Photo by Cosi Living
Let’s talk about how to stack the perfect rent-to-rent deal! Over the eight years I built my rent-to-rent business, I perfected the model of stacking deals up, and as a minimum, I made £200 net cash flow per room each month.
So, if that’s a five-bedroom property, that’s £1,000 per month. And if you do two, three, five, or 10 of them, you could then be making £2,000, £3,000, £5,000, or even £10,000 net per month!
Read below or listen to the full episode on The HMO Podcast for the four key elements I used to stack every single rent-to-rent deal that I ever did. This ultimately allowed me to build a successful business, and I was even able to sell it as part of my investment and management portfolio in 2023!
Of course, there is far more to rent to rent. But if you get this right, you’ll build the foundation of a fantastic business that generates substantial cash flow every single month and that could be the platform to go on and do many more great things in the property industry!
1. Prime Location
When I was building my rent-to-rent (R2R) business, I always focused on prime locations near a city centre, university campus, amenities, transport links, and where young people want to live. Prime areas are ideal because R2R is incredibly sensitive, particularly to things like voids.
Having empty rooms creep through as costs that can really impact your business. So, having properties in a location with high rental confidence reduces the risk of void periods as much as possible. And it also means that you’ll likely be able to push the rent up further, especially if you do certain things to the property.
Investing in R2R deals in prime locations allowed me to increase the rental confidence on every single deal, so I could negotiate better deals with landlords. It gave me better footing and more confidence, and in turn, that allowed me to manipulate the numbers by a higher degree of certainty when I was building the model out.
The idea of building a R2R business in a super prime location sounds confusing to a lot of people because that’s where the rental demand is the highest… So, why would landlords possibly want to give us their properties?!
Well, a lot of landlords let their properties get tired, they become empty, and then they’re stuck with figuring out what to do with them. Do they give it to an agent to try to flog it? Do they sit on it and lose money? Or do they give it to someone who might do a refurbishment and guarantee rent? That’s where we come in!
Another one of the great things about investing in prime locations is that the HMO registers will likely have a lot more landlords in those areas, so you’ll have more people that you can target. And you can then send direct-to-vendor mail to them.
2. Refurbishment
I’ve always been a huge advocate for undertaking a refurbishment on R2R properties and improving their condition. This allows you to control the product and create what you know will rent well with a design that services your brand, and this will also help dictate the rent that you can achieve.
If you’re just sprucing the property up and not doing a refurb at all, how will you be able to increase the rent over what the landlord is already achieving? So, the refurbishment is crucial, and it’s important to understand how to stack this element up in R2R deals.
On average, we usually spent between £12,000 and £15,000 on refurbishments. To get the money for this, you can either use your own capital, borrow it, negotiate with the landlord to pay for some of it – or a combination of all three.
We’d usually completely redecorate with new furniture and special features, replace some flooring, and improve the kitchens and bathrooms (but not usually replace them). But of course, the costs and types of renovation you do will depend on the size and current condition of the property.
Don’t forget to also use this as a tool to negotiate with the landlord. If you’re prepared to invest £15k into a refurb to force the rent up, understandably, you’ll need to be able to get that money back as quickly as possible. And putting money into improving their property shows you’re incredibly committed to the deal, which most agents are never going to be able to compete with!
When you’re stacking your deal, you also need to factor in the time it’s going to take to recoup this money. I recommend that you aim to get it back within the first 12 months. So, if you spent £12k, then you need to be making clear of £1,000 every single month. Once you get the initial investment back, you then remove almost all of the risk from that deal.
3. Agreements & Contract Length
There are a couple different kinds of paperwork that you can use for R2R deals. You need to use the right agreement and get the length of the contract right. I’ve seen some terrible agreements that aren’t constructed in the right way with lots of contradictions, landing people in a whole heap of bother.
For the types of contracts, you can use a management agreement or lease. They both basically do the same thing, but a lease is much more robust. And if you were ever to sell your business or have an issue with the landlord, the lease will stand up much better in court and hold a lot better value.
