London and UK Property Investment Blog

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

Holiday Home Investments #6 Mitigating the Risks

 

 

 

Previous: #5 Management Company Next: #7 Due Diligence 

 

Video Transcription: 

Hi guys. The holiday home investments. Let's talk about the risks, okay. I'm always into looking the risks and making sure that we... we want the upside but the problem is often times the higher the upside, the more potential for upside, the greater the downside of the risks so we really want to work on mitigating these risks as much as possible. Now, you as an individual investor, some of these risks you have no hope in influencing, you've just got to control over with your cash flow or you're not making... So you can mitigate all of these risks to a certain degree. Some of them you really don't have any chance of influencing. Some of them you do have a lot of chance.

So let's start. So first of all the area risk. At the end of the day, there's a lot of areas, you tend to find seaside, lakeside, you know, where there's a fishing spot or whatever it is. Mountains walk, that's where these holiday homes are going. And a lot of these places are quite well established, all right. But what you've got to make sure, like anything you want to buy...if you get them...in the best areas with the best fundamentals for holidays. So slightly different, this is... in my other videos, my buy to let videos I talk about you know, shops, school, restaurants, major employers, major investment. It's a little bit different here.

So yes, the best areas but really if you've got... you can have no shops, no schools, nothing like that here. It doesn't matter because you've got a fantastic lake that has trout that comes up four times a year or whatever it is. I'm not a trout fisherman by the way so they... I don't even know if they migrate up or what but anyway... The fact is if you have something that attracts and something that pulls that holiday home.

So if you're holiday home is around the lake then you need to do the research based on that being the fundamentals. So that's the... the area of risk is all about what happens if it's a fishing lake and if the lake gets contaminated. What happens if for instance there's an earthquake? I don't know, that's probably a bit far-fetched for the UK but anyway. So it's the area risk. What happens if the... something happens in the area that doesn't make it quite so attractive to holidaying...holiday people.

That's the sort of area risk you need to look at. So it's one of the things you need to look at and if it's a really established area and I want to say the stuff we're selling is in established areas so it's going to be very easy to do the research on. If it's not in an area that's established, it takes years to establish an area. So be very careful of people putting stuff, saying it's a holiday home because...in an area that really isn't established. Then you start to get that high-risk sort of stuff because really in a lot of these areas you're going to find hundreds of holiday homes run and operated by various companies and various people. And they are the areas that you really want to get into, they have the established area.

So, the next one is the management risk. So we've talked about a management company before but this is probably one of the most acute risks that you're going to have which if the management company isn't working, isn't doing their job then your income is going to be affected. So you really want to pick the management company well and make sure they've got a good solid grounding in holiday homes, make sure they've got a good solid grounding in marketing and in management and in all that sort of stuff. You're going to be getting a new... virtually new asset so there might be a lot of the costs and sort of that risk which is another one of the risks we'll talk about in a second. So it's the management side, you've really got to pick them well and make sure that you do your research on those guys because actually, that is for me the biggest determinant between success and failure.

You can be in the right area, you can have the perfect everything but if the management company is crap, well, your asset is not just going to perform or not going to perform for you. Okay, so one of the... and this is... so the next one is labour risk, staff effectively. And really if you look at the holiday industry or the leisure industry in the holiday homes, a lot of it is the "Eastern European" type labour which is generally being cheaper. Now with Brexit... so post-Brexit, what's going to happen with that later? We might find that you're not able to get the labour and therefore you've got to hire a local, which means it might drive prices up and if costs go up, obviously, is the income going to go up conversely? Yes, no, we'll see how good the management company is.

So there is a risk there that Brexit drives away all the cheap labour and we have to replace it with expensive labour. Unfortunately, this is one of the arrogance of Brexit is in saying we get back our country and immigration... immigrants. In reality, its a lot of immigrants are doing the jobs that we don't want to do. So if we're driving those guys out, who's going to do those jobs? And a lot of these jobs are not jobs that people want to do. So we'll see what the social impact of that is, we'll see what the actual economic impact...and I think it's already having an impact. Make no mistake.

For me, Brexit is already... it's a case of self-harm and it's already, we're harming ourselves. We're already seeing the effects of Brexit in a big way. I think the actual Brexit day, the Brexit day when we move away from the EU is going to be almost a non-event to some degree because we saw the price and so already. But we will see with the wages...and the other side of it is that the labour risk is the national living wage. Because that is going to be driving our prices and driving our prices means more cost, more cost means if we don't get the income up correspondingly then our profit margin has to wear that and that's really not what we want. We want to maximize our profit obviously.

So the cost risk. This is the real one because I have to say with my buy to let and with my property, I look at things like insurance and how much that's gone up in the last 10 years since September 11th. It's gone up dramatically and some of those service charges which used to take me...we used to say one or two pounds outside of London, it's three pounds in London. I just looked at one the other day. In Newcastle seven pounds per square foot. And you're like, what the hell are they doing there?

I want to tell you what they're doing. We're actually inquiring into it. But the reality is the costs have gone up tremendously so we've got to really keep the costs and that's part of what a management... a good management company will do, is they'll constantly be managing that cost. I have a fantastic finance director and he's always worried about the little detail and the cost and that's fantastic for me. I get to drive the income, he gets to look after the cost and pay the bills. But that's all part of having a really good management team and the management team we have chosen, they are fantastic. They've got years of experience, they're very, very good from that perspective.

Damage risk. So this is... its not...it's a bit different because this is rather being an AST where you've got a tenancy created, there is no AST, there is no tenancy created. This is a commercial transaction so if somebody wants to stay in your holiday home they will pay the management fee, they'll give them a credit card and it's like any hotel would be and hotel guest. If they damage the place, if they do the wrong thing, you call the police and the police come out. If they do that in a tenancy or an AST and you call the police, the police go, well sorry but that's not my problem, go and deal with it yourself. I mean sure if they're doing certain things, but the reality is you have full... there's no tenancy created and that's actually a fantastic thing because it means you can chuck them out, you can charge them damages.

And sure, if the damages are huge you may need to go through a court process. That would probably be the management company doing that anyway so it's not necessarily you but it may mean an interruption in your income. It's a risk and it's something you should be aware of.

Finally, it's the market risk. At the end of the day, the market goes up, the market comes down. It's cyclical and you're affected by the cyclical market like everything else. So don't think this is immune to this. One of the good things though is even in a recession people like going away and when times are really good they might go internationally. When times are a bit tough then they'll stay home and at the end of the day, staycation works for us in this investment. But likewise, in good times people still go to these places. So good times are really good, bad times are not so bad. So there is sort of a list of risks associated with these investments.

The big one for me is the management company risk and that's why you really need to keep that in mind and keep those from harming. Because if you have good managers then they'll run the business well and it's like anything, this is a business. If you have a good business manager...I mean, I've just gone through a process where two of my business... I had people who weren't doing the right job in there. Got rid of them and now I've got good people in there and it's amazing the difference like just immediately from day one walking in and all of a sudden... Like good managers, that's where it's at. So that's where you want to spend a bit of time and really ask those questions and ask the hard questions of the team about that. All right guys, that's it for the risks so we'll see you on the next video. Have a great day, live with passion.

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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