How I Cut Risks To Maximise Profit and Scale Faster

In this episode, we’re diving into one of the most important pillars of property investing – risk. It’s the foundation behind every decision we make, yet too many investors spend far too little time thinking about what risks they face, where they come from, and how to manage them.

After nearly 20 years in this game, I’ve learned that becoming more risk-aware doesn’t mean doing fewer deals – it means doing better ones. As I’ve grown older, with more to lose and more people depending on me, I’ve approached risk differently. I’ve structured deals smarter, had better conversations, and ultimately built safer, stronger businesses because of it.

Today, I want to help you do the same. We’ll unpack what risk really is, where it comes from, and how you can mitigate it to build a more resilient property business.

 02:46 – Understanding Different Types of Risks
 05:52 – Sources of Risk in Property Investment
 08:35 – Mitigating and Managing Risks
 41:34 – Evaluating Project Viability

-

Did you find this episode useful? Please leave us a quick review on Apple Podcasts or Spotify!

Got any questions? Join The HMO Community on Facebook!

Connect with me on Instagram or Linkedin for daily HMO tips and advice! 

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

Feeling overwhelmed and don’t know where to start? Join The HMO Roadmap on a Premium plan and get all-access to our award-winning library of 400+ resources to help you start, scale and systemise your HMO business. Get instant access here.

Transcript

Andy Graham (00:02.671)

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

Andy Graham (00:40.684)

In today's episode, we are talking about one of the most important components of investing. One of the real pillars, the foundation of every single decision that we should be making. And that is of course that four letter word, risk. This is so incredibly important to us as property investors, but I think too few people are spending too little time actually thinking about the types of risks, where those risks are coming from, and most importantly, what they can do to manage and mitigate those risks. 

Now, the good news for you is that I've been doing this for nearly 20 years and as I've got a little bit older, I found that I think about risk more and more. Perhaps it's because I'm getting older. Perhaps it's because I've got more dependencies. Perhaps it's because I stand to lose more than I did 20 years ago. Perhaps it's a bit of everything, but it is so important. And I have found that I have done better deals and made better decisions as I have become more risk aware. Interestingly, I haven't done less deals. I've perhaps done deals in a slightly different way.

And it's pushed me to do things and have conversations and structure things in a slightly different way that actually has been better for me and my business partners and everybody involved. And I want to urge you to do exactly the same. So today we are going to get into it. What is risk? What can we do about risk and how can we help you build a better, safer business? Please sit back, relax and enjoy today's episode of the HMO podcast.

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

We've also got guest workshops added every single month, we've got new videos added every single week about all sorts of topics, we've got downloadable resources, cheat sheets and swipe files to help you, we've got case studies from guests and community members who are doing incredible projects that you can learn from, and we've also built an application just for you.

Andy Graham (02:56.027)

that allows you to appraise and evaluate your deals, stack them side by side and track the key metrics that are most important to you. To find out more, head to theHMORoadmap.co.uk now and come and join our incredible community of HMO property investors.

Andy Graham (03:17.326)

Welcome back, gang. So today we are talking about risk. This is an episode that I can't believe I've actually not already recorded. In fact, when the idea came to me recently, I had to go back through our records, our directory of over 300 podcasts, make sure that I haven't actually spoken about it. And I hadn't. And I'm really looking forward to doing it because this is so incredibly important. There are no downsides whatsoever to listening and taking on all of the advice that I am about to share with you in today's episode. It can only help you. 

And I think it's so important. I think it's increasingly important actually, the market and the industry has changed a little bit. It's harder to make money. And I think when that is the case, it is sometimes tempting to make decisions that we perhaps wouldn't otherwise have done. We push things out to the limits, to the extremities, and it's not always the right thing to do. Risk is all about understanding what could go wrong. And thinking about what you would do if that happened. And today I'm going to break it down. I'm going to talk about the different types of risks. We're going to talk about where those risks can be sourced from. And we're going to talk about most importantly, of course, what we can do about the risks. How can we manage them? How can we mitigate those risks? And the objective of today's episode is to help you think more constructively about the risks in every single project and not necessarily just the project, every single deal, relationship, potentially every decision that you make.

You are always calculating risks and probabilities, whether you know it or not. So this is something that's happening in the background. And it's also something that's going to be happening very much in the foreground on some of the key decisions that you make. But I think taking all of this on today will help you build a much better and a much more robust business. So I'm really, really excited to be getting into this stuff with you today. So the way that we are going to do it is we're going to kick off by talking about the types of risks. I really want you to understand what's actually at stake.

Then we're to talk about the sources of risk. Where are these risks actually coming from? What is the genuine source of that risk? And then we are going to talk one by one through some really important things that can actually help materially mitigate and manage the risks in your HMO property business. I'm to give you some really good examples and I can guarantee there's loads of stuff here that I'm about to share that you simply won't even be aware of, let alone have thought of. So shall we get stuck into it? Risk then.

