're just outside London. And when we were doing the kind of, where do we go? Where are we going to focus in terms of areas? If you draw anywhere around London, that's pretty difficult, right? Because it's super high prices in terms of property prices and the yields just weren't really there.

[00:06:26] Alex: And then we had a choice to make. We had a choice of do we go towards kind of middle and the north of the UK or do we go down south? And we were lucky enough to speak to lots of different people, get lots of different perspectives, and the South coast from a capital appreciation perspective, was better.

[00:06:42] Alex: And it also meant that when we started looking into it a bit more, we had that debate of Article four, friend or foe. And we realised that actually there's a lot of opportunity. There's a lot more red tape and there's a lot more things to get your head around, but actually there's a lot of opportunity there. So that's where we managed to focus in on that South Coast area.

[00:07:02] Andy Graham: Fantastic. And this must have all been part of a bigger plan, I assume. This certainly you haven't stumbled across that this first HMO. And I get the impression that you guys have probably been thinking a bit further beyond just the first or second and third property. Can you talk to me a bit about that five year plan, Sam? What does that look like for you guys and how did you design that?

[00:07:23] Sam: Yeah. So I guess one of the first podcasts we listened of yours actually was around. Kind of reverse engineering your numbers, where do you need to be, or how do you get to where you need to be by counting kind of the HMOs that you need and things like that.

[00:07:38] Sam: So we kind of sat down and went, right, our ultimate goal in five years is to be able to kind of replace our corporate salaries through property. To give us that flexibility and option. We love our jobs and we wouldn't change kind of our corporate lives as well. But we want the flexibility. And for us that's where the five year plan come into play.

[00:07:58] Sam: We worked out that we need 10 BRR HMOs in the south coast. To kind of get us to where we want to be from a cash flow perspective And from there, I just got super aggressive with the numbers.

[00:08:11] Andy Graham: So it sounds like you've reversed engineered this, which I think is absolutely the way to do it. And any other way, I think you really risk drifting off course.

[00:08:21] Andy Graham: It's quite easy, I think, just to get started with something because it's easy or it's there or you heard someone in the pub talking about it. But actually. That deal or that location of that strategy might not be quite right for us. It's different for all of us, isn't it? What we actually want to ultimately achieve and what we need and how we are going to get there is different for all of us.

[00:08:44] Andy Graham: And it sounds like you guys went through that process, which is always good to hear. And much less risk of you being one or two degrees off and then getting to your end of your five year plan and finding it actually a thousand miles out from the, you know, maybe the financial objectives or even that freedom and time and choice and the flexibility that you really want, which is the simple stuff in life and I absolutely get it.

[00:09:05] Andy Graham: We'll talk to us about this first project and your experience of doing the first deal. Then Alex, has it been a baptism of fire or, or was it as you expected? Was it more challenging than you thought? 

[00:09:17] Alex: I think we've been really lucky that we're working with experienced people that are experienced with HMOs. And I think that is the difference between the projects going relatively well and it potentially being a disaster. So that's been great. And when I say people, I mean, there is so many people, you don't realise how many people are actually involved in what is a very intricate process of doing a BRR HMO, whether it's brokers or whether it's architects or whether it's the actual builders themselves, everyone in between.

[00:09:42] Alex: So, so far, it's been really good. We've learned a lot and we're taking a lot of those lessons in our second and our third HMO project in that area. So I think that the number one thing has been communication and getting good people. They would listen to one of your podcasts and you mentioned about kissing a few frogs and we've done a little bit of that, but we've actually been very lucky because we've taken the time to speak to as many people as possible and get recommendations from people that have been doing it and have the experience.

[00:10:13] Alex: And that has saved us an enormous amount of time and energy and money and mistakes as we've gone through the last couple of months.

[00:10:20] Andy Graham: I think that's a great piece of advice to share and really good to hear. It's really difficult sometimes when you're planning a new business or planning a new project.

[00:10:30] Andy Graham: And again, the easy choices are just to pick the first builder that you come across or go with the cheapest price and actually go through a proper tendering process, spending time to actually meet people, get them on site. Build a bit of a rapport with them. Do they email you back when they say they're going to, have they included the detail that you need to understand?

[00:10:51] Andy Graham: Have you got the references? Have you been and seen them and met them on their size? Is it all adding up? And it does take time and there's a real commitment to it. And I think it's really important that people are listeners and new investors really do understand how much of a commitment there is to actually just getting these parts.

[00:11:08] Andy Graham: And these ducks in a row the risk is you get something wrong and the whole thing comes down like a deck of cards you have the wrong builder and then you miss out on your timelines and then you have an issue with the mortgage and so on and so forth and actually they can be really expensive problems from a time and just pure financial cost perspective so it's really great that you guys have been through this process.

