Category: Property

Deming’s 14 Points and Property Investing

flat lay photography of macbook pro beside paper

Dr W Edwards Deming is known as being one of the quality gurus and is highly regarded in Japan as Deming made a significant contribution to Japan’s reputation for innovative, high-quality products, and for its economic power that has helped Japan become the second largest economy in the world. As some of you know I am a quality professional as well as a property investor and therefore I have studied Deming’s work over a number of years and particularly his 14 points which still apply to today as it did in 1982 when it was first published.

I was revisiting the 14 points to see how I could apply them to property investing and this is what I came up with:

1. “Create constancy of purpose toward improvement of products and services, allocating resources, with the aim to become competitive, to stay in business, and to provide jobs.”

This point calls for looking ahead and making changes to your business so that you have better approaches to changing markets and environments. The one that comes to mind is the changes in the tax laws that we will all have to face, so think of the ways that you can mitigate it. But bear in mind who your customers are as the customer’s needs remain the top priority in your business because without them you have no business.

2. “Adopt the new philosophy. We are in a new economic age. Western management must awaken to the challenge, learn their responsibilities, and take on leadership for change.”

This point is all about innovation and change management. Therefore, look at your processes and systems and make them robust. If you don’t have any yet, then now is the time to start applying these to your business otherwise you will be working in your business instead of on your business.

3. “Cease dependence on inspection to achieve quality. Eliminate the need for inspection on a mass basis by building quality into the product in the first place.”

This point is about monitoring your processes at every stage and not trying to detect defects at the end. Not only will you prevent defects from happening, but you may also be presented with an opportunity to innovate the process. So, for instance instead of doing snagging at the end of a refurbishment do your snagging during the refurbishment.

4. “End the practice of awarding business on the basis of price tag. Instead, minimize total cost. Move toward a single supplier for any one item, on a long-term relationship of loyalty and trust.”

What this point is telling us is to stop cutting corners by buying cheap materials when in fact you need good quality materials as this will work out cheaper in the long run. You also need to work with single suppliers and build up relationships so that you can work together in this way you will get your materials at a decent price and delivered on time as your supplier will know exactly what you need. Also, by building the relationship you will know what your competitors are doing as the supplier will have their ear to the ground and let you know.

5. “Improve constantly and forever the system of production and service, to improve quality and productivity, and thus constantly decrease costs.”

This is about building a culture of making improvements within your business. By ensuring everyone is looking at all of your systems and processes on a constant basis and finding ways to make improvements you will increase the quality, your productivity will go up and your costs will come down.

6. “Institute training on the job.”

People are part of the process; therefore, you need to train them properly, therefore you must have continual support for learning about process monitoring and improvement. This can also be applied to people outside of your business e.g. estate agents can be trained to understand what your requirements are and not to give you information on unsuitable property that does not meet your needs.

7. “Institute leadership. The aim of supervision should be to help people and machines and gadgets to do a better job. Supervision of management is in need of overhaul, as well as supervision of production workers.”

Leaders should help people think about their job and find ways to make improvements, this will also help people understand their processes. This will help your business grow and become part of the culture.

8. “Drive out fear, so that everyone may work effectively for the company.”

Research has shown that if people are afraid to speak freely it will have a negative impact on innovation and reasoning. Therefore, you need to ensure that the people in your business can speak candidly.

9. “Break down barriers between departments. People in research, design, sales, and production must work as a team, to foresee problems of production and in use that may be encountered with the product or service.”

You need to have a cross fertilisation team that can work together, e.g. planner, architect and builder working together to come up with a design that suits your needs.

10. “Eliminate slogans, exhortations, and targets for the work force asking for zero defects and new levels of productivity.”

You need to remove targets and quotas for people to hit, instead you need encourage your team to work collaboratively as this will move your business forward.

11. “Remove barriers that rob the hourly worker of his right to pride of workmanship.”

This is point is about putting quality before quantity and encouraging people to make improvements in their work. By allowing people to make improvements you are also encouraging your business to improve.

12. . “Remove barriers that rob people in management and in engineering of their right to pride of workmanship.”

This is about allowing people to manage without undermining their responsibility. Managers also need to encourage continuous improvements and allow people to take responsibility for their work.

13. “Institute a vigorous program of education and self-improvement.”

Training should engage people in on-going learning opportunities and not just limited to specific tasks. Also, you should allow time for your own on-going mentoring, training and education so that it can help you grow your business.

14. “Put everybody in the company to work to accomplish the transformation. The transformation is everybody’s job.”

This is all about teamwork within your business and collaboration with your suppliers and power teams so that everyone is on board to help you grow the business.

