London and UK Property Investment Blog

By Brett Alegre-Wood | [fa icon="calendar"] November 7, 2018

Holiday Home Investments #7 Due Diligence

 

 

 

Previous: Mitigating Risks

 

Video Transcription: 

Hi guys. So we're gonna cover all this up. So holiday home investments and we're gonna look at the assessment or the due diligence you need to do and the areas you need to look at. Now the good thing about that is, if you're buying through us, we will have already done a lot of this sort of stuff, but obviously all the time you got to second guess us, you know, we may have done it wrong. You can't rely upon it. Never ever rely on. Even if they say, "No, no. We've done it all for you," you know, "done for you," which is one of the things we say, don't listen, yeah. Take what they've done but then go further in, go deeper because remember, once you own the asset, you can't go back and you know, and change the due diligence. So you've got to get it right up front and know what you're getting into.

You know, it's not only you don't know the rules of the game, but you don't really know what the investment is and what's involved with the investment. So let's have a look at them. So a lot of these investments will hold guarantees. And look, you've probably read many things about, you know, when I talk about guarantees, I'm very sceptical about guarantees. And for me, one of the easiest sales tools is to guarantee which is an enhanced rate, and then all of a sudden the guarantee drops and the income drops dramatically back to reality. So what I would suggest, whatever the guarantee, ignore it, find out what it really is, you know, without a guarantee, and then base your cashflows on that. And okay, yes. If the guarantee applies and you get it there, you know, fantastic, you know, that's topped up your thing, but do it on the realistic values now, not at some future value, okay?

Now, that can be hard, all right? It can be hard to find that information. But you know, at the end of the day, if they say, right, the guarantees in there here, and this is one of the products we're looking at right now, the guarantees are there because the income's here because they're renovating the places and they're redoing the marketing. So what the plan is, the business plan, because this is a business, is to drive the income up to that level and that's why they're giving, for instance, a three-year guarantee on it. That's fine, but you've still got to do the research and the business plan has to make sense. If it doesn't make sense and it seems, you know, like they're driving occupancy, which was 40% and now they're saying, oh, next year is going to be 80%, it's like, well, how? What are you doing? How are you spending this money? How are you gonna market? You know. Whereas if it's incremental, bit by bit, fantastic, okay.

I think one of the things you really need to do is look at the history of the assets. So, you know, if you're buying into a leisure, you know, a holiday park, then look at the history of that and find out what's been happening there and find out, you know, the business case and the justifications for why they think the income's gonna increase or why they're doing certain things. Look at the history of that park, you know. And look, this is where Google is your friend, you know, and that's one of my big sayings. Google's your friend. You know, do your research, not only just listening to the salespeople, but do your research on Google. Go to the company's house and see the accounts and see where they're at and you can get a really good picture of where things are at, okay?

So thirdly, the area. Do the research on the area because you want to make sure that you're buying into a holiday home area, a place where people is desirable and attractive for people to go on holidays. Because you know, far too often, you know, you can say, well actually I'm buying, I'm gonna rent my property as a holiday home. If it's nowhere near that anyone knows to go on a holiday in that area, it's like why would you? Or if there's, for instance, one attraction, you're buying a place based on one attraction which might be a, you know, a zoo or something like that, you know, that has lions and tigers. I don't know. And then that place shuts down, well, what have you got left? Are there other attractions in the area? That sort of thing. That's what you're trying to reach and work out. Is the area one legged or is there multiple strands? So if one fell down, I've still got the asset and the potential income.

Current rentals. You know, jump on the website and have a look at a few different places and see how much places are renting for. If they're saying, you know, this happened with Harlequin many years ago. They were saying X amount per month, and when I looked and I actually tried to book, the income was so significantly less. The income they were quoting was for the penthouse in the best area right near the city. Where this new place was, was on the other side of the airport in the middle, you know, banana plantation, there was nothing there. So they're gonna put the resort on there and there was nothing, you know.

And so I'm like, there was no way that is realistic. So effectively, was it misleading? Well, in hindsight, absolutely it was, and I thank goodness we didn't sell it. But we didn't sell it because we did the research. You know, we looked at what the current rentals are and what they were quoting was way above in terms of value and rent, okay? And that's where due diligence is quite good. You know, we've had so many opportunities to sell stuff, you know, all different products. Pretty much everything that you see out there we've...somebody approaches us and tries to get us to sell it, but very few things where we actually sell, okay. And you know, that's just my game and that's, you know, that's what I do.