[00:11:29] Alex: I suppose it hasn't been all plain sailing, but more of the projects are actually been okay. It was getting to the project itself, but that was the tough bit because when you're new. You're an unknown entity to everyone involved and you have to build that credibility and you have to have that consistency and a state agent is a perfect example when we're in sales and we know what it's like if they qualify as a buyer and you have to consistently deliver and show up and the same what you said in terms of the builder of them saying that they're going to email you email, it's the same on the other side.

[00:12:03] Alex: You need to do what you're going to say you're going to do and you need to do that consistently to build that. Because otherwise. you're always going to be at the bottom of that list. They've always got people that have got existing relationships and you need to get part of that club. And that takes a lot of time.

[00:12:17] Alex: We probably spent our first four or five months just grafting at that and not getting a lot of progress for it until we really actually found the. Yeah, the right properties and started building out the right contacts.

[00:12:28] Andy Graham: Yeah, I think you speak some real truth. And actually we were finding that a lot of our community members were struggling with this piece, Alex.

[00:12:36] Andy Graham: And actually that's one of the reasons why we started to build some of the services inside the Roadmap out because we could see that people were struggling to know who to turn to for their architecture services or the right broker who really understood the lenders and the specific types of products and the way that properties can be valued commercially and actually without a feasibility from an architect and without understanding what.

[00:13:02] Andy Graham: Maybe the term finance looks like on a deal and perhaps without having a good planning consultant and lots of other stuff, it can be really difficult to pin down what your investment actually looks like. And yes, there can be a cost to it. And yes, there's absolutely a time that needs to be put to it, but we really did recognise how much of a challenge this was just getting into the deals, let alone being in the deals and managing projects themselves.

[00:13:23] Andy Graham: So it's really great to actually hear that you guys took this on board and really prioritise this exercise. I suppose now that you've kind of got that first one under your belt and you've nearly finished, are there any lessons that you've learned from the first project that you will take into the next projects?

[00:13:38] Sam: Yeah, I think my absolute biggest lesson has been no matter how perfectly you plan and time everything, property does not stick to your timelines or your plans. I had a very neat timeline that planned out, right? Builders go in on this date and they'll finish on this date and then we refile on this one. And sometimes you just have to show a bit of flexibility and kind of go with the flow. 

[00:14:04] Andy Graham: I think that is, even now 20 years on, the most accurate sort of representation of doing small developments and development projects that we could give anyone. And actually I think it really highlights the importance of planning.

[00:14:19] Andy Graham: For that to happen and plan for the worst hope for the best and having contingencies in place, especially if you're working with private investors or you're on a bridge and you need to get off and it's, you know, there's going to be a certain cost to it. And actually, what does that mean? If you accumulate more interest?

[00:14:35] Andy Graham: And unfortunately, I think even with the best planning in the world and, you know, the best builders and there are surprises, there's things behind the walls, there are global pandemics, there are budgets by people like Liz Trust that can all kind of come in and just kind of pull the rug from under your feet.

[00:14:50] Andy Graham: And I think the fact that you guys coming out of your first project and you're already talking about this sort of stuff, and you're aware of it, is brilliant. It would be really concerning, I think, if actually the whole project had gone swimmingly and there was nothing that you could have sort of come out of the woodwork that had made you kind of maybe change the way that you plan to do things next.

[00:15:09] Alex: It's all about problem solving. That's the big thing. There have been things that come up and you just have to angle it and go, okay, right, that's happened. That's going to take an extra 10 days to fix and we're going to have to get something to come out. They're normally far less expensive because we need a certificate for something.

[00:15:25] Alex: You have to go with it and then you have to figure out, okay, how do we make that time back? How do we kind of trim that cost or use that contingency? As you said,

[00:15:33] Andy Graham: that problem solving element, Alex is one of the things that I've really enjoyed about building businesses and especially in property. Um, the number of challenges that land on my desk. And problems that need solving on a daily basis. Some of them quite, you know, significant with pretty huge implications. And while it's really frustrating and you kind of wish it wouldn't happen in a way, it is one of the reasons why I love building businesses and doing this. I like the fact that I'm constantly kept on my toes.

[00:15:59] Andy Graham: And I like the fact that it isn't predictable despite how much work, how much control we want to try and to make it predictable. It never is predictable, but I quite like that. And I think in a sadistic way,

[00:16:11] Alex: Yeah. And when the stakes are this high property is a high stakes game. You can make good money, but you can also lose a lot of money. And when mistakes are that costly, I think it does give you an edge as a team. I think we've got really kind of sharp in those skills. And it means that you've just put, you've got more skin in the gates. You just put more energy into it. And as individuals, I think we've learned a ton, but as a team, I think we've done pretty amazing things over the last 10 months.

[00:16:39] Sam: I mean, you are the numbers man. So if you lose me a ton of money, I won't be happy. 