Andy Graham (05:41.254)

Why is it so important to think about risk? Well, this really is the kind of the guiding light. It should point you. Your risk calculator should ultimately point you in the direction. That direction is that decision that you make at the end of the day. Now, not every risk can be removed. That's the first thing to say. There are simply some risks that you can only do so much about. And ultimately, at the end of the day, it's down to you to make a decision on how you feel about that risk.

The way that you feel about that risk doesn't necessarily have to be the same way that somebody else feels about that risk. There's lots of stuff, including your experience, your knowledge, your confidence, personal circumstances that might mean that you interpret that risk in a slightly different way. So the first thing that I really do want to say is that be true to how you feel about something. That gut instinct is there for a reason. Sometimes learning more about it, getting help from the right people, like solicitors, for example, to explain things.

That might help you manage that risk and interpret it in a slightly different way. But ultimately, if your gut instinct is to do something different, don't be afraid to listen to that gut. It is so important. And what we're going to find as we walk through today's episode is that sometimes the risk is just simply not worth it. Move on, do something different. So let's start by talking about the different types of risk. 

Well, the first one is of course financial risk. It's the biggest, the one that we all think about when we're talking about risk, right? Losing capital, income risk, rent's not covering costs, exit proceeds falling short on exit finance and things like that. Whatever the financial risk might be, but ultimately that's kind of the big one, isn't it? Front and center. And I think most of us do think about financial risk. Ultimately, we're thinking about are we going to make as much money as we want? Are we going to make less money. What can we do to try and make sure that we make as much money? That is a risk management strategy. 

Of course, there's lots of components to that, lots of ways to break that down, lots of different things that feed into it, so many different variables. But ultimately, financial risk is the first big type of risk. The second one is time risk. It's huge. Your time is actually the most valuable thing that you have. If you're listening to today's episode and you're a part-time investor, maybe you've got a job and a family and juggling all sorts of things.

Andy Graham (07:56.019)

Your time is so incredibly precious. Every single minute that you spend in your property business is gold and you've got to protect it. And I don't think we all do enough to protect our time. The sorts of deals and the potential for deals going wrong and us getting sucked in to things in various different ways like planning and projects and overruns on refurbishments, refinances taking longer, all of that stuff can suck us in and it can take more time. It takes our time.

And that time can cost money one way or the other. So we need to be really aware of it. So for me, the big number two is time risk. The third one is reputational risk. If you want to do something really special in this game, you are going to have to build a big pot, pot of equity, capital base. And even if you've got a nice cash balance in your bank account right now, I can almost guarantee that if you want to do something really, really special, if you want to buy a lot of property, if you want to build a really big portfolio, then you are going to need more capital than you've got access to right now. So you're going to rely on borrowing from the banks and from private investors. And you're also going to rely on other people wanting to work with you and being happy to work with you. So there's a lot of stuff here from a reputational perspective that could absolutely be at risk if you don't make the right decisions. Damaging trust with investors, with partners, with lenders, with tenants, with service providers, with whomever it might be could destroy your business. So it's really important that we manage that reputational risk. 

Number four, the fourth type of risk is the health and stress risk. This is real. Trust me, I've been doing it long enough. I can honestly tell you that this game is really hard. I've been hopefully super honest about that with you guys on the show over the years. Burnout, overwhelm, the emotional toll that can have not just on yourself, but on your family. That is very, very real. I'm sure a lot of you listening to today's episode can absolutely resonate with the pressures that we as investors can often exert on other people trying to get things done quickly, having to sacrifice and compromise weekends and evenings, not going on holidays, cutting back the spending. All of that stuff puts stress on other people and ourselves as well. I think as investors and entrepreneurs, we burden ourselves with a lot of pressure as well. That can be a lot at times. And I think it's really important to think about the health and stress risk. Talk to you guys on the show.

Andy Graham (10:20.969)

many, many times about my non-negotiables. And one of my biggies is my health and my fitness. If I don't have that balance, and that balance for me is having the time that I want and need to spend with Gem and Isla, it's having the time to train and exercise every single day and being able to walk Hugo, going out with the dog every single day. They are my absolute non-negotiables. Now, of course, there are days where I don't do one or more of them.

Sometimes it's weather dependent. Sometimes something comes from the left field. That's okay. Of course, we've got to be realistic about this stuff. But generally speaking, 98, 99 % of the time, I have that full control on my diary and I don't let things get in the way of that as a priority for me. So health and stress is absolutely a risk that you need to be aware of. 

Number five, opportunity costs risk. This is possibly something that you may not have thought about. Tying up your capital. Your time or your team in the wrong deal means that you're not putting all of that stuff to good use in the right deal. That is an opportunity cost risk. Okay. Ultimately, if you get sucked into the wrong thing, not only is that going to be problematic and potentially give you elements of financial risk and time risk and reputational risk and health and stress risk, but there's also an opportunity cost risk because you're not doing the right thing and you're not actually making progress on that thing over there.

