How Much To Spend On Rent To Rent Refurbs?
Do you know how much you should be investing in Rent-to-Rent refurbs?
Join me for this podcast episode where I run through my refurb trick, tips and five considerations to consider when taking on a project…
This episode is split into two parts. Firstly we are going to look at the costs associated with my Rent-to-Rent deals. Secondly, I will break down the top five considerations you should make when deciding whether to take on a project.
When I look at the costs associated with Rent-to-Rent deals I like to split the costs into two categories.
Category one being expenses, for example agency fees, investment that you will never get back.
Category two is company assets, and this will include items that should the deal fall through, you would be able to recover your investment or utilise for another deal.
I like to split the costs to ensure that I can accurately calculate my break-even point. Let me run through an example.
Let’s take a £5,000 investment.
£2,500 will be allocated to agency fees, carpets, painting and decorating (money that you will not get back).
£2,500 will be allocated to fixtures and fittings - a new TV, Fridge/Freezer, soft furnishings (investment that you can recover).
*it’s important to consider depreciation on the assets that you are buying. You will not get the entire amount back.
To calculate the break-even:
Category one - £2,500
Category two - £1,250 (loss due to depreciation)
Break even figure = £3,750
After I have achieved my first aim, which is establishing a break-even figure, I move onto five key considerations to decide whether the deal is the correct investment for me. Listen to this weeks episode where I breakdown and run through in detail each consideration.
Make sure you stay tuned for the entire episode, as I will be sharing a key tip that could be a game-changer for your property business.
Available on iTunes, Google, Spotify and others or click “play” on the player below!
Podcast Transcript↓
[00:01:13] Simon here. Welcome to another episode of the podcast, where we talk all things, property, creative cashflow, and of course, how to be financially independent to day here, not in five years, 10 years, 15 years, 20 years. Or 25 years, we want to live to day. I don't want to be paying a mortgage of or 25 years to eventually become mortgage-free.
[00:01:43] And eventually we live my best life. I want to force the time down. I want to force the issue and I want to use creative property strategies to be free now. And not only me, but. My friends and family, because that's what I'm doing all the time. I'm reinvesting in helping other people kind of get on board and, you know, sack their bosses and come do something that they enjoy.
[00:02:15] Where as me and Lucy say, we make the rules. That's what it's all about. Don't get me wrong. The cashflow's amazing, but it's what the cashflow brings that we care about. And that's the freedom, the independence, the, the security of knowing that you don't rely on too many external factors and or the people and a boss or a job or a business or the economy even.
[00:02:44] To feed yourselves and your family. That's what this is all about. So sounds good. You are in the right place. Subscribe right now, head over to YouTube search Simon Smith, online subscribe. I'm doing well. The videos, multiple videos. In fact, every single week of all things, property rent to rent, where you can actually see in the flesh, what I'm talking about.
[00:03:09] Because as they say, talk is cheap and I give maximum value on this podcast. But one of the things I pride myself on is that I'm doing this stuff on a day to day basis. And I just wanted to share my journey, which is why I started this. And look, I do not proclaim to be a go or anything like that. I'm just a normal guy.
[00:03:34] And if I can do it, you can do it too. So. Remember every single week new podcast, subscribe, jump onto the YouTube, go and subscribe. Any comments, anything you want me to cover on either platform hit me up on Instagram at Simon Smith on line. So into today's episode, how much should you spend on your rent to rent deals?
[00:04:00] And I've got some massive, massive value, massive content to share with you today. Okay. And I'm going to do it in two parts. The first part is when I look at the costs associated with my rent to rent deals, I split them in to two categories, category one, or the expenses okay. On the property or acquiring the property.
[00:04:27] That you will never get back. I'm talking about agency fees. I'm talking about first month's rent. I'm talking about core pits that are fitted blinds that are fitted. Um, you know, if you was to paint and decorate the property, you can't rip the paint off the wall in two years down the line and take it away.
[00:04:49] So I like to split the costs into two. Okay. The first one is the things that you will never get back. The second thing, all company assets, these are the things that if the deal didn't work out, for any reason, you would be able to take these items or things from the property and sell to really some of your capital or use in a different deal.
