Rent to Rent HMO - How To Calculate Your Deals
Did you know that there is massive opportunity to invest in property right now?
Discover how I calculate my Rent-to-Rent HMO deals, mistakes to avoid and why its so important to start with the end in mind…
There are massive opportunities in the property market currently and especially with the Rent-to-Rent strategy. For the first time ever, I'm going to be breaking down exactly how I calculate my HMO deals.
I'm going to split the episode into two halves. The first half will cover; how I consider which properties to go for and how to protect your downsides. The second half will cover additional considerations you will need to evaluate outside of the initial figures.
If you have any suggestions for future episodes or feedback you can find me on social media here – I respond to every single message personally, and I would love to hear from you.
Or if you don't have time to listen right now, scroll down to see my top 3 tips from this weeks episode.
In this episode, you will learn
How to calculate the figures for a Rent-to Rent HMO deal
How to reduce your risk
How to find a creative solution if the deal doesn't stack
Why it's important to start with the end in mind
Here are my top 3 tips from this weeks episode
How to calculate your average room rate
The first place I start when looking for an average rate is looking on Spareroom, Rightmove & Zoopla. A key option and one that people usually forget is to speak to other investors and speak to agencies. They are active in the market every day and will have a valuable insight into what price you can achieve.
My recommendation is to be conservative on your estimations. You want to make sure you're comparing your rooms realistically. So if you have a fantastic en-suite room, you can't compare this to a standard double room. Make sure you take a conservative estimate until you are more experienced and can become more confident.
Pay yourself first when calculating the figures
Make sure you pay yourself first when calculating the deal, know the amount you want to get from the deal at the beginning. (Listen to the podcast where I run through how to calculate the figures)
Never over-crunch the numbers and over negotiate, you want the deal to be win-win for you and the Landlord. I remember when I started if the deal didn't stack, I would find myself bending the figures to make the deal work. Please make sure you never force a deal, I've done that, and it doesn't work.
If you find yourself in this position, it's best to walk away. Another option, however, is also to try the deal using the Serviced Accommodation model which I ran through in last weeks episode.
Start with the end in mind – what is your exit strategy?
In any deal I want to break-even as quickly as possible, I avoid any property that is going to take me longer than six months to break-even, most of my deals range between two and four months. You also need to factor in the length of the agreement.
If the agreement is not working, I always have a termination clause and break clauses to protect me. I might have, for example, a two month notice period so if the agreement is not working, I can give the property back.
It's important to note here that I have never given a property back, I am looking to build a property empire. I have been able to guarantee rent to my landlords through the whole of COVID.
To learn more listen to my new podcast and subscribe! Available on iTunes, Google, Spotify and others or click “play” on the player below!
Join a community of likeminded people with ambitious property goals, where I post daily property insights and motivational content request to join my Creative Cashflow FB group here.
As always, if you have any questions, please don't hesitate to contact me directly. You can direct message me on Facebook or join and ask me your questions within the Creative Cashflow Community.
Podcast Transcript↓
[00:00:56] Welcome to another episode of the podcast, and today I've got a massive show lined up for you. For the first time ever, I'm going to be breaking down exactly how I calculate my rent-to-HMO deals. How do I know if it's a deal? How do you know which properties to go for, which properties to maybe throw away? How can you cover your downsides and all the different things that you need to take into consideration before entering a deal? Because, look, I'm just going to keep it 100 percent honest with you.
[00:01:31] There's massive opportunities in property and in rent-to-rent and Creative Cashflow. But you've got to get educated and you've got to know the things to look out for. And today I'm going to be sharing so many of my experiences and the things I've learned so that you can learn from my mistakes. You don't have to learn from your own. So if that sounds good, stay tuned. I'm going to keep it below 15 minutes. And in that 15 minutes, you're going to learn everything you need to know in terms of how to calculate your rent-to-HMO figures. If you're brand new to the podcast guys, you know what to do. Please subscribe, review, rate, like, follow, share. I really, really appreciate it. It means the world, all the support that I'm getting at the moment. And I can see the weekly listeners are increasing every single week. So that's great. And if you've got any suggestions, any feedback, any bits you want me to cover, hit me up on social media. I respond to every single message personally and I'd love to hear from you. So without further ado, I'm going to structure this podcast in two halves. The first half is going to be how to calculate the figures and then the second half is going to be other key things to consider because property is a numbers game. However, it's also a people game. And there's many different things you need to take into consideration, which will determine whether it's a deal or whether it's not. So, yeah, let's get into the first half. So there's four key points you're going to want to consider when you're trying to crunch the numbers on your rent-to-HMO deal.