[00:16:42] Andy Graham: The thing will be pointed well and truly at you, Alex, in that case. But before we get on to some questions that I know you want to ask me, just help me understand then sort of very high level. So we've got the first HMO that's coming up for refinance.

[00:16:55] Andy Graham: That is how many bedrooms?

[00:16:57] Sam: That is an eight bed, all en suite. Luxury high end HMO.

[00:17:02] Andy Graham: Very nice. And what is your anticipated cash returns, like bottom line income when all is said and done on that project? You've refinanced, you're repaying the mortgage, you've got your bills, overheads and stuff like that. What should the performance on that property be every month?

[00:17:17] Alex: So we're looking to net about 2.8k now, obviously there's voids and things like that, but if fully tenanted 2.8k and we're at a ROIs of somewhere in the region of about 30%. 

[00:17:30] Andy Graham: Okay. And that's on a self managed basis, I assume. Yes. Brilliant. Okay. And the next two projects that are already on the books, but you're just getting things in line, where are they and what will they look like? Are they similar types of projects? 

[00:17:43] Alex: Yeah, if you draw a circle, they're probably within five minutes of each other. 

[00:17:46] Andy Graham:Great. I mean, that is music to my ears. Absolutely. And is the objective the same with them all ensuite HMOs? 

[00:17:53] Alex: Yeah, the two that we bought are actually pretty much cookie cutter. They're a little bit different. So they're detached Victorian houses. One's going to be a seven bed. We could have squeezed eight in there. We wanted it to be premium. We've got rooms in there that are 18 square meters.

[00:18:11] Alex: So. It's a really nice scheme. And then the other one is an 8-bed as well. So they're all sui gen HMOs. Five minutes with each other in an A4 area. 

[00:18:19] Andy Graham: I mean, you're definitely saying all the right stuff. And these are obviously from a sort of cashflow performance wise, these are really good properties. You know, the eight beds, there's a few challenges to eight beds that I've talked about on the show before, but definitely if you can pull them off the relationship between the sort of the asset value and the cashflow, it generally just does increase significantly over five rooms.

[00:18:41] Andy Graham: So really great to hear this. And how have you bought this? Just help me understand as a business, where is the capital coming from to buy these HMOs, how are you getting out the deals and how are you making it possible to do the next deal?

[00:18:54] Sam: So in terms of our first project, it's fully funded by ourselves. As we mentioned, we've worked in technology sales for a long time, so we've really kind of grown our funds so that we truly have skin in the game. And then the next two, it's a combination between investor funding, we've raised just over 430,000 in investor funding this year, and also bridging on one of our projects.

[00:19:16] Andy Graham: Well, so you guys, so I think this is an important point to pause on just for a second, because this will be really interesting to our listeners. So you guys, you've done the first project and you've got the first, the next two on the box, but you've already raised over 400,000 pounds in private investor funds and the skill to do that. And I suppose the confidence to do that, that came from the exercise. Before we can do the first deal, all the work, the research, that's where it all came from. 

[00:19:40] Alex: Yeah, I think once you know the numbers, once you've seen it, there's a lot of people doing high end HMOs at the moment, and it's a proven model.

[00:19:49] Alex: Then we've got our corporate backgrounds, our jobs are to understand businesses and understand the intricacies of those businesses and how do you improve them and how do you ultimately help people make money? That's what we do for a living. So when we convert that into our business, we were thinking, okay, well, how are we going to do the same?

[00:20:06] Alex: We don't went through a similar analysis and investor finance is going to be a critical part to us scaling and us growing out those 10 HMOs that we want to get to in five years. And we can help people, investors make a lot of money in doing that as well. So it was kind of a win-win and a no-brainer.

[00:20:23] Alex: And when you have those conversations, you break it down to people. We've been lucky in terms of circumstances, actually investors that we've been speaking to who happened to just have quite a lot of cash there. We've also been talking to people who we never thought would have any money, and we're still talking to about what we do.

[00:20:40] Alex: And they ended up that they did. So, yeah, I would say my biggest advice is talking as much as possible about what you're doing. And you never know where that's going to come from.

[00:20:51] Andy Graham: I've got to say, guys, I'm, I'm seriously impressed. And this isn't meant to sound patronizing in any way, but with as little experience as you have, but you have such a good insight into the model and obviously such good control over the kind of your strategy and to have executed on it as well as this at this stage, that's really, really impressive.

[00:21:12] Andy Graham: You should be really proud of yourselves. A lot of people. It takes them a long, long time to get to the point where they realise that actually finances is kind of the key to unlocking the growth. It takes a lot of mistakes to realise that actually it's a bit like decorating all of the preparation.

[00:21:28] Andy Graham: That's the important stuff. Yeah. The easy bit is slapping the paint on the wall. The difficult bit is all of that preparation. So you guys are absolutely saying the right things. Well, look, I know you've got some questions that you want to ask me. So now that I've got a good and thorough understanding, I think of your business, shall we fire away with some of your questions?