[00:05:15] So that's the first thing I do. Um, I split the costs are my aim. Is to make sure that my breakeven point is on the costs. I can not get back. Okay. And then sometimes what I will do is I will also add 50% of the costs. This is getting a little bit complicated. Let me simplify this. Whew, you got a deal. It's going to cost you 5,000 pounds to do the deal.
[00:05:48] Two and a half thousand pounds is on, let's see an agency fee and let's say carpets and painting and decorating. Okay. You'll never get them back. The over two and a half thousand pounds is on a new fridge freezer, a TV, um, and over furnishing furnishing furniture and dressings, you will get this back. But not at the full rate because you do need to account for the appreciation.
[00:06:16] So, and not 50% of that. So you got two and a half grand that you will never get back. And 1250 that you're probably going to lose in terms of the depreciation, which means the real figure that you need to be looking at is 3,750. It's not 5,000. So that's the first thing in chest him. Okay. That's the first thing.
[00:06:41] Then once I've got that figure, there's five key considerations that I look into as to whether it's worth me investing that money and I'm going to go through them right now. Make sure you tune until the end of the podcast, because I'm going to be giving you an extra little tip, which I think could be a game changer.
[00:07:03] Okay. A massive, massive game changer that a lot of people overlook. But into the five key considerations, number one breakeven point on that Fager, which in this example is not 5,000 pounds, the total investment, it's all the money that you can't get back 2,500, a hundred percent. And then 50% of the company assets, which is two and a half thousand pounds divided by 2, 12 50, because there is going to be depreciation and there's going to be some hassle and running around.
[00:07:36] Um, in relation to this that I think needs to be accounted for. So 3,750 pounds, the first thing I want to know is how long is it going to take me to break even? So what I would do is I would quick, quick, let's do quick maths. If. The property is going to cashflow a thousand pounds per month. And your investment is free, fast as 750.
[00:08:02] You're going to break even in just shy of four months. Uh, my role is I want to break even in less than six months, but I dearly in less than four months and some of mine breaks even extremely, extremely quickly. Okay. That's the first thing I'm looking at. The second thing I'm looking at is the cashflow.
[00:08:26] Cause I'm okay. Investing a little bit more if I know that the cashflow is big. So if I got a deal that was going to cash flow, 1500 pounds and I had to invest seven grand up possibly would because I'd break even instill less than six months and it's kind of feels worth it. But if I'm having to invest a lot of money for five Japan a month, then not only will that intrinsically slow down the breakeven point, but I just don't know if it's going to be worth the risk.
[00:08:55] And in those instances, I would try and lean on the landlord to contribute to it doesn't mean it's not a deal. It just means you'll need the landlord to contribute. Another sort of little factor on 0.2, as well as the cashflow is the strength of the deal. That how hard is this deal going to be to fail?
[00:09:15] If it's an amazing property in amazing go with huge potential and the cash flows. Okay. Big Buddhists know it's going to let itself out. You should take that into consideration as well. Number three is a key one, the length of the agreement. Massive, massive. I don't mind creeping up at six months, maybe even a tiny bit more if I've got the property for five years, because I've still got four and a half years to cashflow it.
[00:09:46] I don't want to be breakeven. Um, I don't want to be breaking even at the six month point if I've only got the property for 18 months or I, you know, a year even. Watch out for the short term agreements, because you're not giving yourself a realistic window, including voids and any obstacles that could come your way to still Clore that money back.
[00:10:09] And remember, we're doing this too, make money. That's the whole point we want to create cashflow point just having to deal. I speak to so many people. Yeah. I want a deal. Yeah. I've got a deal. Yeah. Don't want to deal. The deal is not the end result. The end result is creating cashflow and adding value, helping the landlord, providing great accommodation for the tenant and of course, making some cashflow.
[00:10:34] So watch out for your length of agreement longer, the length of the agreement, the better in terms of you being able to break even, and get your return. Number four, often overlooked it's the landlord situation.
[00:10:54] If the landlord seems extremely confident that they're done with this property for the foreseeable future and they're based 400 miles away and they just want to be completely hands free. Then I would be a lot more open to invest in a little bit more because I kind of do get the impression I get that the gut feeling that.