So that's incredibly important. There is also an opportunity cost risk of doing nothing. So this episode is not about doing nothing or doing less. It's actually just about making sure that the things we do, we do right. So opportunity cost risk works in a couple of different ways. And I actually think about this an awful lot. I don't like sitting on my hands. I like to be busy. I like to be doing things, building my businesses, getting marginal gains wherever I possibly can, because there's an opportunity cost of not doing that. But you need to be in an environment where you're able to actually take advantage of those opportunities in the right way in the first place. 

Finally, the sixth risk that I want to highlight to you today is legal and compliance risks. We're all aware of this sort of stuff. I'm not sure we all give it as much thought as it deserves because this stuff is the sort of thing that if it were to happen, could get bad pretty quickly. Especially if someone brought a claim against you that you were not prepared for, or you perhaps were

Andy Graham (12:37.936)

not insured against but breached in planning, licensing, building legs, tenancies, professional, public indemnity related types of things. The whole spectrum, it is a massive, massive, massive risk. And as an investor, you need to be really aware of it. The more deals you do, the bigger the deals are, the more people involved, the higher your risk really and quite fundamentally, it kind of boils down to that. So there we are, the six different types of risks that I want to highlight today. 

Financial risk, time risk, reputational risk, health and stress risk, opportunity, cost risk and legal and compliance risks. Every project has a mix of them. I would imagine that every single project that you look at will have an element of this in variable quantities, different ingredients, but they are always there. They're not always necessarily visible at the beginning at least, but they are ultimately there, hidden lurking. You've got to be aware of it. And that is the first thing that I want to point out in today's episode, just being aware of all of this stuff and at least having it on some form of a checklist so that you don't overlook or oversee it. Very easy, isn't it? To forget that you might need some professional indemnity insurance or some public liability insurance. You wouldn't want something to happen on site having forgotten that. OK, so these things are really important. 

So there we are, the different types of risks. The second section of today's episode is about where the sources of these risks actually come from. So, what I want to do is take a look at some different situations and some kind of decisions that might create risks. And we need to really think about these as property investors. Again, every project is a little bit different, but I bet you most of the projects you're looking at have an element of this sort of thing built in without any shadow of a doubt. 

So the first one I want to start with is planning risk. Now, you may be buying something that actually doesn't need planning. I like those sorts of schemes because there is a limited amount of risk with it. Planning for me does actually carry quite a large amount of risk. Article four directions permitted development assumptions, slow planning offices or local authorities making decisions that itself is a risk. The consultation period can take a while to get decisions back from people, the decisions that you can get back from consultees or local residents. Let's just call them objectors or NIMBYs. They are all material risks to planning applications.

Andy Graham (15:00.086)

Whilst as an investor who wants to build a portfolio, especially in the space that we're involved in, it is something that we quite often have to deal with. There is an inherent amount of risk involved in that process. And there are different ways that you can manage the risks of planning. And that's incredibly important. I'm going to come on as we progress through today's episode to some of the solutions to manage these risks. So don't worry, I'm going to come back to this, but I just want to point out that's one of the big sources of risk. 

The second one is valuation risk. As investors, we're really fascinated, aren't we? Actually kind of almost addicted to the idea of that kind of end result, that GDV. What is that refinance valuation going to be? But honestly, I've seen it many, many, many times that GDV, that valuation estimate can often be quite ambitious. That end value estimation can be toppy. In reality, when you look at the data, sometimes it may not stack.

If there isn't comparable data, it's difficult to actually justify that you are going to get that valuation. Now, it's not to say that you absolutely won't, but there's a risk that you might not. Just fulfilling lender criteria, lenders require lots of different things. Valuers they have slightly different opinions of various things. There's lots of stuff when it comes to valuation that can really influence and quite significantly influence what that valuation will be. But there's definitely a material risk in valuation. 

So this is a big one I want to point out because it does affect all of us whenever we're looking at a deal and we're looking at certainly return on capital employed, we have the ability to repay investors out or a bridge loan or something like that. That valuation estimate and that kind of ultimate figure that money we can get out of the deal, that's really important to us, isn't it? And that is why this is such a big risk. And that's exactly why I want to highlight it. I'm sure you're already aware of it, but there's things that we can do that we're to come on to that can help reduce that valuation risk. 

Number three, then the development risk. This is a big one, isn't it? Depending on your experience, you might have a slightly different opinion as to how risky you think development is. I've been doing this for a long time, so I am pretty confident with your run of the mill, cookie-cutter, kind of residential project, anything up to about 4,000, 5,000 square feet. I'm pretty sure I could go in and probably get within about 5% of a final cost for a refurbishment. That comes with experience. It comes with

Andy Graham (17:22.532)

understanding the sorts of things that can go wrong, where costs tend to hide and pricing all of that stuff in and then having a good grasp on what things including labour actually do cost and how long certain things might take. If you're just getting started, don't beat yourself up about this one because you probably will find that you're not sure about your numbers and you're not super confident and that makes the risk much higher for you. That's okay. That's exactly how you should feel. I'd be much more concerned if you didn't think that that was a risk.

