5 Key Principles For Building A Profitable Rent-To-Rent Business

Rent to rent (R2R) is notably less capital-intensive compared to purchasing, acquiring and refurbishing your own HMOs. If your goal is to build a HMO portfolio, R2R can serve as an excellent starting point, helping you accelerate the overall process!

However, it’s easy to get this investment model wrong, which can mean you lose a lot of money, burn bridges and damage the livelihood of landlords. So, it’s important to recognise that there’s a huge amount of responsibility, and this isn’t just a side hustle you can do with your eyes closed…

I started by buying and acquiring my own HMOs and refurbishing them, and then I moved onto R2R a little later as I realised it was difficult to recycle all of my capital and keep growing and building cash flow at the pace that I wanted to. However, for a lot of people, starting with R2R can be a great gateway to buying and owning your own HMOs.

Read below or listen to the full episode on The HMO Podcast for an overview of building a rent-to-rent business and its benefits and five key principles you need to think about if you want to do R2R deals that generate £1,000 per month!

The Rent-to-Rent Strategy & Its Benefits

I started building my rent-to-rent business in 2016. I grew it, and it became an investment and management business. Last year I exited it so that I could move on to other things, but it was a very profitable venture. The R2R deals I did accelerated my investment journey and helped me continue building my own HMO portfolio.

Over the years, we managed thousands of tenants, but even a small portfolio can generate the sort of cash flow that can allow you to leave your job, generate savings and reinvest into your HMO business.

Additionally, at the same time, you’ll be learning and developing the skills, experience and knowledge that’ll help you to go on and acquire your own HMO deals and refurbish and develop these projects.

As R2R is so much less capital intensive, you can generate the sort of cash return from your own HMOs on a monthly basis without having to put anywhere near the same amount of capital at the front end. So, if you have a limited amount of capital to get started with, this could be a great model for you.

If you want to do profitable R2R deals, there’s a lot you need to know and get right. Rent to rent is still quite high risk if you get it wrong. But it’s easy to get it right if you follow the main principles and construct deals around them. So, here are five important principles to construct good deals and build a profitable rent-to-rent business!

1. Master location and the numbers behind building profitable deals.

For starters, you need to have the knowledge, skills and confidence to master the location and numbers behind building profitable deals. Keep in mind that every single deal will be different and you can’t use the same assumptions each time.

You have to understand what the risks are, how a deal should perform and what the performance needs to be for you to actually agree to the deal. If you get any of your assumptions wrong, you could end up with a deal that either doesn’t make money or doesn’t make as much as you expected!

There are a number of things that can impact a R2R deal, including:

Whether you’re investing centrally or peripherally around a city
The refurbishment you carry out
Whether it’s a property that’s best suited for students or professionals
The type of property, size of rooms and whether there are ensuites
The length of the lease or management agreement

The property needs to be located in exactly the right place for the target tenant demographic. As you start to take all of these different things into consideration, you can see how very quickly they could all add up! This is why you need an incredibly solid knowledge base because the performance of your deal almost relies entirely on your ability to do that effectively.

So, stack up a lot of deals and compare them side by side to see why some things work and others don’t. When you’re starting out, a lot of this will be based on assumptions. So, learn about these areas, leave margin for error and don’t be overly optimistic.

2. Find and secure the right rent-to-rent deals.

Next you need to generate high quality leads as you won’t have a business without that! And there are a number of ways to do that. For example, director-to-vendor (D2V) marketing is an often-overlooked strategy that can help you acquire good quality rent-to-rent deals.

This is the best way to get direct to landlords, and cutting out agents means your deals will be more profitable. To do this effectively, you can create a system that’s almost on autopilot. Allocate a budget for a direct-to-vendor marketing program and leave that running for 12 months.

There are some people that teach D2V marketing, and it often involves a simple series of a few letters… While sometimes that can work, on the whole, it won’t generate the yields that you’re looking for.

There are much more creative and convincing solutions, particularly if you want to build a strong pipeline. Focus on building trust, rapport, reliability and authority, and that is possible by sending them useful content.

