In every industry, the Global health Crisis we are facing due to Covid-19 is creating huge unforeseen uncertainty, challenge and distress. The residential property market is no different.
It’s clear that cash flow and liquidity will define both opportunities and challenges over the coming year, and that we collectively know less than we thought we did about these.
One opportunity we must all take is the opportunity to reflect, review and adapt how we approach investing.
Arguably, the most valuable commodity in property investment at the moment is not oil (an idea that seems rather old fashioned now!), or data, but certainty.
If you’re not certain or confident that your strategy is going to work going forward then it’s vital to adapt in a way that is considered and strategic, rather than erratic or emotionally-driven.
If you know you need to review your strategy, this is for you – an excerpt from Strategic Property Investing: What works and what doesn’t in a complex UK residential property market by Anna Clare Harper (order here).
As important as strategy is for property investors, it’s not enough. Investors need strategic flexibility, too. Why? What proved to be a great strategy yesterday may not be a great strategy five years from now. Major market or personal changes can profoundly affect your chances of success.
Your goals, ability to meet them, returns, risk, the effort required, and what alternatives are available can change. A change in one or all of these factors can alter the efficiency and effectiveness of the strategy. The headline is: No strategy is evergreen and investors should not be afraid to flex.
For investors of all scales, and at all stages, it’s important to adopt an efficient, effective and logical approach, and to be able to translate this into practical, implementable deal criteria and asset management.
The same ideas that apply to setting a clear strategy also apply to adapting in the context of significant change. Investors must understand their ultimate goal, starting point and what’s happening around them.
This chapter touches on when, why and how you should adapt, and pause, pivot or persevere. This might be in the face of structural market change or when your own personal circumstance changes. Adapting well and being flexible and resilient is universally important. The same idea applies to other business contexts beyond property investment, and even aspects of life, ranging from health to hobbies.
Why should you review your strategy?
The reasons why it might be worthwhile to review, centre on productivity and effectiveness.
Personally, I look at changes to three metrics. Opportunity costs, risk/reward and effort/reward ratios. If these change significantly, it makes sense to check-in and ensure that:
- Business and investment activities are still likely to lead to the results you are aiming for
- Activities are underpinned by strategic decision-making
- You are not following an outdated map
- You are not making emotionally-attached decisions or thinking about the decision too late
It is important to review and respond. This helps you to focus harder on activities aligned with market trends, and move away from dead-ends.
Understanding the risk/reward, effort/reward and opportunity costs isn’t always easy, in the context of property investment. Let’s take each in turn.
Firstly, on risk/reward. There’s a fine line between taking on risk to reap rewards and taking on unnecessary risks. There would be no profit for businesses or investors without risk. Knowing the right level of risk is important for sustainable success but it’s not easy. The question to answer is, is the potential reward worth the possibility of the potential downside?
Use a proper risk management framework, regardless of your scale. Best practice incorporates:
- Risk identification – knowing what the risks are
- Risk measurement – knowing the magnitude of the risks
- Risk mitigation – for example through minimising leverage, or maximising diversification
- Risk reporting and monitoring – keeping an eye on what risks there are, and how these change
- Risk governance – having a process for keeping uncertainties in check
All of these must be addressed as part of defining and refining your strategy, and then reviewing it regularly.
Secondly, on effort/reward. There’s a fragile margin between enough and too much. Are you giving something (in this context, a property investment strategy) enough time and effort to work? Or are you refusing to respond to objective market feedback, such as what people can and will pay, which is beyond your control? It can be difficult to tell if something isn’t working now but will soon improve, or if it simply isn’t going to work. This is especially true with a relatively new venture, or if the market is fast-changing.
Ask yourself, is the potential payoff worth the effort and resources currently being allocated to it? Could the same effort be applied with greater results elsewhere?
Thirdly, on opportunity costs. It’s important to appreciate the costs and payoffs associated with the alternatives. Again, there’s not a big leap between not enough and too much. Don’t be fooled into thinking the grass is greener on the other side. This is different from a new investment strategy that is genuinely offering better, actual and potential rewards. As I mentioned earlier, no grass is greener, except for the grass you water.