[00:21:45] Sam: Yeah, let's do it. But I guess one of the things that I would love to get your opinion on is, as Alex and I have kind of talked through, we've got super aggressive growth plans, but we're super conscious of also being over leveraged. Because in your opinion, what does healthy and sustainable growth look like?

[00:22:03] Andy Graham: That's a great question. And I think you've got to remember that the answer to this is going to be different for everybody. So, and it's dependent on your current situation, circumstances. It's really dependent on your risk profile. So I'll give you my opinion. I'll kind of explain how I break it up and manage that, but you have to interpret that in a way that's right for you.

[00:22:25] Andy Graham: And that's the same for all of our listeners today, listening in. So with my HMOs, I think when it comes to HMOs, fundamentally, the primary objective should always be cashflow. Fundamentally. I think they are still the best performing. real estate class when it boils down to good old sort of cashflow. But there is definitely a compromise.

[00:22:45] Andy Graham: The further away you kind of try and kind of push the deal in the direction of capital uplift and to be able to recycle cash out, I think the more you risk compromising that. So a good example is within the article four directions, it can be quite challenging to find those deals that allow you to add lots of value and recycle money out.

[00:23:02] Andy Graham: Well, they're the deals that. We'll typically have incredibly high rental confidence where you'll probably get the best rent, where you probably long term get the best capital appreciation. There's two risks here. One of the risks here is that you buy loads of those deals. Or you start buying those deals, but you ultimately run out of options because it just sucks up all your cash.

[00:23:22] Andy Graham: You cannot get cash out of the deals fast enough. That's a big risk to you in your business. So while actually you might not be over leveraged on the deals and you've probably got very good and safe deals, actually your business and the plan is at risk because you haven't been aggressive enough. On the other side, if you kind of tip that on its head, if you push too hard into trying to get cash out of deals, you end up maybe investing in areas where there isn't a huge demand or where there isn't a huge precedent set.

[00:23:49] Andy Graham: And actually the weather changes, the value gets outta bed on, on the wrong side, and, and it comes in actually, it doesn't give you the valuation that you want and all of a sudden you've got a problem. because you've got less predictability in your model. Within the article 4 directions, you've got more predictability.

[00:24:04] Andy Graham: Equally, you might get over the first hurdle with, let's say, a professional let outside of an article for direction on the fringes, you might make a good sort of amount of capital uplift. But if some way down the line, let's say two or three years later, the wind changes direction and they fall out of favor or banks don't want to put as much value on them because perhaps you're not getting the occupancy that you expected.

[00:24:30] Andy Graham: That's a real problem. And actually, what do you do in that event? The answer probably lies somewhere in between. You need to probably carry enough risk and enough leverage. To keep the music going, but not so much that it, the music stops, you're kind of, you're the ones that are holding the ball. I think as an absolute minimum, you always want to have a continuity in the worst case events.

[00:24:55] Andy Graham: If there was a Black Swan event, what would you actually do? Could you tolerate that? Are you confident if, for example, you had kind of an issue with values in the future, would it matter too much if you still had the confidence of paying the mortgage, getting the rental income and paying it. You'd probably find that a bit more tolerable.

[00:25:15] Andy Graham: So I think you've got to take a few things into careful balance. What I personally wouldn't do and wouldn't recommend no matter how aggressive your plans are, is to buy lots of stuff and get it all leveraged on a commercial valuation and do it all in the same way. So lots of, for example, eight beds, all in the same location, all with the same bank.

[00:25:35] Andy Graham: All on commercial valuations, that for me, there's too many eggs in that one basket. I want to see a bit of diversification in there. What I'm saying is some deals can be more leverage than others. And some deals have, might have a bit more of a focus on cashflow or capital uplift short or long term than others.

[00:25:54] Andy Graham: The real way to de-risk what you're doing is to actually balance everything out overall. In a perfect world. And if you asked me what the perfect deal was in terms of balance, I would say that's one where there is a healthy net and gross yield, there's a healthy return on capital employed and there's a healthy cash flow.

[00:26:12] Andy Graham: So at least 200 net cash flow per month per room, but ideally more like 250. That's on a managed basis. If you're getting that and your return on capital employed was between 12 and 15 percent and your net yield was somewhere in the region of about 6%, that for me is a very healthy deal if, of the spreadsheet, it's in a good location.

[00:26:30] Andy Graham: But not every deal is going to be like that. And it would be unrealistic to actually plan to do every deal like that. So I think you've got to stay open minded. I think you've got to have your wits about you. You've got to be prepared to take a bit more risk here and a bit less there over the sort of the journey that you guys are going on.

[00:26:46] Andy Graham: And what you'll find is that gradually what happens is. Your risk reduces naturally because you're diversified. And if you're not too aggressive about refinancing as well, you can let hopefully with time, some capital build up in your assets, which just reduces your risk profile. You got a little bit more cushion if something happens.