And again, because you're aware of that risk, can plan, you can put a contingency in place. You can have slightly different conversations. You can think about doing certain things and not doing certain things helps manage and mitigate the risk. But it's one of the big ones for us as HMO investors, as property developers, that's the development risk. 

Number four then, the market risk. This is one of those things that we can't do a huge amount about directly. You and I cannot directly influence what the property market does, right? We can't change the tenant demand, we can't change their interest rates, we can't change whether or not there's a cost of living crisis. We can't do much about the market turning upside down and a financial crisis. We can't do anything about them directly. We can't influence whether or not those things do or do not happen. However, what we can do are certain things that would help in the event of those. Again, we'll come onto it and talk about it, but there's stuff that would help if any of that were to happen. And we can think about that right from the outset. 

Moving on, neighbor and kind of legal risks mentioned it in kind of the different types of risk, kind of legal and compliance risks, but things like party wall issues, nuisance claims, property damage, you might damage your neighbor's property, things like that. I think there's a slightly smaller risk generally speaking, but they're definitely risk. You need to be really well aware of them, really prepared. Only recently, I know somebody who had a contractor go in to a property to do a bit of work on a kind of a strip out, a contractor stripped out the chimney stack and what they didn't plan or have contingency for was that that chimney stack may have already been removed on the other side of the party wall. They left an element of the chimney stack on the roof thinking that it would still have some reasonable support underneath at the neighbour's side. That was not the case, which means basically a chimney stack on a roof with no support, that is lethal. That is incredibly dangerous. And ultimately, depending on

Andy Graham (19:44.89)

the sort of paperwork and the liabilities and how everything's been set out with the contractor that could leave the investor in an incredibly precarious position. Now, obviously that's a problem that needs sorting immediately, but nevertheless, it's a problem that happened and it needs to be managed in a particular way. It's been resolved now, obviously, but I'm just pointing out how easy these things can happen. This was a contract that wasn't even instructed to do that, but went ahead and did it caused this sort of sequence of kind of issues to then a surface which had to be dealt with. But you can see how dangerous and how easy it is for this sort of thing to happen. 

The sixth and final risk that I want to highlight today is the people risk. Contractors disappearing, tenants damaging properties, joint venture partners falling out, business partners falling out. These are all really, really material risks that we need to manage. And there's lots of different ways to manage these sorts of things. But this is one of the things that I would say more so than anything else in the source of risks that I've just given you prevents people from progressing and actually cost them. All of the things that we started with, it costs them financially. It costs them from a time perspective. It damages reputation. It's incredibly stressful and damages their health. They're not doing other projects. There's an opportunity cost risk and it can end up in a bit of a legal tangle. So this stuff for me, people risk is probably the single most important one that you have to be aware of and you have to get right from the outset.

I see it so often and it concerns me so much when I see people just getting to bed as business partners without any paperwork, without any real planning, without any real consideration about all of these things that could go wrong. Because if anything does go wrong, it would be an absolute disaster for both parties and everybody else involved in that project. 

So let's just recap on the different sources of risk. This is not an exhaustive lift. It's not absolutely everything, but it's the key ones that I want you to be really, really aware of. They should be absolutely front of mind. Number one, the planning risk. Number two, the valuation risk. Number three, the development risk. Number four, the market risk. Difficult for us to do much about that directly, but there are contingent measures that we can always have in place for that sort of thing. And then number five, kind of the legal risk, risk with neighbors. And then number six, the people risk.

Andy Graham (22:04.99)

So I said I was going to give you some advice. We're going to share some experience and give you some ideas, a bit of a playbook, if you like, to mitigate and manage these risks as much as possible. Now, again, there are so many different scenarios that we could plausibly discuss. I can't possibly give you them all. So I'm going to give you a number of what I think are the really obvious ones. And hopefully, and I'm quite sure actually, there'll be a lot of stuff in this list that you haven't even ever thought of, even heard of. So I'm pretty sure that this is where you'll get the most value from today's episode. 

So first of all, let's start with trying to engineer risks down. So let's go back to our source of risk and let's look at the planning risk. What sort of stuff can go wrong with planning? Well, obviously we might not get planning. Maybe planning takes ages. Maybe we don't get the planning that we want. And in all of those scenarios, it's going to cost us more. It's going to be frustrating, stressful, pretty much all of the different types of risk is going to burden us with an element of that. So what can we do? Well, the first thing is we should be really, really, really, really, really, really, really clued up on the planning policy. It is your job to ultimately know as much about this stuff as you possibly can. 

Now, I appreciate that planning terminology and local policies, it can be a bit of a minefield and it can be pretty difficult to decipher and councils are not always the best at making it clear what is the most recent guidance and what is national guidance, what is local guidance and things like that. So it can be very difficult. So what do we do? Well, we acknowledge that despite the research and the effort and the knowledge that we can build ourselves, we're not likely to be an expert because we're not living and breathing this stuff 24 seven, but who is well, of course, a planning consultant. What a great person to have on our side. 

