Photo by Wilson Finch Properties

Get ready to dive into the exciting world of rent-to-rent (R2R)! Read below or listen to the full episode on The HMO Podcast to learn about everything you need to know to get started in R2R, from the fundamentals, challenges, and common misconceptions to practical tips and strategies to help you build and scale a rent-to-rent business!

I’ll be drawing on my years of experience in building and scaling my own R2R business, which I sold earlier this year. So, if you’re interested in getting started or if you’ve just started in R2R but want to make sure you’re on the right track, then this is definitely for you!

The Top Benefits of Rent to Rent

Rent to rent has played a really important role in my broader property businesses, and for anybody who has the right attitude and commitment, R2R can be a phenomenally powerful model, particularly if you want to eventually build your own asset-owning business!

The barrier to entry is lower.

For starters, the main benefit of R2R is the fact that it requires substantially less capital than buying your own assets, making the barrier to entry lower. And you can generate some really significant amounts of cash flow.

Depending on the sort of deal that you do, you could get away with spending only a couple thousand pounds on a refurb. The average amount we would spend was about £12,500. And the aim is to really push the rental value up. That’s how you create margins in R2R deals.

There’s the potential for a high return on investment.

If you want to generate significant cash flow every month, it’ll be much easier to do this through R2R than by buying your own properties.

If I were to take a pound that I’d spend on an R2R deal and compare it to a pound I’d spend on buying a HMO myself, I have the opportunity to get a far better return on investment with a rent-to-rent deal. This means the limited money that I do have can go substantially further.

It can be scaled quickly.

Another benefit of R2R is that you can move really fast in this sector. You can go from zero to 10 properties pretty quickly, while this is very difficult to do when buying your own assets.

With R2R, you can get deals done and do refurbs within only a couple of weeks. You’re not hanging around for three months waiting for a mortgage lender and solicitors to do all of their bits.

The Challenges that Come with R2R

While there are a lot of benefits that come with R2R, let’s also consider some of the challenges that come with this model, because there definitely are some and it’s not a strategy for everyone!

It’s not easy to bring on deals.

You have to work really hard to find R2R deals, and most people get direct-to-vendor marketing completely wrong. You’ve got to invest some money in the right sort of marketing and be incredibly consistent and persistent.

There is a lot of legislation, regulation, and red tape to be aware of.

You need to make sure that you’re doing everything the right way. You’ll need the appropriate permissions, and there’s a lot to manage properly and keep on top of.

Managing people and properties is hard work.

With R2R, there’s also a lot of management to do. It isn’t easy to manage properties and people. Managing tenants can be really tough, and on top of that, you have to manage landlords as well.

Things to Think about When Starting an R2R Business

If you’re getting started in R2R, you need to understand how to assess deals first and foremost. And it’s quite different to assessing deals that you’d buy on the open market. You don’t have to consider mortgages, but you really need to think about payback terms with your original investment into the deal.

If you miscalculate how much you’re going to spend on the refurb and bills and what room rates and occupancy you’ll be able to achieve, that will really change the economics of a rent-to-rent deal. If you’re slightly out on these things, you can end up miles out at the end. So, you need to nail how to appraise and analyse deals.

You can’t work on wafer-thin margins in R2R. Know your numbers, stress your deals, and understand what healthy margins look like. If you do this right, even in lean times when occupancy isn’t as good, you will still be absolutely fine.

As well as the numbers, you need to know about locations. A lot of people make the mistake of just investing on their doorstep because they think that’s the place that they know and that it’ll be the easiest. But that’s not necessarily the right decision…

R2R works really well in areas with strong demand, where the tenant demographic is favourable for the type of accommodation that you’re proposing to create. You have to consider things like where are people commuting to, what are people looking for, and what else is going on in that location in terms of infrastructure, amenities, and employment.

You also need to think about what the competition is doing, how much competition there is, and whether or not there is an Article 4 direction that’s going to scupper your plans. A lot of people don’t go into the details of all this before they start their R2R business, which is a big mistake!

What’s Involved in Managing a Rent-to-Rent Business

R2R is fundamentally a management model as there’s so much involved in managing properties, tenants, and landlords. It’s not easy as you really have to have your finger on the pulse when it comes to managing the properties and tenants!

This means staying on top of certificates, maintenance, and inspections, keeping tenants happy, and managing things like check-ins, check-outs, inventories, deposit protections, and conflicts within the houses.

You can’t just take a property, put some people in it, and expect it to make you money! You have to work really hard. It’s not something you can do just in your evenings and weekends. It might be possible to start out like that, but you certainly can’t continue to build a business like that. And if you can’t do it all yourself, you’ll need to build a team to help you do it

On top of that, you have to manage the business as well, and it has a lot of moving parts. You have a lot of things to manage, including the legal, accounts, and marketing side of things. And all of this takes time and energy, and it requires money!

If you want to sell your business one day, you’ll have to make sure it’s managed incredibly well in regards to the finances, legals, and admin. Everything needs to be in the right place, and you’ll need to have a good archive system. So, think about how you’re going to manage your tenants, properties, and your business – all at the same time!

How to Scale up an R2R Business

There are a number of ways to successfully scale an R2R business, but it takes a lot of commitment and hard work. One of the ways is to replenish your capital by recycling it. So, when you earn rental income from your deals through your healthy margins, you’ll then recycle that into the next deal.

If you want to build and scale a successful R2R business, you need to commit to re-investing it back into the business. Even by doing that, you may still not have enough capital for the next deals, but you can also raise money through crowdfunding exercises or borrowing money privately.

This can then help you ramp up your marketing, build your team, take on more deals, and do more refurbs. You can also leverage your contacts, network, and landlords. Landlords know lots of other landlords, so they can help you find deals and make it easier to bring on the next deal.

Systemising operations and processes in your business can also help. If you pick the right market, create the right product, and build the right networks and contacts, you can do deal after deal after deal!

The Common Misconceptions About R2R

There is a common misconception that R2R operators are all shady. It’s definitely not the truth. There are people out there doing an incredible job in R2R, and the competition is pretty high out there. In our business, we tried to blow everyone else out of the water. We did it well, and we did it by the book. And that’s the only way to do it!

One of the other misconceptions is that R2R is a get-rich-quick scheme. I suppose the truth is you can get rich from it. However, you can’t get rich quickly without putting a TON of work in. And a lot of R2R operators won’t ever get rich.

Many give up because they’re not getting results from direct-to-vendor marketing or they’re getting turned away by the local agents that they’re going to see for deals. So, commitment and persistence are really important. But it isn’t a get-rich-quick scheme. It’s a get-rich scheme if you work really hard, and it might happen quickly.

I hope I’ve encouraged, inspired, and motivated anyone out there who’s been thinking about getting started in R2R! If you do it well, it’s a great business to scale, and it’s certainly been an incredible part of my property business journey.

If you need help starting and scaling your rent-to-rent business, head over to The HMO Roadmap! This can help you build your industry knowledge, and there are R2R case studies from our community members. And if you have any questions about R2R, join us over in 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 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!