[00:27:05] Andy Graham: So I know that's a long winded way to answer your question, but I think the truth is because it's not a simple answer. And I said, I was going to give you a couple of examples from my own. So let me do that. My HMOs now are super vanilla, student HMOs in an article four direction, all in a similar location.

[00:27:22] Andy Graham: I have different types, fours, fives, sixes, and so on. They are very, very easy to run. They give me a lot of rental confidence because of the university nearby. But they don't really do me particularly well from a capital creation point of view. So while they're low risk and very safe, actually, I can't just do that and continue to hit my long term number, my big growth plan.

[00:27:43] Andy Graham: So actually, I've got to take a lot more risk somewhere else. And that's what I do with my bigger commercial to residential projects. They are significantly bigger. They require a lot more from a capital perspective. Um, they potentially reward, you know, much greater amounts, but the risk is much, much higher as much as possible.

[00:28:03] Andy Graham: I try and separate those risks. There's always the potential that if everything imploded, things are personally guaranteed and got to be mindful of that. But that is how I sort of separate it. And I don't try and get too much of anything from one deal. Those deals, those commercial treasury projects, the assets at the end that we try and keep, they're not the best from a cashflow perspective.

[00:28:22] Andy Graham: Actually, they're pretty, pretty poor versus the HMOs, but they do really well on a capital perspective. So my strategy, I think, is a good example, but fairly extreme example of that diversification process. So plenty of food for thought for you guys. And I think you could certainly afford, if you're fixing some of your mortgages, Five years.

[00:28:39] Andy Graham: I think you could certainly afford to do a bit more of what you're doing for the next five years. But I think you want to be getting those capital values. Um, you'd be allowing them to increase over time, but also reduce your loan to values over time and then gradually doing different types of projects as well.

[00:28:54] Andy Graham: But at the same time, keeping your business really streamlined so that you're not having to do and juggle lots of different things. A long winded answer, but hopefully that has answered your question.

[00:29:04] Alex: Yeah, very, really helpful. I think from our side of things. We wanted the next five years about growth and cashflow, and I think that's something which we're aiming or sprinting with Sam in terms of getting to that five year mark.

[00:29:22] Alex: But I think you're right, and we've heard you talk about diversification a lot on this podcast. And we know that we want to be in a position where if something does go wrong, if there's a market change, if there's a new bill that gets introduced, actually, we haven't got all of our eggs in one basket and something that we hadn't really considered only in the last couple of weeks or months was we were thinking, great, we'll just mortgage it up to the hill on a commercial valuation.

[00:29:50] Alex: We'll take the highest LTV ratios, we put it on interest only and happy days. It was only when we were speaking to other people around. Actually, what happens if and what happens in that five year mark, or if you fix for maybe the second time, it's okay, but what happens when your next fixed term comes up?

[00:30:08] Alex: And that got us thinking in a slightly different way in terms of over the medium term, we certainly want to be knocking down those LTV.

[00:30:15] Andy Graham: I think long term, and I mean, this is my goal, yours might be different, but I think long term you want to be letting inflation sort of road your debt away. And for me, I think the getting down to the sort of across the board, 50 to 60 percent loan to value or a 10 year period, I think that's a great position to be incredibly safe.

[00:30:33] Andy Graham: Not completely bombproof, but as close to it, I think, as you can get as possible. And actually, if you're doing deals that allow you to exit and you've got solutions to maybe pay any residual debt back, if you're leaving a bit of capital on the table, whatever it might be over time, I think you can be creative and you can find solutions, maybe.

[00:30:50] Andy Graham: Every now and then you sell a property and you just chip away at some residual debt. There's different ways to do it, but I think long term that's probably where you want to end up. And at the end of the day, you might choose to go again at some point between now and then. It gives you the choice. And I think it gives you that cushion.

[00:31:06] Andy Graham: It gives you almost that insulation if there is a big shock, but there's no doubt at the early stages of business, you are going to have to stick your necks out a little bit just to get to a point where you can afford the luxury to actually say, you know what? We're going to let some of the mortgages drift and we're not going to refinance them aggressively.

[00:31:23] Alex: I think we worked out that at that five year mark, that it becomes a snowball effect. And that's where you actually, money that we're leaving on average is about 100 grand a property. So once you're getting the room rates and once you're getting the rental income that we're receiving and the Royces that we're getting, it doesn't actually take that many to start making a self fulfilling prophecy.

[00:31:43] Alex: And that's when it allows you to get choices. You mentioned,

[00:31:46] Andy Graham: I mean, it is like speaking to myself, Alex, but you're absolutely right. And I describe it to my mentees as a bit of a tipping point. There is a point in your portfolio in this projection where your portfolio every year will be making enough to almost be aggregated and allocated to the capital you're leaving on the table in each deal.

