It’s becoming more and more apparent to me that when it comes to buying property, funding is a major issue for pretty much everybody.
When you join my new Skool community, you’re asked a couple of questions, one of them being “What is the biggest challenge facing you?”. Overwhelmingly, the response has been funding. About 80% of responses said something along the lines of raising money, getting access to capital, funding the project, whatever it might be.
So, this week I want to talk about some funding strategies that I’ve seen put to good use, and my DEAL system, which you can use to analyse potential deals,
You don’t know what you don’t know
There are many misconceptions out there when it comes to investing in property. I’ve seen people who have a little bit of knowledge quickly get themselves into trouble because they’re not aware of what they’re doing wrong.
It should go without saying, but I’m not sure people are aware of the scrutiny that you need to give a deal. Certainly, if you’re presenting a deal to an investor or a lender, they’re going to look under the bonnet, and if you haven’t done your homework, that’s why a deal is rejected. They’re not necessarily going to take you aside and say, “you didn’t do this or this, and that’s why we’re rejecting you”. They’ll just say that the mortgage (or loan) hasn’t been approved, and you’ll be left scratching your head thinking that raising your funding is just impossible.
A lot of novice investors seem to make one of two mistakes when it comes to analysing a deal. The first is someone who thinks that they’re buying in a good area and that’s enough for a lender or bank to lend you money. That’s the first mistake: there’s an awful lot of nuance behind what makes a ‘good’ area.
The other mistake I see people making is them looking at what they can afford… and that’s as far as they go in terms of analysis. They don’t dive into the economics of the deal, just whether they can raise the deposit and make their monthly payments.
Understanding the finer points of a deal boils down to how experienced you are as a property investor. It’s one of the problems that I find when people join my courses (particularly the Mastermind): from listening to other people talking, they soon start to realise how much they don’t know!
Analysing your deal
So where do you start when it comes to analysing your deal?
As I see it, there’s a process to follow in order to successfully examine and raise funding for a project. I’ve created the acronym D.E.A.L.: Demand, Economics, Approach, Location. If you’re thinking about buying a property, you can run the property through the DEAL process to ascertain whether or not it’s sound.
D is for Demand
When you’re looking at a property you’re planning to rent out, you need think about what level of demand there is for your intended property type.
Say you’re planning to get into the student accommodation sector – are there educational institutions in the area? Is it easy to get to nearby colleges on public transport? Basically, is there a demand for what you have in mind?
Generally, taking some time to do some research will help you figure out what kind of demand there is, before you get too far down the road.
E is for Economics
As I mentioned earlier, all too often I hear that someone hasn’t properly considered the economics of their deal. They look exclusively at whether or not they can afford the property and that’s it.
Problems start to arise with other expenses that haven’t been considered. An apartment, for example, may have a block management charge or service charge in addition to your mortgage. You have to think about ongoing maintenance too – things can suddenly break and need to get them fixed.
These are the little things that people often get caught on: they don’t realise that it’s not just the mortgage they need to consider, it’s the peripheral costs too.
A is for Approach
When you’re thinking about a deal, you have to consider what approach you’re going to take to actually extract the maximum value.
What is your strategy for the property? You might be thinking about BRRR, or Airbnb, or you might be looking at buying a commercial unit and converting it to residential. I had great success buying a large commercial space and splitting it into smaller units.
Once you know which strategy you’re using, you need to be able to articulate it. If you’re going to talk to investors, you need to be able to tell them why you’ve chosen a particular strategy, what the benefits are, and what outcome you’re expecting.
L is for Location
As I said earlier, a mistake I see being made over and over is someone thinking that because they’ve bought in a ‘good’ area, they’ll automatically be able to raise funding.
But really, what makes an area good? Who would be a good area for? If, for example, I’m looking to find a place for my family, then a good area is somewhere that is safe and has a school nearby, that maybe has playgrounds in the area, or a park. If I’m trying to accommodate nurses or medical practitioners, then a good area would be close to the hospital.
A lot of the time people think that if there are good transport links, that makes for a good area. That might be the place that you would like to live in yourself, but it doesn’t necessarily tick the box for other people. Young professionals, for example, might not like the type of area that an older couple would like.
You need to think in the context of whether the area that you’re looking at, nice as it might be, is compatible with the type of tenant that you are looking to attract.
Summing up
So there you have my DEAL process. It covers just four items of many, but I think they’re the four principal items that are important.
Have a look at the property you’re looking at and think about it in the DEAL context. Does it stack up now? Is it as good as you thought it was? If it’s good, and you can demonstrate to a lender that you’ve looked at all of these different things, it’s going to reassure the lender, or the investor. It will show that whilst you might not be an expert, you’ll certainly have done more homework than a lot of people applying for similar loans.
Raising the funding for your investments is hard work, and you might face a lot of rejection, especially early on, so it’s very important to be persistent and keep on pushing through. If you’re really serious about becoming a property investor, then you have to bring some tenacity to it, and also some resilience: you will face challenges, but at the end of the day, it’s definitely a worthwhile industry to be in!
For a deeper dive on my DEAL process, take a listen to Episode 202 of the podcast, and for more information on any of my programs, take a look here.