So I would recommend that anybody who is submitting a planning application, whether it's just for something small like an extension that they think is under PD or maybe something significant like the types of schemes that I do with my business partners as well, you should have a planning consultant. That cost is comparably to the consequence of potentially getting this stuff wrong. An absolute no brainer. It'll cost you a few hundred quid, maybe even a thousand quid if it's complicated to get some really good professional

Andy Graham (24:23.111)

advice that is backed by very clear evidence. Now, sometimes that advice is not completely black and white because sometimes there is a remaining risk, which is it is likely to be approved, but there are still certain challenges that we would need to overcome. And that is the reality. Okay. That is the industry that we work in. Unfortunately, it's not completely binary, but having that person on your side can absolutely help. What else can we do? Well, of course we can try and work as closely as possible within those policies if the policy says something and we do something else, we are materially increasing our risk. 

Now I understand that that might not be the most favorable outcome for your scheme from a financial perspective, from a space perspective, but that's the reality. And if you decide to take that punt and push it a little bit, push the envelope, and by the way, I do, I'm a developer, I can have to, but I do also understand what the repercussions are if we don't get it. And sometimes you have to have a bit of a contingency. 

So, be on your toes, have conversations with your architects and your planning consultant that if through the planning process you get some feedback that is, let's say, not positive, if you are able to on your feet very quickly make an amendment, turn something around to give them a slightly different version or an alternative which does satisfy them, that can be the difference of getting it through planning and not getting it through planning. Ultimately, they could just not give you any feedback and could reject it. But if you've got that good relationship and an open dialogue, and that might be between you and your planning officer or your architecting planning officer or your planning consultant and your planning officer, depending on who you want to manage that relationship, that can be incredibly important. So just make sure that you've got some contingencies in mind. 

To simplify this as best as I possibly can, let's say for example, you want to extend the building up into the airspace, but you know, it is potentially a bit contentious because maybe it will have an impact on some of the light that the neighbors receive behind the property. You might go in for planning with a number of variations and changes to the existing building and asking to go up a level. If you know that there's a good chance that they might push back and say, you can't go up a level, you can amend the plans and you can give them a new drawing without that. But you need to have a contingency in mind. If you have bought this scheme, you need to make sure that the numbers still work. You've still got a contingency plan that means financially it does still in...

Andy Graham (26:45.347)

some way work or you can still exit the scheme. So that's another key point here with planning risk. Yes, get an expert. Yes, try and build a good relationship with your planning officer. Have a contingency in terms of what alternatives you've got with the scheme. Have a contingency as to how you might actually exit the scheme if you can't do what you're hoping to do with it. Again, looking at planning risk, if the risks are quite high and there's a lot involved, you may actually decide not to just buy the site of the property unconditionally, you might decide that it's much safer to offer subject to planning or by under an option agreement. That way, if you don't get the planning that you want, you could pull out of the deal. Yes, you are going to spend whatever you spend on planning and the time, but that significantly reduces the risk. If you're not an expert on this sort of stuff, if the site is contentious in any way, then my advice would be to make a decision like that to significantly materially reduce your risk.

Of course, that might make you less competitive as a buyer, but at the end of the day, you can't have your cake and eat it. If you want to offer cash, buy it quickly, take it off the table, then you are going to run the gauntlet if the planning risk itself is quite high. So you've got to weigh all of this stuff. I can't tell you whether or not you should or you shouldn't. It depends on your personal circumstances and your attitude to risk, your appetite for risk. But ultimately, those are all things that you can do. So those are a few examples on planning risk. And hopefully there's some food for thought there.

Let's talk about valuation risk. What can we do about the valuation risk? Well, first and foremost, please, please, please don't be too ambitious about the end value. And whatever that end value is, whatever you stack into that spreadsheet, or better yet, the deal stacker inside the HMO roadmap, make sure that you are justifying that data. Do you have comparable data to demonstrate where you have got that gross development value or that end value from? If you don't, you're running the gauntlet. There's a very good chance that a value is going to come and he's not going to agree with your valuation. So you need as much data as you possibly can to support it. 

Ultimately, the decision on evaluation comes from supportive data, sold comparables, not other comparables on the market, sold comparables within a recent time period in a reasonable distance from the property. That is ultimately kind of the benchmark for determining a valuation. Now, of course, there are variations in spec and things like that. And you can do certain things to try and

Andy Graham (29:05.687)

influence that, but please don't be overly ambitious and whatever you do do or put into that appraisal. Make sure that it is really, really well justified. Now there's a couple of other things that you can do here. You can take your deal or a scheme and you're doing a number of flats or whatever it might be. You could take that schedule and you can discuss it with local agents. Now, if you've got good relationships with people, I'm sure that you will find some good local agents with experience and with a good landlord database, they can give you their opinion on what it is. 