As you can see Deming’s 14 points can be adopted and applied to any business, therefore it can work in your property business. I have just skimmed over them as you need to see how you can apply them to your own business. If you would like to know more about the 14 points and how to apply quality to your business, I suggest that you read Deming’s book ‘Out of Crisis’.

What’s your strategy?

Introduction

How often do we hear people at network meetings ‘What’s your strategy?’ and the answer is usually goes something like ‘Baby buy to lets, then move up to HMO and eventually commercial properties’, and everyone is satisfied and they then move onto the next person and ask the same question. This always begs the question why are using this strategy, what are you hoping to achieve? You then get the blank looks or a mumbled answer which indicates that this has not been thought through.

According to the Business Dictionary strategy has the following meanings:

  1. A method or plan chosen to bring about a desired future, such as achievement of a goal or solution to a problem.
  2. The art and science of planning and marshaling resources for their most efficient and effective use. The term is derived from the Greek word for generalship or leading an army.

Integrated Method

As can be seen by the above definitions strategy is linked to a plan to bring about a desired future and we need to bring our resources together to be efficient and effective. What do we mean by this and how can we achieve it? Because we need everything and everyone to work together rather than in isolation we need to consider an integrated systems approach. This method is about people and systems coming together and working as a team. Why as a team? If we think of the system as a football team and now the manager calls each team member one by one and tells them what the tactic is that he wants them to play. The team then go out on the field and they play badly because each member of the team only knows what his specific task is, they have not had the benefit of listening to what was said to everyone else and knowing what their roles were. Now that you get the idea why we need an integrated approach let’s model it so that you can see how it fits in together.

 

As can be seen by the model you need to understand where you want to be in your future, as this is the starting point. This could be your why, or it could be your financially free figure. Once you have decided what your future should look like then you can work on your strategy to see what you need to achieve your future. Then you need to understand what methods and tools are required to make it a reality. Do you need training in the tools and methods? If so this needs to be added to your integrated approach. Finally you need to consider what systems need to be put in place to support the integrated approach and KPIs (Key Point Indicators) to measure your success. By having flow down and feedback throughout the integrated approach everyone understands what is required to reach the future state.

If we take each of the headings and place it into a table we can then work on each section to come up with our integrated approach e.g.

 

Where do I/we want to be? What is my/ our strategy? How can I/we do this? What capabilities must be in place? What systems are required?
Financially Free Figure of £10k per month Buy to Let = £200 per month.

£10k/£200 = 50 Buy to Lets

 Money in Money out.

 

 Training Courses KPI’s
HMO = £1500 per month.

£10/£1500 = 7 HMOs

 Joint Ventures Mentors Standard Work Procedures
Serviced Accommodation = £2700 per month.

£10k/£2700 = 4 Serviced Accommodations

 Investment area(s) Benchmark against successful investors Lessons Learnt

Work with suppliers (Estate Agents, Letting Agents, Sourcing Agents etc.) so that they can deliver to our requirements

 Power Team Visual Management

 

You can see by using this method you start to build up a picture and you begin to see how everything is linked to your future state. This is your birds’ eye view of where you want to be. This can then be broken down further e.g. you may decide that you only want HMOs as your strategy, in which case everything below the strategy needs to be geared for HMOs e.g. Finance, Estate Agents and Letting Agents that deal in HMOs, Training, Regulations, Commercial lending, vetting, house rules, etc.

 Conclusion

When you work on things in isolation it is quite easy to lose your way, by having an integrated approach to your business you will become more focused and achieve quicker results. Planning for your future state is important so take your time to think and make your plans. As Abraham Lincoln said ‘Give me six hours to chop down a tree and I will spend the first four sharpening the axe’

Landlords Losing Money

One of the principles of quality in industry is customer focus, and this is something that most landlords do not even consider, as all they are interested in is filling voids. It is in the interest of landlords to keep their tenants as long as possible in their property because in the long run it saves the landlord money as there is a regular cash flow going into the bank account. Landlords can go a long way to ensure that they not only help their tenants but also themselves. The following are but a few suggestions that landlords should consider if they want to keep their tenant and in some cases be able to charge a premium for what they are offering.

Tenants are not money trees they too need to earn and save to pay the rent; however, it is becoming increasingly difficult for them as their wages are below inflation. This means that bills have got higher, so they are trying to cut down wherever possible to make ends meet. As landlords you can help them, not by reducing the rent, but by helping them reduce their bills. Consider for instance of replacing all bulbs with LED bulbs, replacing shower heads with water efficient ones. from the 1st April 2018 there will be a change to the Energy Efficiency Standard Regulations to ensure that any property that is privately rented will have to have the minimum performance rating of ‘E’ on an Energy Performance Certificate (EPC). So, if you must update it go beyond the ‘E’ rating and make it even more efficient.

