What could possibly go wrong…
Rent 2 Rent is easy! You ask an agent to find you some high cash-flowing deals and he hands you the keys to three properties. He tells you that you won’t need to pay the landlord any deposit, plus he’ll get him to delay the first month’s rent until after your lovely tenants move in. You didn’t need to spend any money refurbing the properties as the landlord took care of all that, and within a few days you have all the rooms full with professional tenants who, thanks to the feature walls, are paying you well over the average rent. Of course they’ll always pay on time and they’ll never cause you any trouble. In fact your property manager and admin assistant take care of all the day to day duties… so you don’t actually have much to do at all… except maybe book the holiday.
Uh… so… who actually believed any of that? The truth is that Rent 2 Rent is just like any other business, there will be good days and there will be the occasional excruciatingly bad day… your goal as a business owner is to ensure you have more good days than bad days. Plus when things do go wrong (and they will), you need to have great systems and procedures already in place to deal with every eventuality.
We all know about the glamorous side of Rent 2 Rent and how you can create a portfolio of properties that can very quickly replace your income. In fact it’s not uncommon for a property to be making in excess of £1,000 NET pcm, and some people have likened this to a personal ATM. Plus if its correctly set up and systemised, it can be a relatively hands-free business. But what about the dark side of Rent 2 Rent, the Calamities, Catastrophes and Disasters?
Nothing is ever plain sailing and we’ve had our fair share of up and downs… in fact we had so many in the early days of property investing that we wrote a book about it: ‘Mayhem, Murder and Multi-Lets’. So what could possibly go wrong? We have a thriving support group of almost 1,000 Rent 2 Rent’ers and ran a quick survey to ask about their Rent 2 Rent tragedies and their biggest fears. Here they are, roughly in order.
1. NOT BEING ABLE TO RENT THE ROOMS
Voids were voted the number one cause of sleepless nights. So you’ve found a great deal, spent some money turning it into an amazing home for young professionals, placed some adverts on Spareroom and you wait for the phone to ring… and you wait and you wait. You can’t understand why no one’s calling. You refresh your ad, consider dropping the rent but decide to hold out for a little longer… and all the time the clock is ticking and the next due day for the landlord’s rent is fast approaching. This exact scenario happened to Michelle from the MLCS support group just last month, take a look at her case study to see how she skilfully turned it around.
2. SPENDING TOO MUCH ON THE REFURB
Almost everyone is guilty of this on their first deal and its perfectly understandable, after all it’s a start of a new career/life and emotions run wild. Its only when you see the final bill that reality comes crashing down with a thud, and you swear it’ll never happen again. We keep our properties fairly basic, use a cookie cutter design and add the odd feature wall and accessories from the Range to make them look great. Like anything else, careful budgeting is a skill and the number one tip is to spend time carefully planning every last detail BEFORE you get started.
3. LANDLORD TRIES TO TAKE THE PROPERTY BACK
We’ve been doing Rent 2 Rent for over four years and have only come across this once. A gentlemen in our community took a property on a three year deal and went a little over budget on the Refurb (see #2). It would have taken him eighteen months to earn his money back but after twelve months the landlord told him he wanted the property back. Although he was panicking we assured him there was nothing to worry about, as the landlord had signed a watertight and legally binding contract. As long as you have a robust contract, this will never be a problem.
4. NIGHTMARE TENANTS
You’ve probably heard the term ‘property is a people business’ and tenants, like life, can at times be totally unpredictable. But whatever happens you must never to bring emotions into it, after all this is a business not a romantic date. A good property manager will quickly develop rhino-thick skin and learn to never allow a tenant to ruin their day. You’ll need set processes to deal with whatever’s thrown at you calmly and systematically. What might be a nightmare right now will probably be mildly amusing in a few months time. Act swiftly, be firm but fair and use a professional eviction specialist if you are in any way uncertain. We can help, just ask.
5. LENDER CALLS IN THE MORTGAGE
From the size and swift growth of some Rent 2 Rent portfolios, it’s obvious that they, the landlords and the agents are ignoring lenders restrictions. Whether we like it or not, it’s a rule and must be adhered to. In four years we haven’t come across anyone having their mortgage recalled, and in all honesty people should be more concerned with ensuring the correct insurances are in place. Mortgage products can be switched, but a fire with invalid insurance could have devastating financial effects. We have a specialist insurer in the MLCS community.
6. NOT MAKING ANY MONEY ON THE DEAL
If a property isn’t making you any money its either due to you buying an expensive deal, agreeing to pay the owner too much each month or mismanaging the utilities and maintenance issues. We prefer to find our own deals for obvious reasons, we have a rule of a minimum £600 net profit and we ask our tenants to play grown-ups when it comes to gas and electricity. We have also installed Time:O:Stats in some of our properties, which automatically switches the heating off after three hours, and therefore rarely exceed £200 per house, per month. Plus we’ve trained our cleaner to be our spy and she keeps a close eye on things.
7. THE LANDLORD TURNS INTO A TYRANT
Occasionally we hear stories in our support group about how dreadful a particular landlord is, how he enters the house uninvited, doesn’t respect anyone’s rights, refuses to pay for agreed maintenance and is always asking for more rent. We would always advise our community to meet the landlord in person before signing anything, as three to five years is a looong time if you’re stuck in a bad relationship. We experienced this once and eventually had to read the unsavoury individual the riot act. We also pointed out his duties to us as per the contract and when he didn’t get repairs done as promised, we followed the correct legal procedure, got them done ourselves and deducted the cost from the rent. We couldn’t wait to hand this house back!