Now, of course, that is not necessarily going to be exactly what the valuation is, but if you get three or four different agents telling you that the end value is likely to be between 300 and 320,000 and you've got 380,000, that's a very good chance that you're wrong and they're probably right. But if they'll come back and they're all around, you know, the 380,000, then great. You've got that additional confidence. You've reduced an element of risk. So for me, that's really, really important. 

Another thing that you could do is you could actually go out to some surveying firms. You could pay for a valuation yourself. You could give somebody the scheme and the plans and the proposal, and you could ask them to do a valuation on it yourself, a desktop valuation. Now, again, ultimately, that's not what your valuation, when you come to refinance, it's going to be based on, but that can be a really useful tool, it gives you that additional confidence. 

Now, just one thing to be mindful of here is that if you go to a valuer, and you ask them to do this, when you get the property actually refinanced, if you want to go back to that valuer or that firm, you've conflicted them. So they would have to disclose it to the lender and there's a very good chance that the lender would not allow them to do that valuation. So just be careful on that sort of thing. 

You can, of course, just go and get advice and some anecdotal experience from the community. Ask inside the HMO community, you know, see what other people have got. Has anyone had a valuation done in Liverpool on a six bed HMO in LS, whatever the postcode might be in the last three months or six months? It's really useful to have those sorts of conversations, whether you do it online, whether you do it in person, but these are all different methods of reducing that valuation risk. But please, whatever you do, don't just take a formula that you've heard someone band about or even me talk about on this show and apply it to your HMO, assuming...

Andy Graham (31:23.183)

with a high degree of confidence that that's what your valuation is going to be. You need to be able to support it with some valuation data. Okay then, let's talk about development risk. This is one of the big scary things, especially, like I said, for people at the early stages, just getting into their first or second or third deal, maybe increasing the size of the project that they're doing. I get it. And actually, if you do feel like that and you know you don't have a huge amount of experience, that's a good position. 

Like I said, I'd much rather you were aware of that and your lack of experience as opposed to felt really confident or were overconfident about this. So much can go wrong through the development of refurbishment process. I can't begin to tell you just how much and just how significant it can go wrong. I'm not trying to scare you. I'm just trying to make you really kind of aware about how important it is to think about this stuff. Budget overruns, hidden issues, structural issues, program drift, material costs, builders ducking and diving, builders going into liquidation, break-ins, theft, non-compliance, all of this sort of stuff can happen if you're not really clued up on this sort of stuff. 

Now, I could give you a much longer list about all the things that could go wrong. That's not what the objective of today's episode is. The objective is to help you just be aware of the sorts of things that you could start doing to mitigate these risks. Now, what I would say is that when it comes to development refurbishment, a starting point is probably think about who else you can employ to help mitigate these risks for you if you don't have that experience yourself.

There are a couple of people that come to mind immediately. The first one is a contract administrator. In fact, let's start with a contract. First of all, get a contract in place. If you've got a contract in place that is like a JCT contract, that's going to help essentially kind of guarantee what the program of works are actually going to cost, the timeline that that's going to happen in. And ideally, if you've agreed a price on a contract that's been done on some sort of schedule of works or some sort of a tender process, which justifies the agreement in the contract. 

And you've actually got something to hang your hat on there. If contractor isn't doing what you've agreed, you could wave the contracts in their face and say, hey, look, this is what we agreed. This is not what you're doing. You need to do it this way or else this is going to happen. And this thing that might happen might be you're going to get penalised with liquidated damage cost or I'm going to be able to throw you off site or whatever it might be. So have a good contract, have the right contract in place in the first instance. That's really important. Now.

Andy Graham (33:47.482)

You might be thinking, well, I wouldn't even know where to get started with a contract. That's fine. Again, get an expert to help you. You can get a contract administrator, usually a QS or something similar, quantity surveyor. They can help draw up the contract, negotiate the contract with your contractor. They can actually then through the process of the job, actually administer that contract, keep an eye on that progress. They can measure the works, how much work has been done versus how much is the contractor asking you to pay periodically.

This helps reduce your risk so that you don't overpay on a project and then your contractor just walks off or goes bump or leaves you with a good job. These things are really important. Now, yes, these things and these people do cost additional amounts of money, but just think about how much it could cost you if you got it wrong. And the answer is far, far more, an order of magnitude more. So that's why this is so incredibly important. If you're not going to be able to get on site regularly, or if you're not quite sure what you should even be doing, if you were to go down to site regularly, you might want to get or employ a project manager. 

Now, one of the big mistakes is to employ the contractor as the project manager. They are not incentivised to manage the project in the right way. If a contractor wants to do things the wrong way and spend longer and try and bleed you dry, they're not going to be incentivised to be reporting back to you as a project manager and kicking and prodding the guys on site. 

Ideally, you would have an independent project manager. They are the liaison between you and the contractor. That alongside a contract administrator or that could even be the same person that is going to significantly reduce the risk. Now, I would say that you could use this on any size of project, but certainly if you're doing projects in the region of hundred thousand pounds or more, this would be well justified. It's probably going to cost you at least a thousand quid a month, something like that to do all of this. 