[00:32:07] Andy Graham: So let's say that that is your portfolio. You gave the example of 100,000 so get a few projects up and running if every year they're making 100,000 and you can afford to keep that in the business and not draw it out personally. That's them paying for the next one and that comes on board. And then next year you're hitting that target even earlier before, you know, you're doubling it.

[00:32:25] Andy Graham: And actually the problem is how do I spend my money quickly enough? Now, how do I make money quickly enough, which is that's essentially the compounding effect, but there is a J curve to it. And at the minute you guys are in that aggressive phase, you're going to be sinking your resources in it. Time and money and energy, and it will feel for a while, like you're not getting much back from it because you're still having to leave the money in the business to do the next one and, and pay for all your professional fees and things like that, but it will pick up and you will find that growth trajectory and the income will come and that will make the next one easier and easier and easier.

[00:33:00] Alex: We're definitely there. We're definitely in the J at the minute.

[00:33:03] Sam: Yeah. We're doing all this work and we just want to see some of the, the joys from it, but obviously you've got to invest before it grows. It's a long game. 

[00:33:11] Andy Graham: You do. And I think you've just got to have the temperament of a good investor to know that actually that's normal. That's fine. You can't do all this work and have a plan like this and then take the money out and spend it all at once and live, you know, in a flashy lifestyle. There is a balance to everything, but a great first question. Should we move on to your next question?

[00:33:30] Sam: Yeah, absolutely. And I'll let you ask the second one.

[00:33:32] Alex: Yeah, I think we spoke about it a bit in terms of investors and that is so important to us as a business. At the moment, we've raised a pretty reasonable sum of money in terms of fixed rate returns. We're always having the healthy debate between the two of us of when is the right time to do JVs and what does that look like?

[00:33:52] Alex: What are the pros? What are the cons? Logistically, what do we need to think about? It means it's going to be right for us and that what time,

[00:33:59] Andy Graham: well, based on what you guys have told us today, I can't see why you would do JVs if you can raise debt finance and you can do the projects like the ones you're doing and you can find a way to continue growing and you're prepared to make some sacrifices along the way.

[00:34:13] Andy Graham: Keep the money in your business as long as you can. I don't know why you would do a JV. Let me tell you why. So first of all, as soon as you bring a partner in, you've got another sort of decision maker in the business, whether you like it or not. What that means is that long term, and when you go back to your original objectives, if that is choice and freedom and flexibility, an element of that is ultimately compromised because somebody else.

[00:34:37] Andy Graham: Will rightly so have their own sort of plans and want to make their own decisions and their circumstances might change. And it may not be the plans that you both agreed to, but if your own plans change, you would want to be able to do whatever you wanted with your business and property. And I think you've got to be careful because actually you can end up.

[00:34:56] Andy Graham: Building a portfolio that might create you some wealth on paper, but actually just doesn't give you the flexibility that you want. Doesn't really deliver your goals and aspirations. I think the other thing about a joint venture is that it still takes the same 9 or 12 months to do a project. You're giving 50 percent of the equity away when actually, if you can just take it on a debt basis and you can factor that debt in and still make the deal work, then why would you give half of it away?

[00:35:20] Andy Graham: I think the best joint ventures work when there's a really clear separation as to what each party is bringing. So someone is the delivery partner and someone is the finance partner. Someone is bringing the tradesmanship, someone's got the skills on site, someone's bringing in all the investment and the deals.

[00:35:35] Andy Graham: But it sounds to me like you guys don't necessarily need either of them. You've got the attitude, you're certainly motivated to do this. You've obviously got the skill and experience to actually do it. You can raise the finance. I can only see that the skills that you maybe don't have yourselves are the ones on the site.

[00:35:52] Andy Graham: I'm not sure that's going to be the best joint venture. You can just pay a good builder to deliver a good product. So it might not be the answer that you're looking for, but I mean, the short answer for me is don’t do JV. Keep doing what you're doing because it sounds like you're doing a really, really good job of it.

[00:36:07] Andy Graham: I think that's a perfect answer. We're quite happy with that. Heads down, do more and keep it off.

[00:36:13] Sam: Yeah, no, absolutely. Happy with that, Brute. I think it was just for us is, is JV is a way that we can scale quicker, but actually we stay on track with our five year plan, we should be good. 

[00:36:23] Alex: I think we're going at a pretty good pace.

[00:36:26] Andy Graham: Yeah. And you can scale quicker with joint ventures, but you've got to ask yourself. Is that sort of scale and what you ultimately end up with as a result of that scale, is that what you want might be more properties on paper, but you might only own the same amount of equity as you would do if you'd have done them yourselves.

[00:36:42] Andy Graham: Now you've got other people making decisions. I think if you were going to do something quite different, like if, for example, when you think about diversification, you might. And to move on to bigger projects or different types of projects, that's different. Or to partner with people who had maybe skills in an area that or a field that you didn't, that is different.

