In my years working in the property world, I’ve seen people who are starting or scaling their rent to rent business make the same mistakes.
But hopefully by highlighting these mistakes to you, you’re going to be able to avoid them. You’re going to be able to implement the rent to rent strategy with open eyes.
This will hopefully give you the best chance of success when it comes to building your very own rent to rent portfolio. So let’s crack on.
Some of the positives that are involved around the rent to rent strategy are that there is no experience needed, low to no start-up capital required and the speed at which you can build a cash flowing portfolio. Well, unfortunately, people are lured into thinking that that all comes very easily. And actually the reality is that there are going to be challenges along the road when it comes to managing a rent to rent portfolio, because, of course, you are managing tenants.
Tenants can sometimes be unpredictable, no matter how many checks you put in place, no matter what referencing you do, no matter how many people you speak to in terms of character references, the fact is that people’s situations can change and you can encounter difficulties with them. A difficult tenant could lead to non-payment of rent. Non-payment of rent could then lead to you not being able to pay the landlords. And then we’re just going into that spiral of problems.
But the good news for you is that you can manage this process. You can ensure there are systems in place. You can ensure the way that you handle your property portfolio is correct in order to minimise that risk. But it’s certainly not easy money. You are setting up a property business. No property business is actually easy money. And the rent to rent strategy certainly is no different. It is not easy. Money is good money, but it is certainly not easy money.
Now, this certainly comes as something that I see more often with beginners than those that have established rent to rent businesses or certainly those that maybe have a little bit more experience in the property industry. But what I talk about when I say hopeful deal analysis are those people who get deal desperate and who urgently require that first deal to come through.
What they do is they have hopeful estimates on the room rates that they’re going to achieve, they underestimate the cost of running a property business. They are hopeful about how minimal the void periods are going to be. They run everything at all these hopeful, hopeful numbers. And then the reality is, when you get further down the line of running that rent to rent portfolio, all it takes is minimal disruption to those numbers and you could find yourself very quickly in the red. Now, this is very easily avoidable by doing deal analysis correctly in the first place. So things like being realistic about the bill, costs for properties where you include the rent or it might be room rates and actually identifying the difference of room sizes versus the demand. All of these are things that you can actually do right from the start as part of your due diligence process.
You just don’t want to make the numbers look more rosy than they might be just to get the deal. So remember, poor deal analysis is only going to lead to problems in the future. It’s a massive mistake I see in the industry all the time. But it’s something that’s so easily fixed by doing your numbers correctly in the first place. So poor deal analysis, hopeful deal analysis, hopeful numbers are potentially going to lead to major, major problems, but very easily avoided.
What that means is that whilst you might not encounter problems from the outset, you will find that when things go slightly sour, that you are going to be up against the terms in the contract that you set up in the first place.
And the last thing you want with rent to rent is to be held liable for stuff that you could quite easily avoid by using the correct contracts. Now, there also some liabilities in terms of revenue, in terms of your responsibilities as a rent to rent and by setting the contracts up from the very beginning in the right way, is going to enable you to avoid issues, avoid challenges, and certainly be able to run a successful rent to rent business without being affected by poor contract terms from the beginning.
So really, really important to get the contract right from the start. It’s not rocket science. It’s certainly not difficult. Having the right templates in place is a huge part of the process. But if you start with the wrong attitude, the wrong knowledge in the first place, you’re just opening yourself up to challenges in the future.
Number four on the list is underestimating refurbishment costs or effectively taking on properties that need too much refurbishment to achieve the rental income that you want to achieve. Yes, we’re going to need to take on properties that need a bit of refurbishment. The more work that we do to them generally will increase the value of the rooms that we achieve. But remember, there’s going to be a ceiling price on the room rates that we can achieve.
And we also want to ensure that the cash flow that we generate from each rent to rent deal is going to become profitable as quickly as possible. Now, if you take on massive refurbishment costs from the very beginning, that cash flow is going to be replenishing that refurbishment budget for a longer period of time. And ultimately, you want to ensure that that refurbishment budget is recovered as quickly as possible so that you can enjoy the profits far more quickly. Now, the issue that I see is that people take on properties and they underestimate the cost of that refurbishment by making up numbers that they just simply haven’t researched.
And actually by doing that, they’re only going to be putting the problems onto themselves, because when they do come to do that refurbishment work, the cost of it is not going to be hidden from. And of course, the last thing you’re going to want is an unfinished property because you didn’t budget correctly. So make sure in terms of the mistakes that I see, do not underestimate how much a refurbishment might cost and certainly be careful not to take rent to rent deals on that may require more refurbishment work more than the numbers will allow.
And last but not least, I really do dislike this and I think maybe it’s because I used to be an agent myself. I really dislike people who think that they can pull the wool over agents eyes by luring them into this false contract, this false description of what it is that they’re doing and think that everything is going to be rosy with that property agent in terms of lead generation and deal flow. Because the reality is, if you want to work with agents, you have to work with them in the correct manner and by lying to them from the beginning or trying to pull the wool over their eyes by using things such as relocation agent or things like company lets, well, actually, all that’s going to do is serve to burn the bridges with those agents.
Because when you start to set the contract up and they discover that, in fact, that’s not what you’re doing, you’re not a relocation agent, you are not a company let, then you’re going to waste your time, you’re going to waste their time and you’re effectively going to cut them off as any hope for lead generation in the future. The reality is with agents, you need to be approaching them as a specialist service provider that they can offer their landlords.
And in turn, they’re going to generate leads of landlords who are not only interested in guaranteed rent, but maybe are interested in changing their lettings and management agency. So it’s a reciprocal arrangement. But the key is honesty, because the biggest mistake I see when working with agents is this complete disregard of telling the truth, which, of course only serves to lead to problems at a later stage.
So those are the five mistakes that I have seen and watched with horror when it comes to the rent to rent strategy.
But now that you know of them, you are not going to make the same mistakes, are you?