Onwards and Upwards to the

Onwards and Upwards to the Next Level Going from Buying Single Properties to Sourcing Multiple Units and Portfolios As investors, many of us are used to working on individual deals, buying one property at a time. We might work with estate agents, bid at auctions or negotiate to buy directly from a vendor who, more often than not, lives at the property they are selling; others among us might prefer to buy through a sourcer if we do not have the time or inclination to find suitable investment properties ourselves. And as most of us know, regardless of our acquisition strategy, finding the finance for a single purchase can be challenging enough. After building a portfolio through buying individual properties in this way for several years, Michael Dong went a step further and took a different approach. He decided it was time to work on bigger deals, so over the past couple of years has made the courageous transition to sourcing and negotiating on multiple unit properties and portfolios. As well as investing his own funds, he started thinking beyond the UK boundaries when it came to funding, and now works with investors from China and the Far East who want to invest in UK property. Ant Lyons (YPN): Your experience over the past few years has been in sourcing properties for overseas investors, and also in finding larger multiple unit properties. We can put a lot of effort into one relatively small deal, but presumably ten times the size does not mean ten times the effort? Michael Dong (MD): That economy of scale is what I have been trying to achieve. I had been doing smaller deals for a couple of years but there comes a point where you realise you probably have quite a lot of experience in buying below market value (BMV), doing some work and getting money out after revaluation to invest in the next one. In 2008-09, it was easy to do that but over the past two or three years, prices have been going up and more people have been going after the same deal. So I wondered how I could carry on with that principle, and the solution for me was to go for something bigger where I could still achieve what I wanted, but with less competition and more funds. YPN: What did you do before property, and how did you get into it? MD: I came to the UK from China in 2002 and did a Master s degree in Accounting and Finance. The day after I handed in my dissertation, I started working for a women s fashion company and stayed there for about three years. Towards the end of my time with them, I set up my own online business selling digital products and for six months or so I was working 10am-6pm in my day job, then 7pm-3am on my business at home. I got to the point where I could not carry on with that lifestyle so quit my job to focus on my online business. I knew that property investment was the way forward and had always had a passion for property. I bought the first one in 2002, and it took me four years to buy the second. Then after the market crashed I kept on buying. Looking back, I was using the momentum investment strategy but did not know what it was called then. Basically, I would just buy something really cheap, add value to it and remortgage it to get my money out and invest in the next one, and kept doing that as quickly as possible. Your Property Network 70 April 2014 1

Case Study #1: 2-bed apartment, Manchester YPN: What was the size of your portfolio at that point? MD: Between ten and twenty properties. Now I usually keep about twenty to thirty properties in the portfolio and sell the rest. I find that is a comfortable level to maintain; they are the bread and butter and give me a good income each month, leaving me free to do other things. YPN: So with your income sorted, anything else you do on top of that is a profitable bonus? MD: That s exactly right. YPN: What is your current strategy? Previously sold (pre-2007): 135,000 On the market: 69,000 Purchase price (2009): 49,000 Costs inc legals, 3,200 refurbishment, etc: Total costs: 52,000 Bank valuation (2010): 100,000 Remortgage: 75,000 Money back: 22,800 Equity: 25,000 Monthly rent: 650 Monthly mortgage payment: 299 Monthly maintenance, 130 agent s fees Monthly profit: 221 Annual profit: 2,652 ROI: Infinite MD: I am now working on larger deals to achieve a bigger discount, and sell packaged property investment products both in the UK and in the foreign market to get a higher price tag. The idea is to make money when buying, then add value and realise the profit as soon as possible to recycle the money quickly. The model works along these lines: When buying, I go for bigger deals with bigger discounts. In adding value, I do relatively small works such as a new kitchen, flooring, décor, designer furniture, then increase the rent; title separation can also increase the value. When selling, I package the complete product to create a turnkey investment with a high yield and offer it to the overseas market. In addition, I run a lettings and management company to provide an after sales service for hands-off investors. I also use the strategy of joint venturing with people, and am really lucky to have a list of potential investors looking for the right type of properties. We have a few amazing transactions on the go at the moment. YPN: When you were sourcing individual properties, did you use the usual methods such as estate agents, auctions, leafleting and so on? MD: From 2008 to 2010, you could walk into almost any estate agent and they would open up the champagne for you! You could dictate the price in some cases. To give you an example (see