3 Of The Most Common Mistakes To Avoid When Starting & Building A Rent-To-Rent Business

I’ve learned a lot over the years since I started my rent-to-rent business back in 2016. I scaled it all the way up and then successfully sold and exited the business earlier this year.

HMO rent-to-rent (R2R) is unique particularly because of its sensitive numbers and thin margins. Making certain mistakes in this business can prove challenging and sometimes even impossible to recover from.

So, if you’re starting a rent-to-rent business or perhaps you already have one that you want to improve, read below or listen to the full episode on The HMO Podcast for the three most common mistakes I’ve seen beginner R2R operators make!

These mistakes can prove fatal to your business, so it’s essential to know about them so you can avoid them. But don’t worry they are really easy to avoid – you just have to know how!

1. Forgetting R2R is a management model – not an investment model.

If you approach R2R like it’s an investment model, that means you’ll look at the whole model the wrong way, and you’ll end up building the wrong type of business altogether! R2R is fundamentally a management model, and you must understand that. This will help you approach it properly and effectively deal with everything it involves.

With R2R, the overarching responsibility is managing HMOs. When it comes to buying your own properties, you can think about outsourcing this piece, but with R2R, you can’t do that. That’s because of the numbers and margins and that it muddles your unique selling point as an operator in this field.

If you try to outsource the management, that will wipe out a big chunk of the profits. So much so that if you had a big maintenance cost or void period, you’ll likely be in a loss-making position on that property.

Additionally, if you’re approaching a landlord and selling this deal based on your management service, that landlord will understandably expect you to be in control and responsible for that property.

If you then go and try and pass the management on, are you really doing what you promised the landlord that you’d do? And it also gets confusing with tenants in regards to who they are signing the tenancy agreement with and who’s responsible for what. This is exactly what you want to avoid!

People who do really well with this model understand that it’s a management model, and they embrace that and constantly look for ways to provide a better management service to their landlords and tenants.

So, make sure you understand that this isn’t just about bringing deals on and signing agreements with landlords. The real grunt of this business involves the service that you provide to your landlords, how well you look after the property and tenants, and how efficiently you take care of your legal obligations.

2. Underestimating the commitment that’s required to bring deals on.

Most people underestimate what’s required to bring R2R deals on. If you want to build a good rent-to-rent business with lots of properties, you need to be prepared to work very hard. It will take a lot of time, effort, and consistency. And you’ll also have to invest some seed capital into marketing yourself to prospective landlords you could work with.

You’ll need to be continuously marketing yourselves to landlords. This is often done through frequent direct-to-vendor marketing. And the truth is sending one, two, or three letters to a landlord will rarely allow you to bring on R2R deals!

Existing HMO landlords make for really great targets, and luckily, we can all get hold of a HMO register, which can have several hundred or thousands of landlords on it. You can then figure out where they live through land register searches, and send them regular direct-to-vendor content.

It takes far more than just one or two letters listing the quick bullet points about what you’ll do. In my business, we sent high-value newsletters monthly. This allows you to build authority, trust, and credibility. And if you aren’t getting the results you want, think about what you can change and improve, but keep sending letters regularly!

The chances of you sending one letter and convincing the landlord that day that they should all of a sudden farm out their property to you are unlikely. It’s about making sure that when that landlord or property owner decides to make a change, you are the first in mind, and that takes consistency. You should also have a website to support what you’re sending.

Another solution to finding and securing R2R deals is through agents that are willing to work with you. However, this is difficult from a cold start and especially in an area where there is really high rental demand.

Social media is another good strategy, but this doesn’t happen overnight. There’s a real commitment to building a social media presence, particularly among prospective tenants. Other solutions include using Gumtree and getting referrals through builders and other property service providers.

3. Negotiating wafer-thin margins in deals.

Too many people (not just new R2R operators) are negotiating thin margins in their R2R deals, and that’s a dangerous place to be! You need to stack your deals up pessimistically, make sure you know your numbers and negotiate good, healthy margins.

If you don’t do this, costs and bills may go up, there could be a global pandemic that impacts your voids, or you may have difficult tenants that lead to a high changeover, and this can crush any rent-to-rent business. I always had a target of securing £200 net per room per month before business overheads (if you’re operating in London, you may need to aim for more).

You won’t get that on every single deal. Sometimes you’ll get more than that, or if you have a fantastic property with a high spec in a top location, then you might not need that much. But if you negotiate the right margins, then if anything happens, you’ll have the cash to be able to deal with it.

When you’ve just started out, you may be really excited to take on your first, second, or third deal and get started building your business, but the deal still has to work for you and have the right margins. You have to be prepared to walk away if it doesn’t, and R2R is often about patience and pipelining.

The best deals I ever struck have been deals that came back years after negotiations didn’t originally work out. For example, a block of 25 units, which turned out to be one of the best HMO rent-to-rent deals I ever did, took three years to come back after I initially negotiated.

I never ventured into a place where those numbers wouldn’t have worked for me. I waited for that landlord, stuck to my guns, and negotiated a really fair deal where I got the margin that I needed to make it attractive, healthy, and prosperous over the long term.

Don’t give away too much too soon as well. You want to make sure that you’re not making less and less on the R2R deal over time to the point where it’s not working two or three years down the line. And if you’ve built your business on several or many deals like that, that’s a really concerning place to be!

So, those are the three most common mistakes that I see so many new R2R operators make! And hopefully, now you can see why they can be so fatal but also why they’re so easy to avoid making in the first place if you just know how.

If you want to take your R2R knowledge up a notch, sign up for The HMO Roadmap! We also have R2R masterclasses and mentorship programs on offer. If you’d like more information on those, drop us an email at info@staging.thehmoroadmap.co.uk.

About the Author:

Andy Graham is the founder and the lead trainer at The HMO Roadmap! He is also the co-founder of The HMO Mastermind and Smart Property, a specialist HMO property investment and management company. He writes as a regular columnist in different magazines about a variety of HMO topics and is the host of The HMO Podcast! Follow Andy on Instagram!