You should absolutely be doing D2V marketing if you’re serious about building a rent-to-rent business. It was probably the single most important thing that I learned as I built my business. I sent thousands of letters and direct-to-vendor campaigns out to private landlords, and that is where I got all but one of my deals!

3. Implement systems, processes and standard operating procedures.

Building a rent-to-rent business is akin to building a management business, which means you have properties, landlords and tenants to manage. And there’s a lot of compliance and legislation, in addition to accounting and bookkeeping, to do!

There are people you will need to support your business, such as tradespeople and staff. There’s a lot of admin that needs to be done, so there are a number of systems and processes that you need in place to build an efficient rent-to-rent business.

If you’re not careful, you can very quickly get bogged down in the details. It’s easy to run yourself ragged and focus too much time on things that aren’t generating income. So, you need to be focused on bringing deals in, stacking them up, negotiating and planning refurbishments.

There are also ways to eliminate, simplify, automate and delegate certain tasks and activities to help you be more efficient. You need to know what systems, processes and standard operating procedures to put in place from the get-go, because that has to actually form part of how you build your rent-to-rent business.

4. Maximise profitability through good negotiation and refurbishments.

Many people get this wrong as it’s probably one of the most challenging parts of R2R! Negotiation is tough as landlords are generally very savvy individuals. They’ve often been in the market for a long time, sometimes they’ve been stung or they may have mortgages and pretty thin margins to consider.

But there are a number of tips and tricks that you can use to negotiate well and give you much better footing. There are also ways you can create additional value in the deal without having to give anything away to your landlord!

A really simple method of doing this is by extending the term. By extending it by one, two or three years, you might be no more profitable on a monthly basis, but bolting those additional years of revenue onto the deal can make you substantially more profitable over the term of the deal.

There are other ways to negotiate with landlords, such as reducing the rent you pay them for the first year, stepping the rent up through subsequent years or getting the landlord to contribute to the refurbishment.

Another good tool in negotiation is simply waiting… This can involve giving landlords a good offer that they then counter, but sometimes you need to be prepared to say no. You have to be willing to walk away from a deal to make sure you get the numbers you need! I’ve done deals that didn’t get done initially, and landlords came back to me six or 12 months down the line.

Additionally, if you’ve picked a particular rent level with an assumption that you’ll be able to rent the rooms back out at a certain figure, the refurbishment has to reflect those rents. I typically spent between £10,000 and £15,000 on refurbs. That, along with effectively marketing the property, usually gave me enough of an injection to really boost the rents quite dramatically.

If you understand how to do all that, negotiate really well, add genuine value through low-budget refurbishments and then actually demonstrate that value to tenants, that is how you create profitable rent-to-rent deals!

5. Use the correct paperwork.

I’ve seen too many people do rent-to-rent deals with improper paperwork that has left them or their landlords completely exposed. With R2R deals, the contract determines and ensures the deal ultimately looks and performs the way that you expect, and it needs to cover everything – all of your responsibilities and liabilities and the landlord’s!

It should be crystal clear about who’s paying for damp issues, drain issues, roof issues, general repair and maintenance and certificates. What happens if there’s a leak and the tenants have to move out? All of these circumstances need to be considered.

When it comes to the paperwork, the lease is your belt and braces, so wherever possible you need to use a lease. However, you can’t always use one, so you need to understand when you can’t and have to use a management agreement.

The terms, dates and how you construct the length of deals is very important. Then you also need to understand how these documents work. Any landlord who’s considering doing a deal with you will likely want to see a copy of the contract very early on.

If things go pear shaped or if something isn’t necessarily understood at the outset, that contract is ultimately how the agreement will work. So, you need to make sure you are using the correct paperwork.

Those are the five things you should be focusing on at the outset of starting a rent-to-rent business. If you keep all of these in mind, that will give you a very good foundation for creating profitable deals.

Become a member of The HMO Roadmap for all the tools to help you start and scale up your rent-to-rent business! This can help you build your knowledge, and we’ll be adding more helpful lessons, case studies and resources about the R2R model. Sign up for premium subscription to access a template rent-to-rent management agreement and lease agreement.

If you want to come and ask any questions about R2R or anything else, head on over to our free Facebook Group The HMO Community.

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!