[00:36:58] Andy Graham: But I think to do what you're already doing, you don't need to just keep doing what you're doing.

[00:37:02] Sam: Okay. Brilliant.

[00:37:04] Andy Graham: Okay. Great. Another good question. Next.

[00:37:07] Sam: So I guess lastly, is that the infamous question, It's to self manage or not, and I guess it's a debate we have regularly, I would say.

[00:37:17] Andy Graham: Remind me when you set out to do this and when you sat down and thought about your goals and targets, there was obviously, you know, a figure, there was a number to it, but on a personal level, what were the things that you wanted to get from building a portfolio?

[00:37:31] Sam: Time. Flexibility.

[00:37:34] Andy Graham: Flexibility. Yeah.

[00:37:35] Sam: And I guess we've gone back and forth with this management piece and we've kind of said, you know, the first couple of years, is it something you can take on one from a learning perspective, but also to allow you to kind of bring in more cashflow. Then once your portfolio gets to a certain point where you could actually say, do you know what the cost of management, we can actually bring someone on board to do that for us. But then, yeah, it's just that ongoing debate, right?

[00:37:58] Andy Graham: I think I can probably help simplify this for you. I think the ultimate objective is time, freedom, choice, and flexibility. So, so actually managing tenants just, just doesn't, it doesn't fit with that quite simply. So long term. I don't think there's any doubt you guys don't want to be doing it.

[00:38:15] Andy Graham: You want somebody else to do it. So the question is, who is that person? Is it an agent that you outsource the work to? Is it a staff member, a team member? So there is a point at which it makes more sense to bring the services in house. But what you need to remember is that it's more than just that kind of when you're making enough money to perhaps pay a staff member, what you would pay an agent.

[00:38:35] Andy Graham: And here's why. If you hire somebody, let's say you're paying that person the same as you are paying an agent to manage your portfolio. That person that you hire still gets sick, they still need to go on holiday, and they still might be rubbish at the job. And in any of those circumstances, what do you do?

[00:38:51] Andy Graham: You then need cover. And who ends up being that cover? Inevitably, it's you. So actually, for me, and it really depends on how important the time and freedom and choice and the flexibility is, but if it's an absolute priority, okay, if it's the number one thing, then for me, you wouldn't bring it in house unless actually you could afford to have coverage across the role.

[00:39:13] Andy Graham: So you could have more than one person doing it. So you need a portfolio of a certain size before that, you would just give it to an agent. Now at the stage you guys are at early stages where it's growth, growth, growth, you want to reinvest, keep as much money as you can. There is a strong argument to say, do it yourself.

[00:39:29] Andy Graham: Suck it up, roll your sleeves up, do the management. Yes. You'll learn a lot. I'm not actually sure that that's that useful, especially as you want to give it away. But I think most importantly, what it does is it gives you all the control. It allows you to produce a good product and control a good product to your customers, your tenants, so that they stay longer.

[00:39:50] Andy Graham: They pay more for their rent. They refer people, you have sticky household that ultimately all translates into income. And the more income you're generating, the more they can stay in your business, the faster that you can grow. But there will definitely become a point where you guys recognise that where you're spending time managing the portfolio, you're not spending it in growing the business at that point or even before that point.

[00:40:12] Andy Graham: You need to see that and you need to say, we've got to make the change. And there is a step back at that point. You've got to pay for the service to get you more and more or keep you more and more in the business so that you can focus on those income generating exercises. That is one of the really tough bits.

[00:40:26] Andy Graham: And that is why most people never get beyond being a landlord. And become proper property business owners, you guys need to make sure that that is ultimately where you stay. So you can do a few things that just help you to get to that point, but you've got to be prepared to make the tough decisions when you get to that point and say, actually, no, we've got to step back now, give it to someone else, pay for it so that we can get our heads down and keep focusing on buying more deals, doing more deals, raising more money and all of that stuff.

[00:40:52] Andy Graham: And you might say, actually, we feel like we're there already. And if you are, you've got to be honest with yourself and give the management away to somebody, but only you guys can answer that. I think that's great. That's really helpful. Does that help? Does that give you some sort of clarity, I suppose, on, I mean, you're self managing at the minute.

[00:41:08] Andy Graham: How much time do you think it does take up on a, you've got the first property and it's not a huge amount of the minute plus some of the vanilla by to lets

[00:41:15] Sam: Vanilla by to let's I actually think a more time consuming. But one thing I didn't think about was actually, you know, I had this longterm plan of we would bring someone on board and they would manage it, but actually I didn't think about if they're off sick or they're out for holiday. That ultimately falls back on us again, and that's not the future we want in five years time. So really great thing for us to think about.

[00:41:35] Andy Graham: I think you'll inevitably get to a point where you'll supersede your cashflow goals, because I suspect that most of five year priorities cashflow goal to get you out of your current jobs is that part of the plan?