8. THE BOILER BLOWS UP
This is what we were referring to in #7, but it doesn’t have to be a boiler, it can be any major repair that you didn’t expect and didn’t budget for. The easy fix for this is to be 100% crystal clear in your contract who is responsible for what, and how much financial burden you will carry. Whereas some trainers teach Rent 2 Rent’ers to take on ALL the ongoing repairs, we teach quite the opposite. Our view is that the property belongs to the landlord and therefore HE should be covering 90% of the maintenance cost. Simple. Once again it’s all down to being absolutely clear from the outset and having a very specific contract.
9. LANDLORD DIES OR GOES BUST
Hey… you get to keep the house! Only kidding. What are the chances of this happening to you? Slim to nothing, but that said, with a busy 1,000 strong support group it was going to happen sooner or later, and in four years although we have registered no bankruptcies, two landlords have indeed shuffled off this mortal coil. We advised the Rent 2 Rent’ers to pay the rent into an escrow account until they could determine who the new owners were. In both cases the properties were sold and the Rent 2 Rent’ers were given ample time to vacate their tenants. This is life and we need to roll with it and look at the bigger picture.
10. TENANTS TRASH THE PROPERTY
No need to spend too much time on this one as in our experience it rarely happens, and the few times it did we tidied up within a few hours and it was ‘business as usual’. The great thing about multi-lets is that damage (which is usually neglect or mess) is usually restricted to one room, and so the deposit is more than enough to cover it. The last time this happened to us it was a rather posh gentlemen who left his room in an awful state. (In fact he was so posh that when he spoke his upper lip never moved). It took us three hours to dispose of the trash, have the carpets professionally cleaned and repaint. He was happy to let us keep his £500 deposit and we were never really upset with him: “Never attribute to malice what can be adequately explained by stupidity“.
11. YOU GET COMPLETELY OVERWHELMED
Overwhelm grabs most everyone at some time or another and it’s not an enjoyable experience by any measure. It’s usually the consequence of growing too fast, being far too busy, having a poor or no team/support and nonexistent systems. The cure is obvious but not so easy, and its almost inevitable that you will have to experience ‘teething problems’ and come out the other side first. Looking back in hindsight (where else would you look?) we would advise growing slowly one property at a time and running a tight well organised ship. We all lead busy lives so where will you make time to work on your new venture? do the Talent Dynamics test to discover your true strengths and weaknesses and build your team accordingly. finally get some property management software in place from day… we SOOO wish we had done this. PS. don’t take on deals that are more than 30 minutes away.
12. A SATURATED MARKET
We hear this one a lot and to be honest, it’s usually from people looking for a reason ‘not’ to do Rent 2 Rent. When you first start out you will of course be competing with whoever is already established, but there will ALWAYS be space for someone who can offer a high end product and who runs their business in an efficient and friendly manner. You might also want to consider your unique selling point, what makes you stand out from the competition? everyone (including us) will have this concern but if you’re serious about creating a thriving property business, damn the torpedoes, full speed ahead!
CASE STUDY 1. Suz Mullen
“I received a crazy electricity bill in one of my R2R properties and jokingly said to my property manager ‘Someone’s growing weed’. She laughed at me for being paranoid but when we did a quick interim inspection that’s exactly what we found! Of course we have a zero tolerance on this and straight away switched off all the lights and fans, and destroyed the plants. We told him that he needed to vacate immediately or we would be informing the police and he needed to sign over his deposit to us to cover the electric and cleaning bill. The stupid thing is that he knows we do regular interims and that we monitor the bills, so it was just a matter of time until he was caught.”
CASE STUDY 2. Michelle Cairns
“I work full time in teaching and got caught up with a really slow and expensive refurb (around £12k!) on my latest deal … and then I couldn’t rent any of the rooms! I thought it was my ad, my property, my location, my rent, I just couldn’t figure out why nobody was booking viewings! I was on the edge of having to hand it back as I didn’t have the cash to sustain it any longer. I was at a low point as I had to cancel holidays, gym membership and nights out just to keep going. But then, something magical happened; everyone in the MLCS support community came to my rescue and I was completely overwhelmed with support.
This is what I did to turn it around: Dressed the rooms and took better photos, constantly refreshed the advert, changed the wording in the ad from ‘young professionals’ to ‘working tenants’, added a line – ‘Move in for £197’, got someone to help with viewings, did some pay per click ads, responded to every message immediately, day or night and got them to view ASAP. I also leafleted retail parks and the main High Street (this really got the phone ringing), I asked shops like Next and Homebase to put postcard sized ads up in their staff rooms, in fact I advertised everywhere!! Spareroom, Gumtree, and Facebook worked the best and I even got my Polish friend to translate an advert for me. I have some really brilliant management software that means I can do EVERYTHING from my phone, usually from my classroom during my lunch hour! My advert is still doing so well that in one day I have sent six prospective tenant details on to another landlord friend in the area to help her out!”
CONCLUSION
No matter how big or how small, EVERY business will have its fair share of problems, and as philosopher Theodore Isaac Rubin once said: “The problem is not that there are problems. The problem is expecting otherwise and thinking that having problems is a problem”. Yes there will be times when you will be far out of your comfort zone, but true self discovery begins where your comfort zone ends.
As business owners we must take great care where we invest our money and probably more importantly, our time, and none of the above problems are insurmountable. We must always do extensive research BEFORE taking the jump, and when we do commit, we must move heaven and earth to ensure our venture is a raving success.
Most problems stem from lack of planning, no attention to detail and not giving your business the time and attention it deserves. The old maxim “If you fail to plan, you plan to fail” has never been more true than when dealing with property, and in this information age there really is no excuse for a lack of planning. Get it right from the start and it is indeed time to book that holiday!
Check out some more great articles from Francis and Emily at www.multiletcashflowsystem.com/blog
Francis