Case Study #1), one property I bought had sold before 2007 for 135,000. It came back on to the market at 69,000. The sale had fallen through with the previous buyer so I offered 45,000 and they eventually accepted 49,0000. I remortgaged it a couple of months later for 100,000, so got 75,000 back from a 50,000 investment. YPN: So you were negotiating very aggressively but there were very few buyers in the market. Where do you operate? MD: I am based in Manchester and operate mainly in northern cities. As the market moves, you have to move with it. If I focus on just one spot, that gives me less opportunities. YPN: Although people talk about the North/South divide and see boom prices in and around London, do you find that the market in the North has started to move in the last year or so? MD: Definitely. It has been crazy and I can barely believe it myself. Six months ago we could not have predicted what was going to happen. As an example, we bought some brand new apartments that were on the market with a developer for 140,000; we negotiated a good price, packaged them up and sold them on to investors for 100,000. The same investors are now putting these back on the market for 125,000, in just a couple of months. 2 Your Property Network 70 April 2014

Case Study #2: Manchester This current transaction is a building consisting of a potential 30 rooms. Asking price: 600,000 Purchase price: 375,000 Legal costs: 6,000 Deposit: 136,000 Renovation to convert to 200,000 4 properties: End value (6 months) 945,000 Gross profit: 364,000 YPN: So you have seen a significant increase in both prices and levels of activity? MD: There is just not enough stock for buyers. YPN: Let s talk about the difference between sourcing single properties and these multiple units, which might come from a receiver or a developer. How do you build those relationships? How do you find out about these kinds of projects? MD: I make people aware of what I do, and make myself known. I work with asset companies, landlords and also get properties directly from receivers or banks, or through estate agents with whom I have previously built a relationship. I work very hard at it and am constantly looking. YPN: Presumably these are often repossessions that have come to the market as a portfolio from a landlord or developer, or sometimes from a developer who has just finished a build? MD: Exactly. I get to know about some of them through word of mouth, where people that I talk to might know somebody else who wants to sell. YPN: How do you secure such large deals? MD: Offer certainty. It is exactly the same principle whether you are buying one or ten houses give the seller certainty. Sometimes it is not the price they are looking at; that might be important but if you can give them certainty, and they can see you have a track record and are in a position to move quickly, that will definitely help. YPN: Do you buy with your own funds and sell them on to investors or do you secure the deal and put the two parties together? MD: I was securing with my own funds then selling on later, which gave me enough time to add value to the property. But now I am also using the second strategy, structuring the deal in such a way that it will allow me to transfer the purchase to the next investor. YPN: That first strategy of buying with your own funds is hugely capital intensive MD: Yes, it is. Previously, I used to take everything on myself, and though a smaller investment, it was 100% mine. But I am a totally different person now compared with the way I was two years ago. I understand the power of working with other people. Not long ago I was interviewed by BBC radio and that was so well received that a lot of people began to ask about my story, what I do, and as a result more want to work with me. Things like that make me realise how important it is to work with others. I can find more deals and they can get a better return on the funds they invest with me. YPN: How do you conduct due diligence on properties that come from asset managers or receivers? Can the values can be uncertain? MD: I do lots of research and comparables. I visit the properties at different times, and discuss them with the people who might be selling them for me. Asset companies and agents tend to be at the forefront of the market and have an idea of current trends. I also talk to the tenants and to local people. After collecting all the information, I do an analysis spreadsheet, from there working out the best, worst and most likely case scenarios. If I am comfortable with the worst case scenario, off I go! I ll do it. With regard to the value, I can usually work that out from what has been selling or what is on the market, and from talking to agents and others who have experience of this type of property. YPN: Is it easier to negotiate a discount when buying in bulk, say twenty or thirty apartments, than it is when buying one property where the vendor is more emotionally involved? Your Property Network 70 April 2014 3