So if it's a six or 12 month project, there's an extra six or 12 grand onto your budget straight away. But again, think about how wrong it could go. Think about the delays. Think about the mistakes. Think about the issues. Just a few ideas there, but really, really important. 

Structural issues. Have you had a structural survey before you bought the property or before you started the work? If not, that might be a good idea. If you don't have the sort of experience that you might need of doing this previously yourself, the fact that you may be working with a contractor for the first time, that itself is an inherent risk. You would take more precautions having worked with someone on the very first occasion. So you'd want to make sure that you were around more, had somebody around more, or maybe you did do that additional structural survey.

Andy Graham (36:07.665)

Maybe you would make the decision to manage the building control officer yourself as opposed to let the contractor do it. That just gives you a certain degree of control and oversight on the project. There's different things that you can do just to try and control. Now, if you've got a bad contractor at the end of the day, you've got a bad contractor. There's not going to be much that you can do other than kind of kick them off if they're really, really bad. But you should have a contingency in place for that. And you literally have an employer's contingency. 

If the cost goes over by five or 10 or 15%. Would you be able to pay for it? If the budget ran over by five or 10 % and you had to pay additional interest costs, would you be able to pay for it? So all of those sorts of things are really important. If you've got an investor in a deal, have you got the sort of relationship where you could speak with them and arrange an extension and do it all under reasonable and amicable terms? These things are really, really important. You should have certainly had conversations about these sorts of risks. These things can absolutely and do often happen with the types of projects that we're doing and talking about. So make sure that you do give this stuff a lot of thought. 

Let's move on to market risk. Now I said that directly we can't do much about market risks. If there's a financial crisis, you and I are not going to able to stop that. However, we can have a contingency. We can have a bit of cash in the bank account. We can try and make sure that we are not running our project at the absolute limit of its profitability. We can try not to squeeze the yield to the nth degree. A good and balanced project has a healthy yield has a healthy return on capital employed and has a healthy recurring cash balance every single month. Now I've always said 250 pound per room per month net is what you should be expecting from HMO. Interest rates are a bit higher at the minute. That's more difficult. So 200 pound in the current market is reasonable, but if you're operating on 100 or 150 and then you factor in the things that could go wrong and then the possibility of maybe something significant like a crash or a pandemic or whatever it might be, you're going to be in a whole lot of trouble. 

So make sure that you are significantly kind of mitigating those risks by thinking about the sorts of things that as a business owner you could have in place if certain things were to go wrong. You must have a question. You must have some sort of contingency. You must have a rainy day fund. You must have backup options for all these sorts of things. Just zooming out a little bit, though, if there was a financial crisis, if the whole market turned upside down, maybe in the student market and students decided

Andy Graham (38:28.556)

they were going to live somewhere else or the university closed. What would you do? What would happen in that scenario? Well, it's difficult to say, but if you've bought a good property in a good location with good demand from other types of tenant demographics as well, or maybe the sort of property that actually would be really popular if you put it on the open market and sold to a young family, these sorts of mitigation strategies are really, really important.

I prioritise these very highly. I like to buy semi-detached and detached properties. I like to have gardens and parking. These are the sorts of things that mean it doesn't work as a HMO. I know it's going to be just fine going back onto the residential market and being sold as a residential property. That's a really good Plan B. Have Plan Bs for everything. Okay. You've got to weigh it all up. Sometimes it costs more to have those Plan Bs and you've got to think about whether or not that's the right decision for you at this moment in time, but you certainly should be thinking about it.

Let's think about people risks, contractors disappearing, tenants damaging properties, joint ventures falling out of bed. So what can we do? Well, the first thing is we always need to be open and honest and transparent and be prepared to have difficult conversations. That is incredibly important, but we must make sure we've also got the paperwork in place. We've already talked about contractors having JCT contracts or design and build contracts, whatever they might be with tenants. We've got to make sure that we're compliant and we're doing everything in the right way. If you're not an expert on this stuff, get an expert to do it.

Outsource all of your management to a managing agent. That way you're not going to get tripped up if you have a difficult tenant. Join venture partners, business partners, make sure you've got the right paperwork, shareholders' agreement, the articles of association, these sorts of things that you must absolutely do before you really start expending money and taking on additional risks in your business partnership. If things go wrong, you rely on that piece of paper, that contract, those articles, because they will determine what you do.

If things are not going right or they'll determine what you do if you fall out, it's incredibly important. But if you don't put that stuff in place and things do go wrong, that's when you can get absolutely sucked in and you get sucked in for years. Okay. And you want to make sure that that never ever, ever, ever happens. A few more things that you should be doing, but making sure you're stress testing all of your deals with interest rates about 2% higher. They're high at the minute. They've been a little bit higher more recently. Yes, we're expecting them to come down, but what

Andy Graham (40:52.594)

If they don't make sure you're getting things like party wall awards and dilapidation surveys done early on in your schemes. Get ahead of those sorts of risks. Make sure you're setting expectations with investors and other stakeholders. Whenever you're doing stuff, we've talked about contingencies in budgets and timelines. We've talked about having experts like planning consultants and we've talked about using the right contracts and paperwork. All really, really important. So what is left? What price is what's left? It's the price that you might offer and it's how you might structure deals.

