First tools come online for selected users

After weeks of additional coding, we're finally there: our first tools are ready to be given a glimpse of daylight, but only to a selected handful of users.

Portfolio Executive will ultimately offer a full suite of tools tailored to the needs of buy-to-let property investors and managers. We believe in innovation at every step, and so the first tools in our range have challenged conventional methods and redefined processes.

Our selected users will benefit from automatically generated tenancy documents, together with rent accounts and alerts. Previously, creating tenancy documents was a laborious process taking anything up to half an hour. Surprisingly, there were only a small handful of other sites that automatically created the documents -- and all of them left plenty to be desired.

What's so unique about our system is that it takes under a minute to set up a whole new tenancy, complete with alerts and rent accounts. We spent days looking at all of the data we needed to capture and redefining user interactions until we had stripped it down to the bare minimum.

We went from about 16 individual data fields to just four -- because we figured out innovative ways of extrapolating what the other 12 fields should be. There are also a few scenarios in which our data capture form dynamically changes itself in real time to account for what the user has entered, thereby ensuring the form is always 100% relevant to the user.

These first tools will stay accessible only to our selected user group until we are satisfied that any major bugs have been captured and we have had adequate opportunity to listen to feedback and make changes where necessary.

From banking to business

I've just started blogging for LSE. At the moment it's only available to current students, but there should be an external version in the pipeline. My first post:

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Moving from the big world of investment banking to the small world of startups is not what it seems. The challenges in banking are huge and varied, but there’s something about the industry that just doesn’t seem real.

Startup business on the other hand is very real. The anxiety you feel when you wonder if a deal is going to go your way is intense. It’s like being the star of a fly-on-the-wall documentary where you – and only you – determine the success or failure of your business. The adrenaline rush from closing your first deal as an entrepreneur gives you a high that makes you feel like you can take on the world.

Startup business is real business. It’s gritty and at times dirty. The challenges, the excitement, the sleepless nights – they all come as a package. I love it.

A little about me…

I set up the LSE Entrepreneurs society during the final year of my Economics degree. Following graduation I followed the status quo and went into banking. I had some great experiences there, and I’d certainly make the same decision again, but I quickly developed an allergy for the industry! I decided to step on to a different track and follow my passion for startup business.

...and my business

That was in April 2006. Since then I’ve grown my real estate portfolio which I’ll be further expanding as the economy continues to plummet. I’ve also innovated a yield-enhancing concept of serviced flatshares for professionals. I packaged this into a management company that enables investors to double their returns, and allows me to capture over 100% return on investment. With those companies nicely ticking over and quietly expanding, I’ve got a team together to create my next business: PortfolioExecutive.com.

Over my coming posts I’ll be following the progress of Portfolio Executive. Our first tool is due to come online very soon and we’re currently in the process of raising a round of seed funding. It’s exciting times. All the latest experiences (and no doubt some horrendous mistakes!) will be available right here.

Residential property derivatives

Derivatives allow investors to make financial gain from particular assets without actually owning said assets. They've been around for years, but recently they've made the cross over from more advanced commercial property structures into the realm of residential property deals being closed by Joe Bloggs buy-to-let investor. Well, not quite, but it's certainly getting there.

I'll be doing some comprehensive blogs on option structures packaged with leases and other bespoke agreements that allow investors to receive cash payments on entry, carry and exit - and all without putting a penny into the investment and never actually owning the property itself.

My background in investment banking has always given me an edge in structuring property deals, but it was really rammed home when I attended one the wealth events run by Tamkin Riaz and his TLC Entrepreneur group.

If you're keen, Google around or read the pig for some terms such as sandwich leases, lease options and rent to buy schemes.

Another great webinar was given by The Sophisticated Investor and you can download it for free from the site.

The economics of the property boom-bust cycle

Economic situations vary and there will always be factors unique to a given boom-bust cycle. There are however a range of broad principles that can often be observed over the course of the property cycle. The assumption is made that the economy starts from a stable equilibrium with limited infrastructure, which will of course not be true of all cycles. The boom-bust cycle can be split into five sections:

1. Start of the boom
2. Middle of the boom
3. Towards the end of the boom
4. At the peak
5. The crash

The boom-bust property cycle is directly related to:

• The general economy, because property is bought with money;
• Land values, because property is built on land.

1. Start of the boom
Assuming that the economy starts from a stable equilibrium, there are no rapid increases or decreases in prices, supply equals demand and price stability prevails. Population growth over time bolsters demand from businesses and individuals for commericial and residential property. There exists a disequilibrium in the market and either supply or prices (or both) need to change to restore equilibrium.

If supply increased to meet demand, prices would remain stable. Property density would increase (e.g. redevelopment of existing sites into more units); undeveloped areas would become developed; and infrastructure would increase to cope.

This does not necessarily happen. Landowners know that if they do not increase property supply, then prices must adjust in order to restore market equilibrium. That is, property prices are gradually bid up by the increased demand.

As a result, developments outside of prime central locations will occur, feeding through to an increase in infrastructure around the city centre. This in turn pushes up the value of undeveloped land in the city centre even further.

With undeveloped land values bid up, brownfield redevelopments become more attractive. Existing property is ‘over-enhanced’, for example by replacing an existing building with another of higher specification (more units).

As the limited supply of land drives price growth, it becomes just a matter of time before property speculators (novice investors) start entering the game.

2. Middle of the boom
Novice investors are mere speculators who believe property values can only continue to rise. They will therefore pay inflated prices for existing buildings, or buy new build property from developers also at inflated prices.