[00:03:11] Okay. The first one is you're going to want to calculate your average room rates. Second thing is you're going to want to pay yourself first, make sure you bag the amount you want to get from the deal at the beginning. The third thing is you're going to want to calculate your expenses. And then finally, what you want to do is pay the landlord what's left. You can only offer the landlord what's left. Otherwise you could be risking entering a deal that doesn't stack. So I'm going to go into these four things in a little bit more detail now. So you've gone out to a viewing, you've seen a property and you think it can work as a rent-to-HMO. And all that means is you're going to rent out the entire property and then you're going to rent that out on a room by room basis. OK, so if there's three bedrooms, two reception rooms, you might say I can get four lettable rooms. And then what you need to do is research what prices you might be to get for those rooms. So I recommend going on Spareroom, go on Rightmove, Zoopla, and a key one that a lot of people forget, speak to other investors and speak to other agencies that are actually doing this every day and find out what you might be able to achieve for your rooms. Now, you want to be conservative, you know, you don't want to be silly, but then to the same degree, you don't want to underprice them to the point where you're not doing justice to the deal. And another key tip is you want to make sure you're comparing your rooms to comparables, direct comparables.
[00:04:46] So if you've got an amazing en suite room, don't compare it to a standard double room. You know, you want to compare them like for like so let's say, for example, you've seen this room's at six hundred, six twenty five, and then there's smaller rooms at three hundred and eighty, four hundred, four twenty. You might just want to go down the middle until you, you know, until you're in the game and you kind of become more confident. So five hundred pound per room, four rooms, two thousand pounds. The next thing you want to do then is pay yourself first. OK, a lot of people say to me, oh, you know, I want to make five hundred pounds per deal on ten deals, that's five grand. It don't work like that. No, no, no, no, no. Don't work like that. Because if one room, you know, if you're in London and each room's 800 pounds and your profit that you want is five hundred pounds, then you only need one room empty and you lose in a few hundred pounds. So what you need to do is you need to play each deal individually. So what I would recommend is take in the average room and timesing it by around one point five, and that's the amount you want to earn per deal. So in this instance, 500 times one point five, seven fifty. So you want to make 750 pounds per month from this deal. So you take two thousand pounds minus 750. You got 1250 left, cool. Well done, amazing. Step number three is you then need to deduct your expenses from the twelve fifty.
[00:06:19] So I generally take a hundred pounds per person per month and generally that would take into consideration your utilities, your internet, your council tax, you know, maybe even your monthly cleaner. And then for good measure, I add an extra hundred pounds. So it would be, in this case, a hundred pounds per person, four hundred pounds, plus a hundred pounds. And that is just an extra buffer for maintenance. And should anything go wrong. Okay, so you was at twelve fifty then minus the expenses from that, which gives you 750 left. And that is the amount, the maximum amount you should be offering the landlord for this deal. Now, when you get to this point, one of three things is going to happen, you're either going to be bang on the button, the landlord wants 750. You've arrived at 750, offer it them. Don't mess about don't try and go below market price because you've already done your figures and it works for you. Top tip, never, ever over-crunch, don't over negotiate. You want it to be a win-win. The ideal negotiation is when both parties leave thinking of one. So don't go too hard. So the first thing is you're going to be on the button, offer seven fifty. The second thing is you're going to be over. So what I mean by that is the landlord's only going to want 650 and you can actually give them 750. So in that case, you could just give them six fifty and then your cash flow goes up an extra hundred pounds. Or you could be kind and go over the market value. Two advantages of that. One, you're going to be more likely to sell it because you're offering more than the next person. And two, you know, once again, they're going to leave this deal feeling more satisfied, which means that they're going to want to stay with you. They're going to be more happy. They're probably going to be easier to work with. And finally, the problem is, of course, is if you can only offer 750 and the asking price is a thousand or nine hundred.
[00:08:26] Now, if this happens, right, generally speaking, you know, a lot of people will have a tendency to start bending their figures.
[00:08:36] I remember when I started, this would happen to me, all of a sudden my average room rates would go from 500 to 550 just to squeeze the deals and make it work better. Don't do that. Never, ever force the deal. I've done that. It doesn't work. And you end up too tight. To the same degree, you don't want to be offering a few hundred pounds less than the asking price. You're going to annoy landlords, you're going to annoy agents, unless they're particularly motivated. So in this instance, what needs to happen is you need to find a more creative way to increase the room rates or you need to let the deal go. You know, sometimes if it doesn't work at this point, I will then do an SA in it. And if you listen to my last podcast, I explain how those figures work. And on this same property, you could dramatically increase the income through Creative Cashflow, which would mean you could still take this one on. But if you do end up like this, there's then five things I want you to consider, which are extra variables, which brings me to the second half of the podcast, that you should take into account to decide whether your deal is a deal.