Customer focus is not all about helping the tenant reduce bills, its also about being responsive when a tenant reports a problem. How many times have we seen a tenant report an issue only for the landlord to ignore it until the tenant has made several complaints. Gone are the days where a landlord could afford to do this as the tenants today are much savvier and will take to social media to tell everyone about the issue and the poor response. It does not take long for a landlord’s reputation to be ruined and it will take a very long time for that reputation to be built up again, and in the meantime the landlord may have lost the tenant and find it difficult to fill the void.

Landlords also need to consider their tenant’s needs, for instance tenants may want to have pets, and are willing to pay either slightly higher rents or a bigger deposit in order that they can have their beloved animals. They may want to paint walls different colours so that it feels homelier for them, the landlord should allow them to do this on the understanding that it is returned to the original colour at the end of the tenancy. Let the tenants hang pictures again on the understanding that the tenant will make good any walls where he has made holes. Consider freshening up the property every few years with some paint, either paint it for them, or give the tenant the paint so that they can do it themselves. As tenants are often busy people, especially the professional tenant, then the landlord should consider offering services such as gardening, window cleaning etc. the tenant will often pay a higher premium for such a service.

Landlords who self-manage could also make it easier for tenants to report an issue by being able to do it online rather than having to phone, as quite often the tenant only has the time to report things out of office hours due to their own workload. So, give the tenant their own portal so that they can report and track the issue that they have reported. The landlord can also use the same portal to inform the tenant in advance when inspections are due, therefore allowing the tenant to arrange for someone to be in attendance.

By doing these little things not only will landlords keep their tenants for longer they will also have happier tenants who will become the advocate for the landlord and help find tenants for other or future properties that the landlord may have.

In summary by focusing on your customer you will enhance your reputation as a landlord and you will find opportunities to be able to charge a premium rate.   

Is your property investment area in a buyer’s or seller’s market?

How many people really understand their property investment area? Quite often they are told to go where the housing stock is cheap, offer below market value and build up their portfolio of buy to let houses. So off they go and put in offer after offer without understanding the local area and whether they’re in a buyer’s or seller’s market. So how can you find out if the property that you are interested in will potentially accept your offer especially if you are looking to put in a low offer? You can use easily obtained data to help you make an informed decision on your potential target property.

You start by looking at how many houses of the same type including the number of bedrooms that are within a ¼ mile radius of the property that you are interested in. This information can be found through the property search engine RightMove. Once you have this number write it down. Then within the same search engine, there is a tab called house prices, then from the drop-down menu select ’Sold House Prices’ then enter the postcode of your property. Then filter the information so that you are looking at property within a ¼ mile radius of your, and set the filter for sold in the last year. This will give you the number of houses sold, again make a note of this figure.

Now for some simple maths. Take the number of housing sold in the last year and divide it by 12 to give you an average. E.g. 36 houses sold in the last year, 36/12 = 3, then you take your current number of houses for sale and divide it by your average figure, e.g. 7 houses currently for sale, 7/3 = 2.33. This figure of 2.33 represents your current month’s supply of housing stock, if it is less than 6 then it is a seller’s market, so there is no point in you putting in low offers, because unless it is a stressed owner, the seller will know that their property will sell quickly at on or very close to the asking price. If the figure is 6 then it is a balanced market, so you have a 50-50 chance of having a below-market offer accepted. If the figure is above 6 then it is a buyer’s market, therefore you can put in a below-market offer with a good chance of having your offer accepted because the market has a lot more properties that are up for sale.

In summary, using data is the best way of making an informed decision that can make a big difference to finding the right area and property. You will not only save time but also money, therefore it is wise to spend a little time checking the data before adventuring out to put in offers.

Learning about property investing from Wolves

It may seem strange to think that we as humans could learn something from animals after all are we not the top predator due to our creative minds. Wolves are always the bad characters in stories, myths and legends, nothing could be further from the truth, as wolves are very sociable, who work as a team and are highly intelligent. If we observe wolves we can obtain some insight on how to use some of their habits when it comes to investing in property. This may seem improbable, but before you dismiss it out of hand keep reading and have an open mind.

Teamwork

For wolves to succeed in nature they have to work as a team, it is the only way to survive. A lone wolf does not last long as they are social animals and need help from the rest of the pack, so they with very few exceptions soon starve, or become victims to other predators.

For an investor to succeed they have to have a team as they cannot do everything themselves. So an investor will have his power team such as Accountant, Solicitor, Broker etc. Without this team, the investor will not last as the investor will be starved from deals and other investors who are organised with teams will become predators who will take the deals away from the lone investor as they can act quickly.