Case Study #3: Newcastle-Under-Lyme Another current transaction, this is a project summary of the first 12 months if the deal goes through. It is a converted Edwardian house with five apartments. Michael plans to retain the freehold and sell the apartments. MD: I find it much easier to achieve a bigger discount on a bulk deal. As you say, individual vendors might have issues that you have to work through with them, and each time the situation can be different. With asset companies, receivers or large landlords, they are looking for certainty perhaps over and above the price, and you have less competition when you get to that level. If you jump higher, you get a bigger apple from the tree most other people cannot reach that high and the price will come down. YPN: So while the rest of us are fighting over individual properties, the number of people who have the skills to put together the finance to buy multiple units is few and far between. Have you ever had a situation where you have not been able to meet the obligations, for example, where you have agreed to buy and the finance has not come through or your buyers have dropped out? MD: Not yet, and I hope I won t! Because I usually work on the worst case scenario, I aim to have three backup plans to give me enough room for manoeuvre. YPN: Do you think that the financial training you did, which is extremely focused on the numbers, was a good grounding for what you do now? Purchase price: 461,250 Purchase and sale costs: 20,000 Renovation: 20,000 Sale of 5 apartments: 596,000 Value of land: 45,000 Rental income, 12 months: 52,908 20% void due to renovation: 10,581.60 10% lettings and 4,232.64 management fee: Projected appreciation, 32,050 12 months: Total income: 725,958 MD: I honestly don t know. I suppose I might have applied some knowledge from the Master s degree to the analysis without realising it. Though talking about it with you, I think it makes sense what you say confirms that idea. YPN: Tell us about your overseas buyers. We tend to hear about the London market being held up by overseas money with foreign investors parking their money there. How did you find your overseas investors? Who are they? Do they look for a similar pattern in terms of a deal? As you are from China, has that helped in finding other Chinese investors who want to put money into the UK market? MD: Yes, I think it definitely helps. We each need to explore and fully utilise our backgrounds. Earlier on, I had wondered what I was good at, because I don t even speak perfect English! Working on individual deals, when going to each house and talking to vendors, I may not have done as good a job as a British person. But now, with my background, I act as a bridge between England and China, the UK and the Far East. I am used to the language and culture and can use my contacts there. At the moment, I find investors mostly through my contacts. I did my foundation degree at a university in China and still have a lot of friends there. First time buyers tend to look for security. That word parking that you used is a good one these people are looking for somewhere to leave their money. But the second or third time, they start to look for equity and yield. Investors parking their money will go to London, but I can get better equity and yields for them in Manchester and Northern cities. YPN: Do they buy predominantly with cash, mortgage finance or a combination of the two? MD: It is a combination of the two. I have just sold some properties to a 100% cash buyer who has no interest in an investment mortgage, but most of the middle class people do get a mortgage. I have now also built relationships with the East Asian Bank and the Bank of China to help investors get a mortgage in the UK, so it is a win-win situation. 4 Your Property Network 70 April 2014

this is the project, that s how much you put in, this is what you do, this is what I do, and tomorrow we will go off to the solicitor and get everything drawn up. Then we re off! Michael is originally from China and has had considerable success finding investment buyers using his network of connections back home. YPN: Are your buyers ever nervous about buying a property thousands of miles from where they live? MD: It varies. Some are extremely cautious. When I went to China last year to do some seminars about UK properties and investment opportunities, I gave examples of what their money could buy. They looked at the figures and could not believe it, asking if it is such a good deal, why are you bringing it to us? They also worry about the money transfers, so I explain that everything has to be done legally, with the money going to their solicitor and not the agent or the buyer, and each transaction is insured. The next question was How can I trust the solicitor?! Having said that, other buyers are already educated about the UK and foreign markets, and they can be very generous when spending to invest. YPN: Could you talk us through a recent deal? MD: This consists of eleven apartments that I bought for 800,000 in 2012. After purchasing, I increased the rent, changed the tenants and did some interior work to increase the value. I remortgaged to get most of the money back out. Because I have a bigger vision and bigger plans for this year, I decided to sell this portfolio. Though it was a good purchase, and would have been nice to keep for the long term, to achieve the bigger plan I would have to let it go. I passed the details to a middle man around a month ago, then one day he texted me while I was at a network meeting to say that someone wanted to offer 1,200,000. My mind went blank and I couldn t remember exactly which or how many flats I had put on the lease to sell. I asked him if it included the penthouse, and he replied confirming the numbers of the flats I had originally emailed him. I counted three times, and there were only nine properties. So this offer of 1,200,000 was for nine properties; I had originally bought eleven for 800,000. Of the remaining two, the penthouse the most expensive is worth around 250,000, and the other around 100,000. I haven t decided what to do with those two yet. YPN: Do you source