As prices rise, speculators spend more in order to gain a higher profit. Consumption in the economy falls as consumers use more income for property investment. The feel-good factor of boom time masks this fact and consumers often go a step further – making unsecured borrowings to finance further expenditure.

A paradoxical consumer position emerges: savings are increased in order to finance property investment, while consumption also increases as it is financed by unsecured borrowing.

3. Towards the end of the boom
With consumption fuelled by over-borrowing, the economy experiences a trade deficit. Domestic output also falls as money is withdrawn from the economy through consumer savings for property investment. That is, domestic output is unable to meet consumer demand and so imports increase to satisfy excess demand, and exports fall as more production is required for domestic consumption.

The resulting trade deficit must be financed and this is achieved through attracting inward investment into the domestic economy from abroad. Government gilt rates increase in order to attract foreign investors. This ultimately leads to rising interest rates.

4. At the peak
Investments are being made based on historical returns – speculators do not adjust their expectations to reflect the fundamental economics. Consumption continues to be fuelled by unsecured finance and second-charge loans. Lenders lend at higher valuations which are only the result of speculative excesses.

Investment, consumption, lending and borrowing are all in excess. Interest rates rise to cope with the trade deficit and consumer price inflation.

5. The crash
Higher interest rates curb consumer expenditure and help to bring inflation under control. Projected cashflows and present values of uncompleted capital intensive development projects fall. Investment returns look less attractive. The property development market slows...

...and so begins a chain reaction of events...



...the chain continues:



And so the market bottoms out and is ripe with opportunity for the professional investor.


Useful links:
* "Beating the property clock" by Ajay Ahuja
* Knowing where in the property cycle to invest

Knowing where in the property cycle to invest

Investment returns in the buy-to-let sector come from two sources: capital appreciation and rental yield. Understanding the dynamics of these two factors enables professional BTL investors to assess the optimal time to invest.

Capital appreciation
Property prices are cyclical. For ease of representation, we can model the property cycle over a 12 hour period. At 12 prices first start to rise and at 6 prices start to fall. We therefore have rising prices between 12 and 6, and falling prices between 6 and 12. Assuming symetry of price movement, the peak rate of price growth will occur at 3 and the peak rate of price decline will occur at 9.



Rental yield
Rental incomes are pretty static compared to property prices. They do not rise and fall cyclically. The trend with rental income is a slow, steady rise over time, approximately in line with inflation. There may be short term seasonal or economic fluctuations, but these have little effect on the long term trend.

Rental yield is calculated as:



From this definition it is clear that property prices are inversely related to yield, so yields are also cyclical and their movements are opposite to those of property prices.

In our 12 hour period, yields would be falling between 12 and 6, and rising between 6 and 12. The long term trend rental yield would therefore occur at 3 and 9 during the period. This means that between 9 and 3, yields are above average; and between 3 and 9, yields are below average. This is shown on the diagram below:



If we put the capital appreciation and rental yield diagrams together we see the four phases of the property cycle:



Note that the labels for each section are from the professional investor's point of view. The 'Cooling spot' on the diagram above will quite often be what the novice investor thinks is the 'Hot spot'. If you’re a sensible investor, you will invest during the warm and hot spots. This is because the investment has a positive yield relative to the long term trend and is cashflow generative. You are also acquiring assets at lower value and holding on for maximum capital appreciation.


Useful link:
* Based on information from "Beating the property clock" by Ajay Ahuja

BTL Basics: The inverse relationship between property prices and rental yields

Property prices and rental yields are inversely related. This means that when property prices go up, rental yields fall. When property prices go down, rental yields rise.

Note that rental yield is distinct from rental income. Rental incomes are pretty static compared to property prices. They do not rise and fall cyclically. The trend with rental income is a slow, steady rise over time, approximately in line with inflation. There may be short term seasonal or economic fluctuations, but these have little effect on the long term steady upward trend.

Rental yield is expressed as a percentage. It is defined as:



In order to see the inverse relationship between property price and rental yield, consider the following numerical examples. Taking a simple starting point it is possible to see how yield changes as the property price increases and decreases. Assuming a property is currently worth £100,000 and produces annual rental income of £10,000, the rental yield can be calculated as:



As the property price increases to £110,000, the annual rental income remains unchanged at £10,000, but the rental yield falls:



The opposite effect can be seen by reducing the property price to £90,000, again holding rental income steady:

Tenancy doc tool expanded - almost ready to be pushed into private beta

Our tenancy document tool, currently in private beta for our pre-registered users, will be shortly upgraded to have some more usable functionality.

Previously the tool demonstrated simply the core functionality of being able to generate a tenancy document in under a minute, using our streamlined forms.

Mike has just finished demoing the new enhancements to me. They're pretty impressive and what's more they took him only 20 hours of coding time - not bad. The tool has now moved beyond showing off the concept and has real usability. The new features are only 'formalities' of a web-based tool, but they mark progress all the same. We now have an admin area, new users can sign up, add and manage properties, and generate as many agreements as they like.

Based on user feedback, the tenancy generator has also been further streamlined to make the user experience even cleaner.

The revisions are scheduled to join the private beta over the next few days. We're still keeping the generator tool itself under wraps, but here are a couple of sneaky screens...

Screen 1: Some of the tabs we have at the moment... they'll be changing soon though

Screen 2: Adding photos to the property profile

* Pre-register to be alerted when Portfolio Executive goes public or to join our private trials