[00:11:19] We all going to have the property for the entire term. If somebody is a little bit wishy washy, maybe they're a professional landlord they've got over profit. Is they still like to do the maintenance themselves? And any of that, then, you know, I wouldn't feel confident enough to invest in a massive outlay knowing that, um, am I really, you know, are we going to see this agreement out?
[00:11:42] Or are you going to maybe, you know, change the goalposts or, or, or do something that could just compromise my investment? Remember Warren Buffett says, first of all, of investment, don't lose money. Second road of investment. Don't lose money. Third road of investment. Yeah, you, you guessed it. Point number five is simple, but.
[00:12:10] This is the great part about rent to rent. If you've been good to a landlord and held that property for three, five years in the retirement age, and they do want to release their capital, who do you think they're going to sell it to? They're going to sell it to you and I'm already adding lease options and stuff like that.
[00:12:28] To some of my agreements. And I've already got gentlemen agreements with landlords that I've got great relationships with that have no intention of selling this, anybody but me and you know, that's amazing. So once again, if you've got us strong intonation, that this is a property you would like to own one day, then as long as you're not overdoing it, then you may be willing to invest slightly more money depending on the cashflow.
[00:13:00] But try not to go over the six months breakeven and try and follow the five key considerations. You won't go too far. Well, now this little extra bonus point, which as I said, a lot, all of you do not, um, consider and it's really, really important to consider. I speak to so many people and they're so fixed on.
[00:13:26] The minimum amount you would accept for, um, to go into a deal. In other words, is there a golden figure that as long as you're making that amount of money, you're happy to do the deal like 500 pounds and this is flawed. And the reason it's flawed is because if each room is 750 pounds and you're making only 500 pounds, then one room empty would be losing you 250 pounds.
[00:13:53] That's why we don't focus on the figure you're making. We focus on the ratio more on that in how to crunch the figures on HMO. And I'll post a link to that in the description of this episode for you to go back and check it out. It's got tons of value, but follow your gut. No new kitchens, no new bathrooms.
[00:14:16] Follow your gut and work with the landlord. That's the biggest golden nugget I can offer you because it's not your property. And Mo people would be willing to invest a little bit of money if they know they don't have to do anything for five years. So what I always do is I ask the question. I never tell the landlord what's wrong with our property.
[00:14:40] I always ask them what they think, you know, Do you have any plans to do anything? Uh, what would you do? You know, what do you think we should do about those carpets? What do you think we should do about that? Do you think this is going to be good enough and let them tell me? And then when they tell me, I then say, well, how, how how'd you want to work that out?
[00:15:01] And sometimes it's a case of, well, I'll tell you what, if you replace the carpets and the blinds, we'll do the paint and in decorating well at the white goods and we'll fully furnish the property, but. As you can see from that furnishing the property in, and the white goods are going to be company assets, which are going to be the second form of, um, expenses, which I don't deem the same as investment.
[00:15:27] You will never get back currently dumb in a deal. And I've got it for five years. I'm painting and decorating a property. I'm doing the carpets on the property. Um, I'm doing the blinds on the property. I'm going to fully furnish the property. The landlords changed the boiler, the landlords added some additional central heat in, um, the landlord cleared the property and the landlord's office to give us two months preparation period, which gives us a bit of time to Claude that money back because they didn't really want don't.
[00:16:00] I have any more outlay. So that's important. Make sure. That you communicate with the landlord because at the end of the day, it's all right. You saying, yeah, I'm going to need a contribution, but if I've got no money or if they've just spent however much on buying a house, they're not going to be able to do that.
[00:16:17] So you can find creative ways and that's the bonus point. If you can find a way for win-wins and be flexible and utilize a preparation period, then. Be prepared to sometimes put the initial money in knowing that you'll get two months free to make the money back. And I guess there's so much value for this episode.
[00:16:41] I don't really know what else to say. Um, over them. The key thing with breaking even, and how much you should spend is going to be how much you can earn. And if you want to know more about how you can maximize your cash flow through rent, to HMO and to essay. Yeah. If you want to know more about that, hit me up on Instagram at Simon Smith on line.
[00:17:06] I'd love to help. Um, and yeah, you know what it is, whatever you do. Don't wait 25 years. Stop procrastinating. Get creative.
[00:17:30] Thanks for listening. For more information, check out Simon Smith, online.com. See you next time.