[00:09:48] Number one, how much have you got to invest in the deal? Is it ready to go? You know, some properties I've taken on they've been fully furnished, fully renovated, fully licensed, HMOs ready to go. I've had to spend three or four hundred pounds on a microwave, toaster, some cutlery, you know, maybe an extra, say, fridge. Next to no money invested. So if my cash flow is only six hundred instead of 750, I might not mind because I'm not investing anything. The other thing to consider is if you were fully occupied at 750 net per month for ten months, yeah, you make seven and a half grand. You've only spent five hundred pounds on the property and then you've got one room empty for a couple months. You might not mind because in the bigger picture, you're still doing well. The great thing about rent-to-rent is you do have to invest a fraction of what you would. You know, then if you owned it, that's why it's a great strategy, and to give you an example, I've got two properties in Derby on adjacent roads, one we own. Cost us 85 grand of investment. When we rent to rent, we spent six thousand, six and a half thousand pounds on it, cashflow's the same.
[00:11:09] OK, so when you compare it to that, it puts things into perspective.
[00:11:16] Key point here, guys, in terms of break even point, I just want to break even as quickly as possible. I don't normally touch anything that's going to take me longer than six months. Most of mine are in between two and four months. A break even after three months, say. And then I've got the rest of the term to make money back. You don't want to be spending a year's cashflow on the property. It's going to take too long. We want to get financially independent today, remember. Number two, the length of the agreement, right. If you've got a five year agreement, right, and you cash flow's slightly less. You might not mind because you might think, well, I've got five years to make this money back, so if I decide that I'm going to be, you know, going to have voids 20 percent of the time, you've got the other four years to make the money back. Point number three, and this is an interesting one that I never, ever hear anybody talk about, how easy is the property going to be to let?
[00:12:22] You know, if the property's right next to a train station and a huge amount of employment and there's really low supply to the area, massive demand. You know, if you go on Spare Room, maybe there's 500 people looking for rooms and only 100 rooms available, you're barely going to have any voids. So that might give you more confidence. So even though your cashflow might be slightly less, that might still swing the deal in the balance of, yeah, let's go for it.
[00:12:52] Number four, how much rent-free period can you negotiate?
[00:12:58] So I've had deals where literally, you know, I've had six weeks rent free, landlord's been like, look, I appreciate you, Simon, do the work, let me know when it's done and we'll start the payments. And by the time I've done the work, maybe six weeks, filled the property, I've dropped him a line and he said, cool, let's start the payments from next month. So, once again, even if my cashflow is a little bit lower, but I know that I'm working with a landlord that's relaxed and is open and, you know, maybe they don't have a mortgage, so it's not costing them anything. He might say, look, take the time, start paying me when you filled it.
[00:13:36] Deleverages our risk.
[00:13:38] And finally, and this is a big one. What's your exit strategy?
[00:13:43] You know, all my agreements have a termination clause. They have break clauses to protect me. So even though I'm guaranteeing the rent for five years, I might have, you know, a two month break clause notice period in there so that if it's not working, I can give it back. But I've never had to give a property back, guys, because that's not what I'm doing. I'm trying to build an empire. And I guaranteed my landlords rent month in month out through the whole of covid. You know, without fail. There was one property where they passed on a mortgage holiday to us and as soon as covid ended, we paid them back in full. But other than that, we've paid all our landlords for the whole of covid. So they're the five things you also want to take into consideration, because it's not just a numbers game, it's a people game.
[00:14:40] And you have to remember that we're investing so much less than we would then if we was purchasing these properties. So just to recap this, four things you need to do in order to crunch your numbers for rent to him deals. Number one, calculate your room rates. Number two pay yourself first. Number three, work out your expenses. And then, number four, offer what's left after them.
[00:15:02] OK, then the five things you need to ask yourself because they play a massive part is how much investment, how much do you need to invest in the deals? Number two, the length of the agreement, if it's a bit of a bigger investment, but you've got it for five years, there's a bit of leeway. Three, how easy will it be to let. Four how much rent free period can you negotiate? If you sign on Monday, the rent's due on Monday, and the cash flows not at the right level, get out. And thing number five, the exit strategy, you always need to plan an exit to cover your downside. Guys, I can't stress this enough. So I hope that's been useful. You know, I'm just trying to give as much value as possible. If you've got any questions, hit me up on social media. And of course, guys, remember, don't wait 25 years. Get creative. Thanks.
[00:16:06] Thanks for listening. For more information, check out Simon Smith online dot com. See you next time.