So at the end of the day, when you've looked at all of these different risks and you've thought about all of the different things that you can do to mitigate that risk and you factored in all of the costs of everything that you need to do, you have to weigh up whether or not it's worth doing that project. Now you might find some cost saving solutions by not doing certain things or doing things in slightly different way. That's fine. And it's ultimately up to you. It's totally your decision. And there is absolutely a risk in not doing anything sometimes. And I'll be honest, it would be easy to convince yourself not to do any deal because you'll never get the risk to zero. And I want to say that and I want you to hear it. It's really important to understand that you'll never get that risk to zero. 

There is a point at which despite doing all of this and you will labor on a lot of this stuff for hours, it will keep you awake at night. And that's fine. That's normal. But there is a point at which you have to take the leap. You have to be prepared to stomach a certain amount of risk. And I'll be honest, I recorded a podcast a little while ago about some of the most important lessons that I've learned from the most successful investors in our industry. And I think last week, if I remember rightly, we may have shared a rewind of that episode. But one of the things that I learned and I've become increasingly aware of is that risk absolutely does correlate with reward. I know that we all understand it and it sounds cliche, but if you're not prepared to take any risk, you can't really be prepared to be rewarded. 

Now, I'm not saying and you must not be cavalier about this. It's really important that you manage and mitigate and you do what you can. But at a point when you can do no more, that's when you have to make a decision. If you're happy and you can stomach the risk, great, go for it. If not, think about what else you can change. Can you delay or change the terms that you're buying a property on? Can you change the asking price? Can you build a better cushion into it? Can you build yourself a better timeline? Can you

Andy Graham (43:20.162)

Bring in even more support or help, whatever it might be to reduce those risks that we talked about initially, financial risks, time risks, reputational risks, health and stress risks, legal and compliance risks, whatever it is. Can you do anything else in the deal to try and suppress that risk a little bit? When you get to that point, you can't do any more. The vendor, the seller won't accept anything less. They're to take it off the market. You have to be willing to make that decision.

And if your gut says it's uncomfortable, I don't feel comfortable, I'm not ready, don't do it. OK, just look for something a little bit easier, with slightly less risk. And it may not be as profitable, but that experience and that learning curve will prepare you for the next one. But if you're comfortable with it, if you're happy, if you understand the implications of things that could go wrong and you feel like you would be able to manage those consequences, great, go for it. But at the end of the day, you cannot outsource risk. You can only own it. It's really, really important. 

So understand the kind of risks that you're facing. Understand where it's coming from. Understand how to reduce it, aware and however you can. And ultimately try and build as much margin into your deals as possible in every single way. That's how you stop gambling. And that's how you start investing like a pro. 

That is it for today's episode guys. I hope you have found today's episode useful. I know it's been a slightly longer episode than usual, but there's a lot of information in there, perhaps come back to it later. If you didn't make notes, come back and write notes. I think it's that important. There's so much in here that could help you build a business and achieve your goals much quicker. The reason most people don't get there is because they do make mistakes along the way and those mistakes put them off wanting to do it again or those mistakes cost them so dearly that it significantly slows their progress. Don't let that be you. 

I hope I haven't convinced you not to invest in property. That wasn't today's objective. I just want you to be aware. So please, please, don't be frightened of doing it. Just be aware of doing it. It's a great time to be investing in property. And if you're doing all this stuff, there are people out there that are not doing this stuff. Ultimately, those mistakes can become our opportunities. But with all of this in your armory, you're going to be a much better investor. You make much better decisions and you'll make a lot more money. 

That's it guys. Thank you for tuning in today. Don't forget that I'm on hand over in the HMO community. That's our free group on Facebook. If you haven't already joined, come and check it out. It's just me and 10,000 plus other members of our community all on hand to give you.

Andy Graham (45:45.17)

As much guidance and support and advice as we possibly can. Anything about anything that we've covered in today's episode, it is a great place to come and discuss this sort of stuff. Share scenarios. We can try and give you the advice that we can. We may have experienced something similar. If you want to know more about this sort of stuff and everything else involved in investing in HMOs and you want to build that business and you want to build it fast, head over to theHMOroadmap.co.uk. 

Access all of our lessons, all of the downloadable resources and templates including some of the contracts and stuff that we've discussed today that'll help you reduce risks. The deal stacker, close to 100 case studies from community members now that will absolutely blow you away if you're worried about what is possible, you're not sure what's possible, it's all there and a whole lot more waiting for you. Go digest it, learn it, absorb it. I promise I guarantee it'll help you achieve 10 times the amount in a 10th of the time.

Thank you for tuning in guys. As always, it's a huge pleasure. I really appreciate the time that you spend here listening to the show. I'm so incredibly grateful. And of course, 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.