Territory

Wolves know their territory intimately, nothing will happen in their territory without them knowing about it. By knowing their territory in this way the wolves know where their prey is likely to be and they also know how to use the terrain to surprise and attack their prey.

For an investor to succeed they need to know their investment area extremely well. Nothing should happen in the investor’s investment area without them knowing about it. The investor needs to know when there are changes and use their knowledge of the area to take advantage and make a potential gain.

Travel

Wolves are hunters, therefore, they travel long distances to find their prey and they search far and wide. They may travel fifty miles or more each day in search of food they can travel tirelessly for hours on end with no energy wasted.

The investor may have to travel long distances to get to their ideal investment area. Due to either the local property prices, the stock available or strategy the investor may not be able to invest in the area where they live, so it will be necessary to travel to different parts of the country. They must do this without wasting energy thinking that they have to get up early, they may have to drive for hours, etc. travel is part of investing so the investor must learn to accept this.

Hunting

Wolves are incredibly patient animals, they will carefully watch and wait to pick out a suitable prey. They are looking for a weakness that they can exploit, such as a slight lameness. Wolves will keep an eye on their potential prey by constantly checking on them to see if anything has changed that has made them weaker. Wolves may trail a herd of elk, caribou etc. for days before making its move. During this time, they are assessing the herd, looking for an animal that displays any sign of weakness, and this is just the beginning. Wolves also factor in other conditions that will affect the outcome such as weather and terrain that can tip the scales in favour of the wolves or its prey. Once a prey has been picked out the wolves become totally focused on it until they can bring it down.

The investor must also be patient, they must search out the right type of property, put in their best offer and wait and see if it will become accepted. At first, their offer may be rejected, but the investor must stay focused and keep watching and waiting and if they see no movement the investor will remind them of their offer. Once the vendor comes back with a counteroffer that they are prepared to accept then the investor will begin to negotiate and find a weakness until an agreement is reached. The investor must remain totally focused until the deal is done and contracts have been exchanged.

Conclusion

As can be seen, there are similarities between wolves and investors. Investors can learn from wolves because wolves are sociable animals that understand their territory and are fully focused as this is the only way that they can succeed in nature. The investor needs to be a sociable person that understands their investment area has the same focus and commitment if they are to succeed with their property investment journey.

 

Rental Yield

When investing in property you should always look at the Return On Investment (ROI), as you are buying the property to make money. Therefore you need to calculate the rental yield to ensure that the property that you are interested in will make you the most money on your investment. Yield uses the rental income over the initial cost of buying the property and it is expressed as a percentage. There are several ways of calculating yield, but for buy to let (BTL) we will use the most common one known as rental yield. This is calculated by the rent minus the running costs and dividing it by the total amount invested to purchase the property. This will give you a percentage, the higher the percentage the better the deal.

So our formula would look like this:

 

Yield = (((Monthly Rental – Running Costs) *12) / Investment)*100

 

Let us do a simple worked example:

Suppose that you have found a couple of potential properties that you are interested in but now you have to decide which one to choose. Property one costs £175,000 with a potential rental of £650 per month. Property two costs £200,000 with a potential income of £800 per month.

 

Property 1.

Monthly Rental Return = £650

Investment = £175,000

£650*12 = £7,800 (Annual Rent)

£7,800/£175,000 = 0.044

0.044*100 = 4.4% Yield

Property 2.

Monthly Rental Return = £800

Investment = £200,000

£800*12 = £9,600 (Annual Rent)

£9,600/£200,000 = 0.048

0.048*100 = 4.8% Yield

 

Although property two costs more to purchase it gives a higher yield, therefore a better return on investment.

 

The above examples is a simplistic version, as it does not include things like voids which can skew your calculations, so you may want to stress test the calculations by using a figure of 10 months annual rent instead of 12 months. You also have to obtain accurate information which includes the following:

  1. Cost of property
  2. Stamp Duty
  3. Mortgage
  4. Mortgage arrangement fees
  5. Building Insurance
  6. Survey Fees
  7. Legal fees
  8. Tenant acquisition fees
  9. Refurbishment costs
  10. Maintenance Fees
  11. Voids running costs (Council Tax, Utilities etc.)

There may be other items that you need to add to the above list e.g. for HMO you may need to include a licence fee and furniture, so do your due diligence and be as accurate as possible.

 

Be wary of yield figures that are given by agents and developers as they are often based on the basic cost of the property so that it makes the deal look more attractive. So do not be afraid to ask questions and ask how they have come up with their figure and use your list as a checklist to help you. Also, do your own due diligence and do a comparable check of local property prices within a ¼ of a mile of the property that you are interested in and what they sold for and also do a similar local search for the rentals in the area.