You can get your hands on the R2R management agreement and lease agreement I used by signing up to the premium subscription package of The HMO Roadmap. I’ve developed these over years and years with our solicitors, so it’s very clear who’s responsible and liable for what. But I still recommend that you get them checked out by your own solicitor.
Now let’s talk about the length of the contract… I always felt it was a no-brainer to make the R2R contract as long as possible. In reality, most landlords are unlikely to sign their property over for 20 or 30 years, but I did a lot of great deals over 10 years.
That meant I only had to negotiate the deal once, and I tied myself to a certain amount of income for the whole period of the contract as long as it performed the way that I anticipated and I managed it well!
I found landlords who have a lot of properties and use commercial lending are usually happier to agree to 10 years or more. For your average landlord, that may be too much to digest, so five years is where you might need to aim. If you can get seven years though, that’s the optimum.
The great thing about a seven-year deal is that with 10-year ones you have to get it registered with a solicitor on the Land Registry. There’s a cost to that with a bit of stamp duty to pay as well, so if you want to keep it simple, seven years with the option to extend can be great.
On the other hand, three years is an absolute no-go for me. If you negotiate an agreement that short, then you have to come back and re-negotiate the deal again so soon, and the landlord will likely squeeze you for more. And after recouping the refurbishment costs across the first 12 months, then you’ll have done all of this work to only get profit for two years.
So, five years is the absolute minimum of where you should be, seven is a real sweet spot, and 10 is the holy grail. But you need the right landlord and if you negotiate that deal once and tie-it in for a decent length of time, it’s staggering when you project it out and see what you can earn across the whole contract term!
It might be intimidating to try and negotiate these types of deals, but trust me, there are landlords out there who like the idea of handing things over and just being able to forget about it for a while. So, please believe that it can be done and have the confidence that you can negotiate these deals!
4. Relationship with the Landlord
It’s key to understand the importance of the relationships you have with the landlords you work with. If you have a bad or difficult landlord, they can make your life so difficult it’s just not worth doing a R2R deal with them. They’ll give you problems and slow you down, and it’ll be more difficult to make money.
It’s so easy to walk into a deal with a landlord that’s not that great and then a second deal and a third deal, and all of a sudden, you’ve got a handful of landlords who are making your life extremely difficult!
And on the contrary, if you have a good landlord who shares your values, respects you and the contract you have in place, understands the value of you investing in their property, potentially making it worth more, and taking all of this work, responsibilities, and liabilities off their hands, you can create an incredibly scalable model.
You’ll likely get approached by many landlords who want to do a deal with you that you ultimately have to turn away either because you can’t get there on the finances or because they’re not the right landlord. Use your gut and be instinctive about this, particularly if they’re only focused on the money, rushing you through the deal, putting you under pressure, or not being respectful.
I turned down so many people and that meant that the deals I did strike were really good. I had such great relationships with my landlords that not only was I making a minimum of £200 net cash flow per room each month, but I had landlords who gave me no problems whatsoever. And that’s the sort of relationships that you need!
So, prioritise a good relationship with your landlords. Building that starts right from the very beginning with direct-to-vendor marketing, the first conversation you have on the phone, how you respond to emails, and how you negotiate the deal. All of that can contribute to the relationship that you end up having with your landlord.
Concluding Thoughts
So, those are the four key things that if you get right and in the right balance, you could stack the perfect R2R deals, earning a minimum of £200 net cash flow per room. And then you can scale this up one deal after another!
Keep in mind that there is still so much more involved in building a R2R business, so don’t rush into this. Do your homework and due diligence, set realistic expectations, and put together a good business plan.
If you’re serious about starting and scaling this model up, then I’d highly recommend getting an experienced mentor. If you’re looking for a R2R specific 1-2-1 mentorship, contract our award-winning R2R mentors Joe and Liv here.
Everything you need to scale up your HMO business is also inside The HMO Roadmap. And if you want to download my R2R deal stacker template and contracts, subscribe as a Premium member, which is 20% off until 31st January 2024.
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. 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!