Photo by J.O. Property

Are you curious how large rent-to-rent (R2R) deals work? If you’re anything like me, then you’ll find reading other people’s case studies really inspiring and helpful. When I was getting started, I found it to be one of the best ways to learn too!

So, I’m going to share the details of one of my all-time best rent-to-rent deals. Read below or listen to the full episode on The HMO Podcast to find out how we found, negotiated, and refurbished a 25-bedroom rent-to-rent deal.

An Introduction to the Deal

This was a rent-to-rent deal for a 25-bedroom block of five townhouses with five bedrooms each. The building is located in a super prime location, and we use them as student HMOs.

We signed this deal over a 10-year lease, which is quite unusual, but it gave us a huge amount of foresight into what the future of our business could look like. It also allowed us to go on and do other things very quickly. 

This deal is one of the most important deals I have in my entire property business. We make a lot of money from it, and because of its prime location, it’s been really easy to let. It’s also generally quite easy to manage because all of the inspections, check-ins, and checkouts can happen at the same time.

I also have to give so much credit to my former business partner, James Jay. We did this deal together. He was a legend when it came to negotiating deals, managing relationships, and pushing deals forward. 

How Content Marketing Helped Us Find This Deal

Initially, we got into contact with the property owners through our direct-to-vendor marketing letters we send to landlords. We had been sending those consistently to them for close to 12 months before we heard from them. 

With our direct-to-vendor marketing, we focus on a content marketing strategy. We send helpful newsletters with content useful to them and information about our services. That allowed us to build rapport with them for serval months and showed we were experts before we even got a call from them.

They received a lot of letters from many other people, but they decided to call us. And they looked at everything else we were doing like our social media channels. And they would’ve seen that we were doing what we were talking about. 

How We Analysed This Deal Before Making an Offer

When we received a call from the landlords, they told us about their building and asked a few questions. Then, they wanted to sit down and have a meeting before we looked at the property, but it was impossible to negotiate with a landlord before seeing the property.

So, the first thing we did was arrange to see the building. They sent their property manager, and we looked through every single room we could get access to. That gave us the context we needed. We also started to forge an idea of what we could do with the property and what it would cost. 

Armed with all of this information and our expectations about what we could achieve on rent, we knew what we would be able to offer on this property. We started mapping out potential deal scenarios, including what it would look like over 5, 7, and 10 years and if the landlord contributed to the refurbishment or not.

The Nerves of the Meeting and Making the Official Offer

A couple of weeks after seeing the building, we met the property owners at their office, which was located in a business centre. It was a large building, and eventually, we were taken up to this huge space on the top floor. It turned out that they owned the entire building, so immediately, we started to feel intimidated. 

They clearly had a number of interests in the commercial and residential space. But actually, we used that to our benefit. Immediately we could see that student lets and managing HMOs was not their primary interest. This allowed us to have quite an honest conversation about that and what’s involved.

They asked us questions about what we did, how we did it, and how long we’d been doing this. We also asked them questions to find out more about them, what they were struggling with, and why they didn’t want to manage the building anymore. 

Right off the bat, we were honest and told them they’d get more for this building if they manage it themselves or hire someone on a standard management basis. But by working with us, we can give them certain assurances and invest money in improving the property’s condition.

I believe that sort of honesty is why we were able to build such a good relationship. At this point, we had only done five or six rent-to-rent deals. Jay, our other business partner, and I all had our own HMO portfolios. 

So, we didn’t have a huge amount of experience with deals of this size. However, people are often more interested in you, your values, and what your business can offer them. But we had enough experience with HMOs across the board to be able to give them the confidence that we knew what we were doing. 

The Challenges We Had to Overcome During the Negotiation 

During the hour-and-a-half meeting, they asked what we could offer them. I remember my heart starting to race. We’re talking about a deal that’s worth hundreds of thousands of pounds, and if we get this wrong, it could all be over!

We started the negotiation by plucking out one of the scenarios we’d come up with and tabling it to them. That started the conversation about what we could pay them for the building and under what terms. 

They told us what they currently earn from the building, and we told them what we thought we could earn after doing some work and the margin we’d need. That honesty was really important as it showed we weren’t trying to hide anything. 

There were a few areas we had to specifically negotiate on, including:

• Contract length
• Refurbishment costs
• Option agreement

In the end, they wanted a 10-year deal, which actually worked in both of our interests. It was also decided that we’d put in all of the money for approximately £70,000 refurb, which meant the rent we’d pay them would come down. 

One point they wanted to try and claw back some rent on was by offering us options on the properties, but this was not something we were interested in. At that time, our main business interest was building good deals with healthy margins so that we could do the next deal. After talking through these, we shook hands on the deal there and then!

The Long and Complicated Contract Stage

The next step was to start drafting up the contract so they could see everything that was involved. There were parts we discussed like who’s going to be responsible for what.

Because this was such a big R2R deal and the agreement was so bespoke, we had to ask our lawyers to draft all sorts of clauses, conditions, and amendments to our agreement. It took us a couple of weeks to get the draft agreement put together.  

Once we had the draft lease, we sent it over to the property owners for review. It was then with them for months and months. Small points got laboured because solicitors were stuck in the middle and wanted to make sure that the interests of both parties were protected. 

It started to take so long that we were running out of time. We needed to be able to do a refurbishment and market the property. We had negotiated the deal around November/December, but the actual agreements didn’t get signed until six months later.

We had started to think that this deal wasn’t happening. As May approached, we realised if we didn’t get this deal signed soon, we won’t be able to do it, so we started to put pressure on the property owners. 

Their tenants were moving out at the end of June. We needed to get a £70,000 refurb planned and arranged, and at the same time, we needed to be able to advertise the property, which by this point was very late in the student season. 

In the end, we had to give them an ultimatum. We told them if the contract wasn’t signed by a specific date, we would physically walk away from the deal… and we meant it. We had almost heard nothing back, but then all of a sudden, they came through on the very last day!

The Refurbishment and How We Pushed the Rent Up

We had only a couple of weeks to plan this huge refurbishment. We intended for it to take eight weeks over July and August. For those two months, we didn’t pay rent on the building, but of course, we weren’t generating any income yet either.

However, we ended up managing to complete the entire refurb in only four weeks by throwing tradespeople at it. By doing it really quickly, that meant that we could start our tenancies from the 1st of August, and we were able to fill all 25 rooms with students.

We did a huge amount of work on the building comprising around 10,000 square feet with 25 bedrooms, 10 bathrooms, and five kitchens. Our refurb cost about £72,000 in the end, but we were able to claw back £10,000 straight away in the month of August.

This refurb also forced the rent up quite dramatically, which allowed us to make a good margin in the deal. And the property owners were very happy as we were able to come in and give them more than they were actually earning when managing and running the building themselves – a win-win!

I hope reading this has inspired you to go out and find your own rent-to-rent deals! But I also hope this has helped manage your expectations about R2R and given you a very honest insight into how these deals often happen.

Do you have any questions about R2R? Ask us in The HMO Community Facebook Group, or sign up for The HMO Roadmap to help you start, scale, and systemise your HMO rent-to-rent business. 

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!