The question to ask yourself is, what are you sacrificing in favour of this activity, and is it worthwhile? Set a test timescale when you start anything new, and diarise a time to review and tweak, for example, in six months’ time.
You need to be as objective and dispassionate as possible in assessing these metrics. You need to be willing to re-allocate efforts or shift focus in response to the results. Does an area of focus still seem viable and worthwhile following your objective review? Consider financial and non-financial inputs, risks and rewards, and alternatives. If you believe change is needed, the next questions are when and how to pause, pivot or persevere.
When should you review your strategy?
Having a regular opportunity to review results versus inputs is best practice across all industries and business scales. For example, a company might review and adapt following their financial results, at the end of each year.
It’s also important to review before and after there are significant changes in market dynamics. For example, if actual demand and supply change substantially or there are new policy announcements that are likely to affect future demand and supply. Or if business, supplier and customer desires and capabilities change. These can affect your current or future position in the market. Sometimes, the two coincide, as is the case for many of the tired landlords I’ve spoken to recently. Market forces may change, which can exaggerate a business owner’s change of heart due to their age, health and personal circumstances.
Let’s say, the part of the market you’ve been focusing on has changed since you got started. Your niche is moving into decline. Demand is falling. This should be a trigger for you to review, then pause, pivot or persevere, on the basis of new risk versus reward, effort versus reward and opportunity costs.
None of us can control the market, all we can control is our actions within it. UK residential property investment in recent years is a case in point. The strategies and tactics that once worked brilliantly have become outdated.
How should you respond?
There are three main approaches to how to adapt: pause, pivot or persevere.
- Pause or pivot. Quit anything which isn’t deemed worthwhile, and start something new which you believe is viable. Do this as soon as possible when you know you need to do it. Create a logical plan for future action and effort with clear timeframes. Include what you will stop and when, what you will slow down or pause, and what you will pivot to. Include how you will do this. Include a back up approach or an alternative plan. Include how these will suit the new market dynamics, risk profile, and relevant business circumstances. Revisit the methodology I’ve outlined in my book.
- Persevere – by which I mean, carry on. This may be especially relevant if market dynamics have changed, and are anticipated to change further, change back, or seem likely to improve in your favour.
Some parts of the UK property market have now become undeniably more challenging and complicated, now. As outlined earlier in this book they are less appealing and profitable than they were a few years ago. Strategies that worked brilliantly for the last 20 are less viable and less rewarding. For traditional buy-to-let investors who are holding properties in their personal names with bank finance, it’s a good time to review and pause or pivot, if you haven’t done so already.
Many small-scale property investors are now receiving lower returns than they were before. This is the case in absolute terms, in relation to risk, effort and potential alternatives. This includes opportunities where returns were tied to property sales, or to a now lower post-tax rental income. Realising this might be a trigger for you to pause your activities in this part of the market. You might choose to observe how market dynamics unfold. You might change focus to a new strategy. Alternatively, you might carry on as you were, and wait for competitors to leave the market. You should choose this option if you think it will strengthen your relative position or believe that things will change.
Will you decide to keep pushing and building momentum (as discussed eloquently by Jeff Olsen in The Slight Edge)? Will you adapt your business and investment focus (as discussed in the context of small businesses in Eric Reis’s The Lean Startup)? Or will you pivot or quit (as discussed in Seth Godin’s brilliant The Dip)? Take the time to reflect.
Review and pause, pivot or persevere. This can be a positive and productive approach to take that will help you to meet your investment goals in a more strategically-driven way.It’s worth putting in the effort to adapt, when you recognise the need to do so. It means you can Come back stronger across your investment activities and improve your returns, the risk/reward, effort/reward and comparison with the alternatives.
Strategy soundbite: Chapter summary
I’ve touched on when, why and how to adapt, using both external and internal triggers to review, then pause, pivot or persevere. The ideas shared are important for the refining of your strategy. They enable you to remain focused and strategic, with strategic flexibility, too.