Look at the management company history, okay? That's another thing. Really get into the management company. I have done a video before. If you haven't watched it, you know, have a watch of that and get a real history of where they are, who's behind it, what have they done, what history have they got, what's their performance record, what's the team they're putting together, what's the vision, mission, business plan, blah, blah, blah. All that sort of stuff. So get down and dirty with the detail on your management company. That's absolutely essential. Probably more so than the area and, you know, a few other things we've spoken about.

Look at the financial backing of the company, okay? Because if you can get a company that's backed really well, then the likelihood is they're gonna be professional and they're gonna do things right. If it's a mum and dad running this thing and we've got no capital and for instance, you're relying on the pool area and they can't afford to fix the pool, well, you know, because they've got that financial backing, you know, your investment is at risk. So do the research into the financial backing of the management company. Also, look at the financial progressions. And this is, you know, for me, projections. Sorry, not progressions, projections.

What we really want to do here is we want to get a sense for, you know, where they are now and where they want to get to. And is it realistic? Because most companies are gonna show growth in income, growth in occupancy, okay. And you know, growth in revenue per night, effectively, you know, and they're gonna look at the growing that. Now is it realistic? You know, if they're saying the growth of 5% per year, well you know, that might be realistic. If they're saying 30%, well they better have a bloody good justification and a business case for that 30% increase, okay. And it may well be that, yeah, the whole park's getting upgraded and you know, we're doing this and this and this and you know, you can go, well, you know what, that's fair enough. It's still within the range of what similar properties that are completed around there, fantastic, you know.

Exit strategy, okay? So resales market. Look at how, if you want to sell this, how can you sell it? A lot of cases they will have on-site sales. And the reason they do this is because people go on holiday and they sit there and go, "wouldn't it be nice to own this place?" Yeah. And the reality is, if you want to resell it, well, you can put it back with that agent who is onsite and oftentimes, you know, they'll invite them to a meeting and they'll sit them down and they'll sell them the property. Well, that could be your property. But as well as this in most cases is an asset, okay? You've got lending on it. You are able to sell that to somebody else through any agents, through a local agent that sort of thing, You know, it's a two-bedroom place.

The only thing is, is generally you'll have rules around the management company, what they allow you to do and not do. So you got to check those out. So it may well be, you have to give them first right of refusal to sell through them or it may be some other terms and conditions. You just gotta be aware of those. Your solicitor who will act in your interests will actually explain that to you, okay? Yeah, do they have a marketing or rental site? Check that out because if they've got a marketing and rental site, you know, then it's more likely to resales, you know. And obviously, the income side of things will be enhanced by doing that. So you know that's just one of the things to check.

And I think the other side of it is when you're doing due diligence, look at what's covered and what's not. Get a cashflow together. My challenge with most cashflows these days is, you know, they give you very little data. Here's the income, here's the mortgage, here's a couple of expenses and that's the profit you're gonna make. It's like, that's not the profit you're gonna make, you know, that's not what you're gonna make because you have forgotten this, this, this, this. And what happens when you have to replace this and do that? If this breaks down, how are you gonna factor all those things in?

Because you know, for instance, furniture has to be replaced. Now whether you use furnishing and you say, well you know what, it's going to grow and maybe I can do a remortgage and take some money out. You know, so, I'll fund my new furniture like that, or I put aside, you know, 500 pounds per year and you know, after five years, I've got two and a half grand, and that allows me to, you know, upgrade the furniture. You know, or you spend 500 bucks a year and you upgrade the furniture as it goes along, you know, who knows? But the reality is, get to grips with what all the costs are and put them in the cash flow and have a look at what the real return is.

Now, the good thing about holiday lets, your returns are gonna be somewhere around the 7% mark net, okay? That will, you know, that will go up and down, but they're a lot higher returns than a standard buy-to-let. They're probably not where they are, you know, you [inaudible 00:09:33] you can get, you know, depending on how they run and you can get a higher income, but you've also got the potential for things going wrong and downsides and you've got more management and that sort of thing.

So look, you know, at the end of the day this is not a risk-free investment, but by doing your due diligence and getting down and dirty with the details, you know, and obviously, if you're buying through us, a lot of that stuff will be done for you. So you take that as your base and then you drive depth in that information, you know, that's what we would always suggest.

All right guys. And that's it for the due diligence. Obviously look, jump on a cash flow, get a cash flow, have a look at what we've done and put together, you know, you'll get to see the brochures and all that sort of stuff. So you'll see the type of information we've got. There's a lot of information that we provide. All right guys have a great day, live with passion. See ya.

Topics: property investment, UK Property Investment property education Investment Strategy Property Investment Strategy holiday lets Beginner Investors Staycation Investment Investment Research

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