for UK buyers as well? Are they a different breed? Are they more difficult to work with? MD: UK buyers are much, much easier. There is no barrier when dealing with UK investors. We talk the same language: this is what we want to do, this is what we want to achieve, Working with overseas investors usually means larger investment funds, but there are more hurdles to cross, like transferring the money, dealing with legals and paperwork, getting the mortgage and so on. UK investments tend to be smaller but easier. YPN: So UK investors would look at individual properties rather than a portfolio? MD: We are working on a collective deal with UK investors at the moment, which consists of fifty city centre apartments. The investors are not in a position to individually fund the whole deal, but a group of us can do it collectively. YPN: How important has the networking circuit been to you in your property business? MD: I cannot tell you how important it is. Working with others has transformed me into a totally different person and investor. Before, I was just a one-man band, doing everything myself. Everything was 100% my own, but in a small way. When you compare that with collective power, we can make the pie much bigger; although most of that pie goes out to others, I am happy. As they say 50% of something amazing is better than 100% of nothing. YPN: I think it is quite rare to make the transition from individual property investor or sourcer to where you are. Have you seen many others make this same transformation? MD: Personally I have not, but I would like to see more do so, so that we can all work together. I think this is an interesting area, overlooked by most people. There is so much media and material telling us how to micro-manage a deal, how to increase room size and so on, but I like to think of myself as an investor instead of a landlord. I have created a scalable business, and if there is too much focus on the smaller things and on micro-management, we can lose sight of the bigger plan. Someone else can deal with the small stuff. YPN: Perhaps you are ahead of the curve and ahead of your time! I think there are a few people who look at the strategies that they were using through 2008-10, who get quite frustrated because it is more difficult to find properties using those strategies in the 2014 market. MD: Can I tell you how I see it? In 2008, you could achieve a 25% discount on small deals. Then it came to the point that you could still do it, but only by working harder. There were smarter and easier ways to invest, so it was time to step up to the next level. There is a window of opportunity here and now where we can buy these bigger properties and portfolios well and quickly. Beyond this, once these deals dry up as the economy gets better, less people go bankrupt, banks hold less stock, there are less distressed landlords, etc., we can move on to something else, like commercial to residential conversion. Your Property Network 70 April 2014 5

YPN: So if we want to thrive as investors, we really do need to adapt? MD: Yes. And think ahead to the future. YPN: On that note, what does your future hold? What is next for you? MD: I have realised that working hard is essential but to make it to the next level, I have to work smart. I have ten years experience behind me now, and it is time to make that step to the next level. I have recently joined Simon Zutshi s Mastermind 15, and that has opened up my imagination even further. I feel that I am only one step into the game and the possibilities in property and in life are unlimited. In 2014, I will build the foundation for the next ten years. I will move on to a bigger platform, looking for more deals, more funds and offering my services to more people. My goal is to achieve five times what I have earned in the last ten years, within the next twelve months. Another equally big target, however, is to improve myself, my mindset, knowledge, efficiency and working skills. More specifically, I think there is a window of opportunity in which we can benefit from both markets post-credit-crunch and pre-boom by buying cheap before the distressed stocks become less available, while selling high as the market picks up. I will shift my focus more towards the overseas markets, not only looking for funding investors, but also buyers who want UK investments. It would be fantastic to match the demand and supply both domestically and internationally, and provide alternative solutions for property investors in the UK. You can contact Michael by emailing him at michaeldong@hotmail.co.uk or visiting his web site www.investarproperty.co.uk. YPN Says Are you inspired? We certainly are. With Michael buying and selling portfolios bigger than some of our own holdings here at YPN, he proves that it can pay to think big. However, he has prepared his ground well with years of experience, knows how to analyse the deals and perhaps more importantly, how and where to find investors to participate. He has used his background and experience to his advantage and is a real example that the sum of our experience makes us who we are today. Moving on to bigger deals does not necessarily mean proportionally more work but it does mean working smarter. Getting out and about to talk to people, and knowing how to structure investments for overseas buyers is essential to his strategy. Due diligence, however, becomes more important than ever when larger sums are at stake. Now listen IN FULL scan the QR code or using the below link in your web browser http://xxxxxxxxx 6 Your Property Network 70 April 2014