[00:41:48] Alex: I think it's certainly to, for a period of time, it may be just, it's matching, but certainly it's given us the choice. Yeah. Like we actually love what we do. It's, it's just. We may not love it for another 40 or 50 years.

[00:42:01] Andy Graham: So when you're thinking longer term and you supersede some of your short term cash flow objectives from your portfolio, capital growth, wealth creation, wealth preservation, a security, I've talked about my figure 40 million on the podcast before and, and having the ability just to crystallise it all, putting it into something dead easy, low return, dead safe.

[00:42:23] Andy Graham: is an option that I want. So, but that is why a lot of my focus on capital creation and not actually cashflow generation anymore. It's actually going to be much, if I was to focus purely on cashflow by trying to keep hold of management costs or by only exclusively doing deals that prioritise cashflow, I'm not going to get to my longer term objective, which is the wealth creation and wealth preservation.

[00:42:44] Andy Graham: There's some levels to the game. And I think once you get over the first level, you'll see the next level and the next level and your objectives, they'll change and your plan will probably evolve a little bit. And I suspect that the idea of management will become less and less appealing as actually you see that you're going to make a lot more money than you're going to save by doing other things.

[00:43:03] Alex: Yeah. Next time when we get to level one or just about to level one, maybe we need to come back and have a conversation about level two and what that looks like with you.

[00:43:11] Andy Graham: Absolutely, and I have no doubts whatsoever that you guys are going to be there in no time at all. You're saying all the right stuff, you're doing all the right stuff, you're asking all the right questions.

[00:43:22] Andy Graham: This all sounds really, really exciting, which is probably a nice time for us to wrap up guys. It's been really enjoyable having you on the podcast today and having a slightly different conversation. I hope it's been helpful. Hope you've been able to sort of get some value from that and take it back and inject it in your business.

[00:43:36] Andy Graham: For anyone listening today that's been inspired, wants to follow you, maybe even wants to get in touch, maybe even wants to invest, where best can they find you?

[00:43:43] Sam: So the best place to find us is Instagram, sam_alex_property.

[00:43:48] Andy Graham: Fantastic. And what can we expect next? These two deals that are on the books coming to fruition, underway, being turned into pretty incredible HMOs?

[00:43:57] Sam: Yep, so plan is end of this year, so end of 2024, we'll have project one up and running. And then the next two projects by end of H1 next year should be up and running.

[00:44:07] Andy Graham: Brilliant. And have we asked you guys to maybe share a case study yet? Are we going to get you to do a case study of the first deal?

[00:44:13] Sam: Yeah, we'd absolutely love to.

[00:44:15] Andy Graham: All right. Well. Maybe by the time this podcast episode comes out, you'll be well underway with those next two deals, I'm sure. And we'll make sure that we've got a case study of your first project inside the HMO roadmap. So everyone listening today interested and wants a bit of a nosy about what it actually looks like on paper, then they can go and find that. But guys, thanks once again, it's been an absolute pleasure. for joining me on the show today.

[00:44:36] Sam: Thanks, Andy. Great to meet you.

[00:44:44] Andy Graham: That's it, guys. I hope you enjoyed today's episode with Alex and Sam. What a great couple already doing great stuff. And I've got no doubt whatsoever. They're going to continue to go on and do even greater. Now, if you want to level up your own HMO property business, heading over to thehmoroadmap.co.uk, that is where you'll find everything you could possibly need to start, scale and systemise.

[00:45:04] Andy Graham: You'll find over 70 case studies from community members, including Sam and Alex's latest deal. That's going to be there. I'm waiting for you to digest. You'll find all of my downloadable resources and templates to help kickstart your journey. You'll find all of the masterclasses from our experts in the industry.

[00:45:21] Andy Graham: You'll find all of my video lessons and you'll find the deal stack and a whole lot more. Plus, if you haven't already, come and check out the HMO community. That is our free group. That's our free community on Facebook. And it's a great place to find guidance and support and advice. It's a great place to have the conversations that you might not be able to have anywhere else.

[00:45:38] Andy Graham: And finally, guys, before you go, can I ask you one huge favor? It's not the first time I've asked, but it helps more than you could possibly know. Whether you've just started listening to the podcast, or if you're a long term listener, if you haven't had a chance to leave a quick review of the show yet, please, please, please, can you do that for us?

[00:45:53] Andy Graham: Subscribe and leave a quick review. Hopefully you think it's worthy of five stars, but it helps us continue to spread the message about all the great work that you guys out there in our community are doing in the HMOs. And you know what? It also really helps us continue to bring great guests onto the show every week or every other week to help you guys learn, to help you guys build better HMO property business.

[00:46:13] Andy Graham: You can leave a review on both Apple Podcasts and on Spotify. And if you do get a chance to do that, thank you so much in advance. Like I said, it really does mean the world to us. 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.